POLICY GUIDELINES NEEDED

All The Serious Challenges

Pakistans Economy Is Facing
Today Include:

Wide Budget
Trade Deficits
Galloping Inflation
Increase In The Level Of Poverty
Power Outages
Water Shortages
Closure Of Industries
Food Insecurities

Since the 1950s we had a system in this

country where the Ministry of Finance and
all the economic ministries were headed by
World Bank and IMF officials of Pakistan
origin.
With increase in the indebtedness of the
country, the situation got from bad to worse
The worst decade was of 1990s

Debt Management
Make sure Debt/GDP ratio doesnt
increase or else IFI will be involved in
economic affairs
How to overcome this problem?
Finance Minister signed a debt
development swap agreement with the
Italian Govt for $100mn
It is a very desirable approach as it breaks
the deadlock between debt and
development

What Does Debt Development

Swaps Do?
Provide debt relief to the country
Increase the education level of the country

Macroeconomic Balance
The rate of growth of the economy during
the last three four years improved a bit, but
was modest when compared with the
neighbors like China and India.
When growth rate becomes a little
respectable for 2-3 years, prices tend to
rise and monetary policy comes into action

What Should The New

Government Do?
First of all, determine whether the prices
are rising as a result of demand pull factor
or cost push factor
If demand pull, then monetary policies are
an appropriate way
If cost push, then identify the factors that
are pushing the prices and find alternative
to these

Budget Deficit
Budget deficit was 3.6% in the beginning of
FY 07-08 but is expected to be 6% in 12
months due to:
Increase in development expenditure in the
run up to elections
Energy related subsidies
Inability of the Government to increase and
diversify the tax base

How Can The Deficit Be

Curtailed?
Another good news! The approach of the
new government appears correct..
But what is it??
Pms decision to reduce the exp on the pm
house by 40%
Mr Shahbaz Sharrif has announced 70%
reduction in the non development
expenditures of the Punjab government.

Reducing defense budget

Curtail borrowing from the State Bank of
Pakistan
New sources of tax revenue.. Tax should
be imposed on those sectors of the
economy where profits have increased in
the past few years but have not been
brought within the tax net such as
agriculture, service sector etc.

Current Account Deficit

It has widened and is expected to cross
$10.5billion.
If deficit increases, IFI will offer to cover it
which will increase the indebtedness and
worsen the Debt/GDP ratio

Short Run Way To Deal With

The Situation

Government should scrutinize the imports

of the country and temporarily halt the
import of non essential consumer goods,
luxuries etc so that oil, machinery, capital
good which keep the wheels of the industry
moving are not stopped

Long Run Solution

Government finds substitutes to the
essential imports that are soaring the
import bill
Switch to oil substitutes to generate power
e.g. nuclear, wind, solar and biomass.
Also, cut down on travel cost by providing
low cost housing to laborers at the work
place(these would result in reducing
dependence on imported oil).

Import substitution of these good within the

country also needs to be explored
As well as, looking for countries that supply
on cheaper rates, e.g. if exchange rate of
Europe is increasing and so prices are
increasing then it is better to buy from
China

Agriculture

Pakistan is an agro-based ccountry

We should build up on strengths

2 visions are discussed:

1. Country should be self-sufficient exports

2. High value added exports

Industry

Pakistan needs to evaluate its strengths and

weaknessesobjectively

Static competitive advantage in under developed

areas, reinforcing are specific fiscal incentives

Dynamic competitive advantage to be used in

selecting industries at national level:

(i) selective industries

(ii) must have strengths in that industry
(iii) income elsticity of demand should be high

Water and Power

Scarcity of both

In the short run, bridge the gap between demand

and supply of power by encouraging saving and
reduce lavish usage

In the long run, generate supply via alternative

sources by wind, solar

Water projects are crucial - start with

small/medium projects

Avoid controversies

Privatization

State owned enterprises - SOE's are a

government failure

They are in efficient and a burden on the country

Case of KESC to K - Electric

Poverty and Income Distribution

Critical issue prevailing

Improve distribution by targetting the supply of

education and health to poor segments

Reduce disparity by increasing direct taxes using proggressive tax system

Institutional Back Up