Economic slump, Hyper Inflation and Possible Fears - Pakistan



For the past few months we here in Pakistan have experienced a lot. From a rapid devaluation of the Rupee (30%), frequent power outages, terrorism and then economic slow down. What we have NOT experienced is a responsible fiscal policy by the current PPP government.
Pakistan, as is the rest of the world, going through troubled financial times. The processed goods sector here, which is the textile industry given its single largest share in exports, has taken a huge hit. Europe and the US are all going through "shrinkages" in economies leaving retail vendors there to be extremely price sensitive in addition to a reduced turnaround in sales. There is nothing anyone can do about this.
The software export industry (offshore software firms) was probably a couple hundred million, maximum a billion. The too may shrink due to the hit enterprise focused firms have taken since a lot of them have shut down (I've heard Fannie May and Freddie Mac had some software components being built out of Pakistan). Although a number of commentators have speculated that offshoring may grow due to this downturn for cost saving reasons, I'm beginning to speculate it will grow as a percentage but will shrink in absolute terms.
Agriculture, this is probably the most painful topic. Pakistan being an agriculture based economy has the dumbest minds focused on increasing the productivity. From the feudals who own the lands, the politicians responsible for the relevant ministries to the "scientist" involved in tactical matters. We've had GM seeds grown here without any prior impact analysis. We've used pesticides without concern for environmental impacts. We've created a system where large land owners (read feudals), get prefrential treatment even though agriculture output from their lands is lowest in terms of output/hecter (need to verify this statement!). And then water shortage in this area thanks to India and power shortages in running tube wells.

This leaves little breathing space for a government known more its lack of competence and merit (read part about giving government jobs on nepotism!). If Hyperinflation sets in, it will impact:
  1. Money holding costs - holding onto cash is a costly and risky proposition, thereby forcing individuals and firms to be nonliquid- from the frying pan to the fire.
  2. Large risk premiums to cater to unknown inflation rates - causes inefficiency in the system
  3. Misallocation of input and output goods - again causes high inefficiency in the system
  4. Contineous adjustment costs - hiring/firing, changing listed prices and misc activities to publish price change
*Read more on such costs from here.

Now that Pakistan's gotten a few Billion (7) from IMF, it must act quickly to announce a strategic economic growth plan. Otherwise we're just waiting for the sky to fall in a few months once the temporary relief from the loan dies down.

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