Pakistan Economy Currently There Is Research Paper

  • Length: 16 pages
  • Sources: 3
  • Subject: Economics
  • Type: Research Paper
  • Paper: #49598907

Excerpt from Research Paper :

In addition the continued decline of the fiscal account will affect both debt sustainability and external balances ("Monetary Policy Decision").

As it pertains to medium term fiscal sustainability which must be present to achieve necessary overall macroeconomic stability, the tax-GDP ratio must be increased ("Monetary Policy Decision"). Additionally government expenditures must decrease ("Monetary Policy Decision"). The article also reports that the revenue deficit, which represents the difference between total revenues and current expenditure, has to be reduced to zero as established by the Fiscal Responsibility and Debt Limitation (FRDL) Act signed into law in 2005 ("Monetary Policy Decision"). In fiscal year 2009 the revenue deficit was 1.5% of GDP and it is anticipated that the revenue deficit 2% of the expected GDP in FY10 ("Monetary Policy Decision"). The article explains that the reduction of development expenditures may be successful in providing immediate relief but at the same time such reductions tend to decrease the prospects infrastructure investment including the generation of electricity and human capital ("Monetary Policy Decision") as it relates to Pakistan's Monetary policy, the article asserts that every inflation indicator, including Consumer Price Index (CPI), Sensitive Price Index (SPI), Wholesale Price Index (WPI), and trimmed measures of core inflation, reflect an upward movement in recent months ("Monetary Policy Decision").

Issues of Transparency in monetary policy

Like many other emerging economies Pakistan, in some instances has difficulty ensuring that the monetary policies of the country are transparent. According to Malik & Din (2008) transparency in the realm of monetary policy is vitally important particularly in emerging economies. Transparency simply means that the central bank discloses relevant information about the monetary policy being implemented. Additionally there are several benefits related to transparency in the context of monetary policy. The primary benefits are accountability and independence. Additionally, "Monetary policy transparency holds particular significance for developing countries where misperceptions and lack of knowledge about monetary policy issues and outcomes are not uncommon. In this context, an important benefit of transparency is that it can educate the public about what monetary policy can and cannot do and thus avoid unnecessary criticism on the central bankers (Malik & Din, 2008)." In many instances Pakistan has failed to be as transparent as it needed to be in disclosing details about the country's monetary policy. This lack of transparency may be detrimental to Pakistan at the current time and well into the future.

Government interference

Government interference in economic matters can have good and bad outcomes. On the one hand, if the Pakistani government interferes too much economic growth will be impeded. One of the cornerstones of free market economy is freedom and too much government interference can make it difficult for the emerging market economy in Pakistan to function effectively.

On the other hand some interference is needed to ensure that the economy has the tools and mechanisms needed for economic development. This means that the Pakistan government has a responsibility to enforce laws related to the encouragement of economic growth. In addition the government must develop laws that are consistent with the economic development that Pakistan wishes to have. This means that laws related to lowering trade barriers and property rights must be developed and implemented.

Legal Structure

Pakistan inherited and utilizes a legal structure that is akin to the British legal structure. However Pakistan has created a legal framework that is unique from that is the British ("Legal System"). Pakistan has a parliamentary system of government that enforces laws based on the precepts set forth by the Holy Quran and Sunna ("Legal System"). Under this legal structure, no Pakistani law can be written or enforced if it is in contradiction to the Quran or Sunna. Some of the main characteristics of Pakistani law include the promotion of Islamic life, tolerance, freedom of speech and property rights ("Legal System").

Exchange mechanisms

The Pakistani Rupee was pegged to the U.S. Dollar until the early 1980s the exchange mechanism was ultimately changed it to managed float. A managed float is "A system of floating exchange rates in which the government or the country's central bank occasionally intervenes to change the direction of the value of the country's currency ("Dirty Float")." It is also known as a dirty float. Pakistan has the Karachi Stock Exchange (KSE) and will begin to utilize a capital gains tax on July 1st of 2010. Initially the tax rate was not made public. However, a rate has been established at 5% on shares held under six months. This rate will increase to 10% by 2014-2015. The article also explains that "The Finance Ministry is now considering eliminating all concessions, including agreed for the stock markets, to make the taxation system equitable ("Finance Ministry re-evaluating capital gains tax mechanism")."

Foreign Direct Investment Flows

Major Source of External Funding

Foreign Direct Investment is a vitally important aspect of groeth in an emerging market economy. In Pakistan there have been many strides toward encouraging foreign direct investment. Such investment Is desperately needed because it is a major source of funding for the country.

Pakistan and FDI

In many ways Pakistan is an ideal place for foreign direct investment. It has the sixth largest population in the world. In addition the country has a growing middle class that has disposable income. According to Yousaf et al., 2008

"the Pakistanis economy showed responsiveness and potential capacity to meet exogenous shocks and minimize risks in response to various major regional and global events, for instance, the nuclear blast (1998), the bombing against French technicians in Karachi (2001); 9/11, 2001 which placed Pakistan in the frontline again and aid from Washington began to flow once again. The subsequent events included: Afghanistan war; the attack on India's Parliament (2001) that led to mobilization of Indian troops, the 2003 war in Iraq, Karachi Stock Exchange (KSE) crisis and severe earthquake (2005). Thus, foreign investors were assured that they could carry out business in a stable and certain environment (Yousaf et al., 2008, ).

However there are many other aspects of doing business in Pakistan that are problematic including the lack of infrastructure particularly in terms of technology and communications industries. Yousaf et al., 2008 explains that FDI in Pakistan has been inhibited by a number of factors including law and order, political instability, the lack of appropriate infrastructure for the instability in stock markets in addition to the regulatory regime (Yousaf et al., 2008). Nonetheless, FDI and foreign remittances provided a strong base to improve the economic situation of the country (Yousaf et al., 2008).

In the two years since the aforementioned article was written there has been a decrease in the amount of foreign direct investment in Pakistan. The following table (taken from "Pakistan Economy") illustrates Foreign Investment inflows in Pakistan in millions. There have been obvious decreases in the amount of foreign direct investment since 2008.

Year

Greenfield

Investment

Privatisation

Proceeds

Total FDI

Private

Portfolio

Investment

2001-02

-10

2002-03

22

2003-04

-28

2004-05

1,161

1,524.00

2005-06

1,981

1,540

3,521.00

2006-07

4,873.20

5,139.60

1,820

2007-08

5,019.60

5,152.80

19.3

2008-09

3,719.90

3,179.90

-510.3

Jul-Apr-10

1,772.9

1,772.9

Total

20,256.60

2,805.20

22,522.2

2,387.9

Government Support Programs

Economic Stability Programs have been developed to assist the nation in the facilitation of greater economic progress. The Pakistani government began a stabilization program in Fall of 2008. According to the International Monetary fund the program was supported by U.S.$7.6 billion in accordance with a 23-month SBA ("Program Note Pakistan"). This particular program was also extended by the IMFfor an additional 25 months in 2009 when the organization gave an additional U.S.$11.3 billion ("Program Note Pakistan"). The purpose of the program is to "restore financial stability through a tightening of fiscal and monetary policies to bring down inflation and strengthen foreign currency reserves; protect the poor by strengthening the social safety net -- this is a key element of the government's policy strategy; and raise budgetary revenues through comprehensive tax reforms to enable significant increases in public investment and social spending required for achieving sustainable growth ("Program Note Pakistan")."

External trade flows

External Trade Statistics Goods and services

According to Pakistan's Federal Bureau of Statistics ("Summary (Trade in services)") the External Trade Statistics Goods and services March through July of the last two years are as follows:

Yearly External Trade

Pakistan's external trade for the last five years in Millions and U.S. dollars according to the Federal Bureau of Statistics are as follows:

Years

Exports

Imports

2004-2005

14,391

20,598

2005-2006

16,451

28,581

2006-2007

16,976

30,540

2007-2008

19,052

39,966

2008-2009

17,688

34,822

Hard/soft currency trading partners

Pakistan has several hard and soft currency partners including Japan, the United States, Germany and the United Kingdom. All of these countries have partnered with Pakistan for quite some time and in many ways these partners facilitated the growth of the Pakistani economy during the economic boom the country enjoyed a few years ago.

Infrastructure support

Infrastructure support is needed because of the major issues that Pakistan has with…

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