Economy of Pakistan

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Economy of Pakistan

  1. 1. Economy of Pakistan
  2. 2. What is Domestic Commerce?-Domestic Commerce covers all aspects ofpricing, packaging, marketing, SPS/TBT compliance of WTOagreement, improving competitiveness, sophistication, productdiversification, improving doing business environment etc.(PIDE Working Papers 2006:11)-A vibrant domestic commerce sector is the core of the economyfacilitating intermediation between supply anddemand, entrepreneurship development, risk-takinginnovation, and competitive markets. Such an economy movesbeyond commodity exports to brand name, process, and capitalexports, all of which command a higher rate of return.“Policy in Pakistan has been fairly path-dependant, placing ahigher weight on export promotion and domestic industrializationsdevelopment than ondomestic commerce”.
  3. 3. Objectives of Economic Growth• Well Diversified High and Sustained Growth in commodity- producing and services sectors• Macroeconomic Stability – economic fundamentals to remain strong, macro imbalances are avoided• Distributive Justice – protecting vulnerable groups thru „effective‟ social safety-nets
  4. 4. Hurdles in Economic Policy making• Theoretically and ideally, we aim for Equilibrium• Because of its Size it is difficult to understand the Economy at the aggregate level so we approach it by analyzing various components (Markets) within a simple macroeconomic model• Why economy deviates from Equilibrium is critical for policy planning and execution• The Role of the Government [long-run vis-à- vis short-run concerns], Government Intervention is desired when deviation persists in the short-run
  5. 5. ECONOMY AND ITS COMPOSITION1. Broadly Three Markets and two sub- sectors are considered – Product or Output Market – Labor Market – Money Market • Foreign Trade Sector when Open Economy is considered • Fiscal Sector when Government Intervention is explicit• 2. Demand and Supply Considerations
  6. 6. PRODUCT OR OUTPUT MARKET• Supply Side: Income Approach – GDP (at Factor Cost) equals • Value Added in [Agriculture (crop and non-crop sectors) + Manufacturing (small and large scale) + Mining and Quarrying + Services]• Demand Side: Expenditure Approach – GDP (at Market Prices) equals • Consumption (private and public) + Investment (private and public) including changes in stocks + Exports of Goods and Services – Imports of Goods and Services
  7. 7. PRODUCT OR OUTPUT MARKET• Equilibrium: Equate Demand and Supply – Caution: Correction is desired to convert GDP at factor cost into GDP at market prices. For this we add indirect taxes and subtract subsidies, i.e., – GDP (MP) = GDP (FC) + Indirect Taxes - Subsidies• Disequilibrium: leads to Resource Gap (RG = Y – C – I); Otherwise Y – C = S = I• Issues: Why domestic savings are low? Where investment taking place? What is the role of financial institutions in promoting savings? What is the linkage between stock market and investment?
  8. 8. LABOR MARKET• Supply Side: Sectoral Labor Supply (HH behavior)• Demand Side: Sectoral Labor Demand (Firms‟ Behavior)• Equilibrium: Equate Labor Demand and Labor Supply• Disequilibrium leads to Unemployment (UN = LS – LD)• Issues: What is unemployment rate? Who is unemployed? Has TNA been done? What is the overall HR Strategy? How to tackle skill Shortages? What is Industrial Planning to meet domestic demand?
  9. 9. MONEY MARKET Financial Market (Money, Bonds, Equities)• Supply Side: Money Supply, Monetary Base includes Net Domestic Assets (Government Bills) and Net Foreign Assets (Reserves and Gold)• Demand Side: Money Demand (M2)• Equilibrium: Equate Demand and Supply• No Disequilibrium problem as MS = MD and there is instantaneous adjustment in financial instruments• Issues: Excess of Money Supply is generally Inflationary. Money Tightening but at what cost? Autonomy of SBP?
  10. 10. FOREIGN TRADE SECTOR• Supply Side: Exports of Goods and Services• Demand Side: Imports of Goods and Services• Trade Balance: Exports (G&S) = Imports (G&S)• Disequilibrium yields Trade Deficit• Further Issues: Exchange Rate Policy and Management. Size of CAD and Problems related to BOP
  11. 11. FISCAL SECTOR• Resource Side: Tax and Non-tax Revenues (F&P) including Surcharges• Expenditure Side: Current and Development Expenditure• Equilibrium (Balanced Budget): Revenues = Expenditures• Disequilibrium leads to Fiscal Deficit: Expenditure exceeds Revenue• Other Definitions of Deficit and Twin Deficit Problem• Further Issues: Accumulation of Internal and External Debt and its Management
  12. 12. Long-run Economic Growth – Why Less Developed Economies lag behind Rich Nations? • For the simple reason that the developed nations at some point in their history experienced extended periods of rapid growth where as the developing nations never experienced sustained growth or have had periods of growth offset by periods of economic decline. – What Determines Economic Growth? Saving & Investment, and Technological Change that help improve productivity of machines and workers. • Example: Quadrupling of average productivity of workers in US since the start of twentieth century. • Example: Initial resource endowment is not that crucial as Japan and Korea compared to many Latin American countries were resource-deficient to start with.
  13. 13. Business Cycles: Recession & Boom – Growth of output is not always smooth – it has hills and valleys (peaks and troughs). These short run, but sometimes sharp, fluctuations are described by what is known as Business cycles. – The downward phase of BC, during which national output may be falling or perhaps growing very slowly, is called recession – implying hard times for many. Recessions are not politically welcomed. Therefore, a lot of effort is put in to understand what causes recessions and how to rectify. – The up-swing of the economy starts with recovery phase leading to boom (expansion), Over-heating of economy is vaguely defined concept.
  14. 14. Unemployment and Inflation – Recession is usually accompanied by increase in unemployment. During great depression of 1933, the UR defined as total number of unemployed divided by active work force (workers either employed or seeking job) was 25% in the US implying that one in four potential workers was unemployed. – When prices of most goods and services are rising over time, the economy is said to be experiencing inflation. Among various measures of inflation Consumer Price Index (CPI) – cost of buying a fixed basket – is most commonly used. – Year-on-year inflation rate is measured as: ∏ = [(Pt – Pt-1)/Pt-1]*100
  15. 15. The International Economy– Open economy implies extensive trading and financial relationships between countries. While there are gains to trade and capital flows, studying the patterns of international trade and borrowing is important to understand the transmission of business cycle from one country to another.– Study of trade and current account imbalances is another area of significance not only for developing but also for developed economies as well. What causes trade imbalances and are they really bad for a country or for trading partners? These questions are receiving increasing attention in the literature.
  16. 16. Macroeconomic Policy– Economy‟s performance not only depends on the availability of human and natural resources, its capital stock, the technology it possesses and the choices made by its citizens, individually and collectively, it is also dependent on the set of macroeconomic policies pursued by the Government.– More important ones are Fiscal and Monetary Policies.– Fiscal policies gain importance when a country runs a large budget deficit. However, critics of government FP question the use of borrowed funds on deficits rather than on productive investment.– Besides other purposes, monetary policy is used to maintain inflation at targeted level.
  17. 17. Economic Analysis– Forecasting: A difficult and challenging job, not carried out to the satisfaction of many. Reason, the knowledge of the economy is imperfect, factors other than economic variables also affect the economy.– Economic Analysis: An important task to monitor economic activities. Difficulties are observed because politicians and not economists make economic policies. • Example: US and Europe subsidies to agriculture sector • Example: Freezing of domestic price of oil– Economic Research: Very important and wide- ranging. Wheel should not be re-invented all the times.– Classicals vs Keynesians, which line should be followed? End of Lecture 1
  18. 18. Macroeconomic Performance in Pakistan: Historical Perspective Growth (%) 1960s 1970s 1980s 1990s GDP 6.8 4.8 6.5 4.6 - Agriculture 5.1 2.4 5.4 4.4 - Manufacturing 9.9 5.5 8.2 4.8 - Services 6.7 6.3 6.7 4.6 Share (%) in GDP Total Investment - 17.1 18.7 18.3 National Savings - 11.2 14.8 13.8 Total Revenue 13.1 16.8 17.3 16.9 Total Expenditure 11.6 21.5 24.9 24.1 Budget Deficit 2.1 5.3 7.1 6.9
  19. 19. Macroeconomic Performance in Pakistan: Historical Perspective Share (%) in GDP 1960s 1970s 1980s 1990s Total Exports - - 9.8 13.0 Total Imports - - 18.7 17.4 Trade Deficit - - 8.9 4.4 Current Account Deficit - - 3.9 4.5 Human Resources/ Social Development Un-employment Rate - - 1.4 5.7 Literacy Rate - - 29.5 40.7 Male - - 39.0 51.6 Female - - 18.7 28.6 Expenditure on Education - - 0.8 2.3 Expenditure on Health - 0.6 0.8 0.7
  20. 20. Relatively RecentMacroeconomic Performance Growth of GDP and Components (%)18.016.014.012.010.0 8.0 6.0 4.0 2.0 0.0 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08-2.0-4.0 GDP - Agriculture - Manufacturing - Services
  21. 21. Relatively Recent Macroeconomic Performance Macro Imbalances relative to GDP 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 Budget Deficit Trade Deficit Current Account Deficit
  22. 22. Relatively Recent Macroeconomic Performance Key Variables relative to GDP 25.0 20.0 15.0 10.0 5.0 0.0 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 Total Investment National Savings Total Revenue Total Expenditure Total Exports Total Imports
  23. 23. Economy of Pakistan:Relatively Recent Performance Human Resources/ 00- 01- 02- 03- 04- 05- 06- 07- Social Development 01 02 03 04 05 06 07 08 Un-employment 6.0 7.8 7.8 8.3 7.7 7.6 6.2 5.2 Rate Literacy Rate 49.0 50.5 51.6 53.0 53.0 54.0 55.0 0.0 Male 58.0 0.0 0.0 0.0 65.0 65.0 67.0 0.0 Female 32.0 0.0 0.0 0.0 40.0 42.0 42.0 0.0 Expenditure on 1.6 1.9 1.7 2.1 1.0 1.9 2.4 2.3 Education/ GNP Expenditure on 0.7 0.7 0.7 0.6 0.6 0.5 0.6 0.6 Health/ GNP
  24. 24. Pressing Macroeconomic Issues• Four major concerns that haunted the economy in 2008 were: – Spiraling Inflation – High (and widening) Fiscal Deficit • Re-emergence of Primary Deficit – High Trade Deficit and Rising CAD – Pressure on Currency and Foreign Exchange Reserves
  25. 25. Pressing Macroeconomic Issues• Soaring Inflation – Possible Causes • Monetary Phenomenon (accommodating to generate growth thru reduced cost of borrowing) • Supply Constraints (sugar, wheat etc) • Imported (POL, edible oil, other primary products) • Adverse Expectations – Possible Remedies • Adopt Tight Monetary Stance – it may retard Growth • Improve Supply Shortages; Better Storage Capacity • Reduce Reliance on Imports – self- sufficiency, conservation • Transmit „right‟ signals
  26. 26. Pressing Macroeconomic Issues• High Fiscal Deficit due to fiscal indiscipline – Expenditure over-runs leading to abnormally high borrowings from SBP • Huge subsidy payments for oil, power, wheat, and fertilizer; • Substantial increase in interest payment on domestic debt – sheer callousness and bad sequencing; • Conscious policy inaction – Shortfall in Revenue Collection
  27. 27. Pressing Macroeconomic Issues• High Trade Deficit and Rising CAD – Poor export performance, paying price for heavy reliance on textile; – The export to import ratio declined from 56% to 48%; – Seven items -- POL, Edible Oil, Wheat, Cotton, Fertilizer, Iron & Steel, and oil rigs had additional cost of Rs. 477.4 Billion in the overall imports of Rs. 2242.3 B till May over last year. The rest of the import bill was just a routine matter. Thus, the real concern and policy action should have revolved around these items only.
  28. 28. Pressing Macroeconomic Issues• Currency Depreciation and Depletion of Foreign Exchange Reserves• Inability to generate external financing due to deteriorating rating• Inability of SBP to intervene• Speculators had a field day
  29. 29. Pressing Macroeconomic Issues• Serious Law and Order situation on the domestic front• Political unrest and transitional phase of the government• Serious energy crisis having adverse impact on growth of manufacturing sector• Falling external demand due to onset of recession in the west
  30. 30. Corrective Measures:Natural or Otherwise• Move towards fiscal discipline – Reduction in Expenditure – Withdrawal of Subsidies – Policy Reversal in Taxation Policy• Further tightening of Monetary Policy• IMF Program once again• Falling petroleum prices, Falling prices of edible oil, other primary products• Lots of PDL
  31. 31. Future Prospects• Difficult period to continue for some time to come• Fiscal and Monetary Policies are contractionary in nature, Growth retarding.• Manufacturing sector still facing high cost of borrowing, reduced domestic and foreign demand• Slowdown in services sector• Stabilization Program is mostly painful with severe conditionalities*** End of Lec 2
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