FOREIGN INFLOWS

Foreign inflows are subdivided into four major components:

1.
2.
3.
4.

Foreign portfolio investments

Foreign direct investment
Remittances
Foreign aids

Foreign Portfolio Investments

Foreign Portfolio Investments (FPIs) simply mean investments in the secondary market by the foreign
investors. For the portfolio investors the purpose is to invest their funds where they be able to get maximum
return by risk exploitation. This job can be done through passive holding of shares or through active trading of
securities in the financial or capital markets. The major difference between Foreign Direct Investments and
Foreign Portfolio Investments is that the purpose of former investments is to take the control and operate an
indigenous business organization.
Foreign Portfolio Investments play a very important role in the economic development of the host country.
First of all FPIs increase the liquidity position of local economy and then FPIs help to improve the Foreign
Reserves that results in a stabilize exchange rate. Secondly FPIs induce new invests in the economy hence the
rate of investment increases and lastly, FPIs are also helpful and encourages existing business firm to expand
their businesses through raising their equities by issuance of new securities in the market.
In the economy of Pakistan FPIs getting more and more importance since the market risk is very high due to
geopolitical situation of the homeland and foreign investors are reluctant to inject FDIs in Pakistan so foreign
investments can be attracted towards Pakistan through FPIs. Even though its a short time measure but this
will be helpful to attract foreign investors in Pakistan.
Now the real question is that how our economic managers can boost the confidence of foreign investor so that
foreign investor be ready to invest their funds in Pakistan?
For this purpose following steps are unavoidable to be taken:
First of all government should float Bailout Program to facilitate investor in divesting their investments. For
this purpose Buy Back option would be very handy. Secondly SECP (Securities and Exchange Commission of
Pakistan) at least make it obligatory for those firms who have raised their capitals in KSE to buy back their
shares. And finally federal government should provide relaxation on Capital Gain Tax for a definite period of
time in order to boost the confidence of investors on stock markets.
To conclude, it is inevitable to uplift the stock markets so that Foreign Portfolio Investments can be attracted
towards Pakistan because foreign investments are unavoidable for the development of Pakistan
Characteristics of FPI:
1. The primary intention is not to control a foreign business enterprise but to gain from
profit making opportunities available in foreign markets.
2. FPI is represented by monetary flows from individuals, mutual funds, portfolio
management companies, pension funds, equity funds etc
3. Due to the short term nature of such investments the fund flows are less predictable.
This may result in volatility in both the foreign exchange and capital markets.
4. There is no interface between the management and the foreign investor. The
transactions represent a change in ownership of existing equity from one investor to
another. It has no impact on the balance sheet of the company.

Advantages of FPI to economy:

1. There is a substantial increase in the secondary market depth and breadth due to the
presence of such investors.
2. The Capital Market acquires an institutional character since global liquidity is channeled into local markets
in a planned manner through research and analytical studies. These funds translate into diversified
investments against predefined risk parameters.
3. These investments increase demand for the shares of target companies thereby increasing their PE Ratios.
This helps such companies to raise capital at lower cost.
4. They provide a buffer for financing the Balance of Payments deficits thereby helping to preserve the
foreign currency reserves of the host entry.
Disadvantages of FPI:
1. adverse law and order situation can result change in investment norms and repatriation regulations.
2. Emerging markets which are the beneficiaries of most FPI traditionally suffer from low retail participation
which results in inadequate liquidity which results in price volatility.
3. Due to the unpredictable nature of such funds there is a tendency to shift from one market to another at
short intervals. Volatility arising out of FPI inflows and outflows has adverse effects on the host country
economy.
4. Emerging economics tend to have depreciation prone currencies. This exposes the foreign investor to
exchange rate risk on both principal and returns.
Advantages of fpi to investors:
Diversification:Foreign portfolio investment gives investors an opportunity to engage in international
diversification of portfolio assets, which in turn helps achieve a higher risk-adjusted return. The global stock
market operates in such a way that the factors that drive the London Stock Exchange at any given time are
different from those that prevail in africa, for example. This means that an investor who has stocks in different
countries will experience less volatility over the entire portfolio.
International financeInvestors who have foreign investment portfolios have a broader finance base because
they can access different sources of finance in foreign countries where they have significant investments. This
is advantageous when finance sources available at home are expensive or unavailable due to various factors.
The ability to get funds on favorable terms and as quickly as possible can determine whether a business
executes a new project or not.
Benefit from Exchange Rate: International currency exchange rates keep changing. Sometimes the currency
of the investor's home country may be strong, and sometimes it may be weak. There are times when a stronger
currency in the foreign country where an investor has a portfolio may benefit the investor.
Access to a Bigger Market:Home markets in the United States have become very competitive, as there are
many businesses offering similar services. Foreign markets, however, offer a less competitive and sometimes
larger market. A business may make more sales selling shoes in one African country than in the entire U.S.,
for instance.
DIFFERENCE BETWEEN FDI AND FPI
Foreign direct investment (FDI) involves establishing a direct business interest in a foreign country, such as
buying or establishing a manufacturing business, while foreign portfolio investment (FPI) is investing in
financial assets, such as stocks or bonds, in a foreign country
FPI inflows are also affected by some factors which are as follow:
Interest rate

 Tax on Interest on Dividend

Exchange Rate

Remittances
A remittance is a transfer of money by a foreign worker to an individual in his or her home country. Money
sent home by migrants competes with international aid as one of the largest financial inflows to developing
countries. Workers' remittances are a significant part of international capital flows, especially with regard to
labor-exporting countries. Countries which send remittances to Pakistan include Saudi Arabia, UAE,Dubai,
Abu Dhabi, other GCC countries, USA , UK, EU countries and other countries.
Remittances in Pakistan are sent through both unofficial and official channels but recent figures shows an
increase of remittances through official channels.
Formal remittance mechanisms commonly used are banks (Habib, National Bank) and the Post Office (which
acts as an agent for Western Union and has an agreement with Habib). Together, they offer several means of
moving money, including postal money orders, wire transfers and bank accounts. The primary disadvantage of
these systems is the need for recipients to come to the offices of the agent, and these agents limited rural
outreach.
Two informal remittance mechanisms are commonly used in the study area. The first is personal, hand carried,
delivery; the second involves sending money via a money-changer (the Hundi or Hawala system). Handcarried remittances depend on home visits by a migrant family member or other trusted individual (usually
another migrant from the same village).There is several reasons for the popularity of the Hundi market. First,
the hundi rates of exchange are almost always higher than the official exchange rates used by the nationalized
banks for converting remittances into rupees. Second, it may be argued that the hundi market transaction
under taking through informal channels, and with an unregistered company and agent inherently involved
greater risk than transaction carried out by official banks. This perception of the hundi market transaction
riskiness may hold with some people, especially the professionals etc. However, most of the people believed
that though only market is informal in nature but operates on the basis of trust and it is not the interest of the
agent to acquire a bad reputation. Third, the key reason for the success of hundi market is the relative
efficiency of the hundi system over the commercial banks. These include easier access, convenient timings,
and faster delivery. The main advantage of this channel is that it is, in a simple sense, free: the amount
remitted is exactly the same as the amount delivered. The main disadvantage is that the frequency and
regularity of remittances is tied to the frequency and regularity of a migrants home visits. The second
mechanism, transfer via money-changers, incurs a commission, but the total cost is lower than with formal
mechanisms, and recipients get their money quicker than they do through official channels. The fact that
details of the whole transaction are clearly and simply agreed from the start makes it less likely that
remittances will be delayed or diverted.
International policy changes implemented in a bid to curtail terrorism funding have had a significant influence
on remittances to many countries, including Pakistan. Since 2001, official flows to Pakistan have markedly
increased, suggesting that the balance between formal and informal channels has moved in favour of the latter.
Meanwhile, the Pakistan government has introduced a series of measures designed to encourage the use of
formal channels, including more favorable exchange rate regulations, and Pakistani banks abroad have begun
offering free-of-cost money transfer services.

Remmitances trend 1998-2015

20,000.00
15,000.00
10,000.00

Amount in millions dollars

5,000.00
0.00

Years

Reasons for trend

1. The freezing of foreign exchange accounts following the nuclear test carried out by Pakistan in May 1998,
which was a major blow to the confidence of nonresident Pakistanis.
2. The 9/11 attacks on the US, which generated resentment and suspicion against Muslims living there,
causing the Pakistani diaspora to transfer their savings/assets to Pakistan especially from the US, as a fallback
in case living in the US or other Western countries became unbearable or unsafe.
3. Following 9/11, the US authorities increased surveillance of the Pakistani diasporas incomes and
transfer of money abroad, especially through nonofficial channels.
4. Anti-money laundering measures adopted by Pakistan in 2002 post-9/11, which included the
registration of money exchange companies for a considerable fee (between Rs 100 million and Rs 200
million), forcing smaller companies to merge with larger companies to be able to pay the registration fee.
5. The collapse of the real estate boom in Dubai in 2009, in which both Pakistanis living there and in
Pakistan had heavily invested, which led to a large number of Pakistani professionals and workers returning to
their home country.
6. The Pakistan Remittances Initiative (PRI) launched jointly by the Ministry of Finance, the SBP, and the
Ministry of Overseas Pakistanis in 2009 to encourage remittances through formal channels, including
incentives for Pakistani banks to increase such flows.
Following the nuclear test in May 1998 and subsequent freezing of foreign currency accounts in Pakistan,
we see an immediate decline in total official remittances from almost USD 1.5 billion in 1997/98 to USD 1.06
billion in 1999/2000, which continues till 2001/02. The decline occurs across all countries, and we can assume
that a large part of it was then remitted through unofficial channels.
Following 9/11 in September 2001, total official remittance flows double from USD 1.09 billion in
2000/01 to USD 2.4 billion in 2001/02, especially in the case of flows from the USfrom USD 134.8 million
to USD 779 million. This amount from the US rises further to USD 1.2 billion in 2002/03, after which it
remains around the same till 2005/06. The jump in official remittances from Dubai and Abu Dhabi follows
broadly a similar pattern.
This increase in remittances in the case of the US appears strongly to represent a shift in the transfer of
remittances from unofficial to official channels as well as the transfer of savings and assets by the Pakistani
diaspora in the US back to Pakistan. As confidence among the Pakistani diaspora in the US is gradually
restored, these official remittance flows begin to even out.
There is an initial fall in official remittances from Dubai following the crash of the building boom and
financial crisis in 2008/09from USD 970 million in 2008/09 to USD 851 million in 2009/10. This is,
however, followed by a sharp increase the next year to USD 1.2 billion and a further increase to USD 1.4

billion in 2011/12. In the case of Abu Dhabi, there is no initial fall but a sharp continuous increase from
2009/10.
After the initial decline, the subsequent increase in remittances from Dubai reflected to some extent
returning migrants accumulated savings. The large increase, especially in subsequent years, however, was
most probably due to panic selling of real estate by Pakistanis living in Pakistan who had invested in Dubai
and were now bringing back into Pakistan what was left of their investments.
Now until 2012 to 2015 the increase in remittances in basically due to the PRI initiatives which has
increased the flow of remittances from unofficial to official channels With the economy slowing down, there
is increasing evidence that young professionals and skilled workers are leaving for employment abroad. Three
factors have spurred this demand: (i) increased demand for labor in Saudi Arabia, Abu Dhabi, and the Gulf
Cooperation Council (GCC) countries, which were not affected by the financial collapse in Dubai; (ii) new
job opportunities in Europe (especially in Italy, Spain, and Norway), possibly due to its fast-aging population;
(iii) job opportunities in the US and UK which, despite the economic slowdown, remain attractive job markets
for professionals and higher-skilled workers, for whom demand has continued to grow at the expense of
unskilled workers; and (iv) the emergence of Australia as an attractive job marker for Pakistani professionals.
A key driver of the flow of remittances, especially of the choice to send remittances through official
channels, is the cost involved. These costs have decreased in recent years.
The recent rise in remittances can partially be attributed to three factors. First, the stock of overseas
Pakistanis has increased during the last decade. As noted earlier, the net annual outflow of workers is about
0.34 million. Interestingly, Pakistanis have not found any new destinations or labor market for employment.
Rather, their flows continue to Saudi Arabia, UK, USA and UAE .This increase in the stock during last decade
could be one of the major reasons for rising trends in remittances. Second, the skill composition of Pakistanis
have improved. On the one hand, the younger generation of expatriate Pakistanis has entered into more
modern professions in USA and UK and, on the other hand, fresh migrants, particularly those who left
Pakistan during last 7-8 years, are equipped with new sets of professional skills (Dawn, October 3, 2011).
Higher wages of these professionals have contributed to rise in remittances. Third, the State Bank of Pakistan
has taken steps, such as Pakistan Remittance Initiative (PRI) to boost and facilitate the flow of remittances
sent home by non-resident Pakistanis. The State Bank takes the credit of its policies for recent rise in
remittances. Similarly the message of senior representatives of Pakistani banks dealing with remittances
during our recent meetings with them in Karachi was that their initiatives since 2005 have attracted more
remittances through the banking channel. Had banks not taken these initiatives, remittances through nonbanking channels would have been much larger at the cost of banking channel.
A bit about PRI
In order to provide for an ownership structure in Pakistan for remittance facilitation, State Bank of Pakistan,
Ministry of Overseas Pakistanis and Ministry of Finance launched a joint initiative called Pakistan Remittance
Initiative (PRI). This initiative shall take all necessary steps and actions to enhance the flow of remittances.
The initiative has been taken to achieve the objective of:
Facilitating, Supporting, Faster, Cheaper, Convenient & Efficient flow of remittance
To create investment opportunities in Pakistan for overseas Pakistanis
Where are the foreign remittances being used?
Remittances have played a significant role in Pakistans economic development as they prevent the balance of
payments crisis. They provide stability to exchange rates and improve credit ratings. The inflow of
remittances lifts up the purchasing power of recipients, which stimulates economic activity in the country. It is
remittances that have been the reason behind the stable and strengthened foreign exchange reserves of
Pakistan. Besides these advantages, remittances create some adverse conditions like the migration of educated
or highly skilled labour the brain drain. Loss of human capital lowers productivity and economic growth.

Increase in remittances shifts the receiving households budget constraint outward by the amount of the
transfer and therefore should have a positive impact on household consumption. Remittance receiving
households spend more on education, health and housing. It can give a household the initial capital necessary
to start a small business. Sometimes remittances are used for investment in the home country for economic
development and can appreciate the local currency. In Pakistan, foreign remittances have significantly
provided assistance in upholding and shooting up the exchange rate of the rupee so that the burden of external
debts can be reduced. There is great potential for using remittances to encourage development.

Foreign direct investment:

FDI is an investment made by a company or entity based in one country, into a company or entity of another
country. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of
foreign direct investment than closed, highly regulated economies.
The investing company may make its overseas investment in a number of ways - either by setting up
a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or
through a merger or joint venture. An example of foreign direct investment would be an American company
taking a majority stake in a company in China.
Since Pakistan is a developing country and generally a developing economy is characterized by low income
level, lack of capital, low level of industrialization, low saving, rapid growth of population, burden of external
debt, paucity of foreign aid, deficit in balance of payment, lack of technical and managerial skills, and heavy
reliance on export of primary goods etc. Also the domestic resources are inadequate to finance the
development needs, therefore FDI can be an important instrument of overcoming these weaknesses necessary
for economic development.

Trends in FDI in Pakistan

Total FDI in Pakistan
$6,000,000,000.00
$5,000,000,000.00
$4,000,000,000.00
$3,000,000,000.00
$2,000,000,000.00
$1,000,000,000.00
$0.00
1960
($1,000,000,000.00)

1970

1980

1990

2000

2010

2020

The policies of host countries have an important influence on the foreign investment decision. These policies
can either simulate foreign investments or discourage it. The success of the FDI policies can be judged by the
size of the inflow of the capital. Pakistan has been making efforts to attract FDI and such efforts have been
intensified by the advent of deregulation, privatization and liberalization policies. From 1947 to 1958 Pakistan
maintained strict control on FDI, even it was not allowed in banking, insurance and commerce. However,
former president Ayub Khan changed the liberalization policies. The Government dismantled import controls
of 1950s through issuing licenses on importable items. Automatic licensing schemes were introduced in 1961
which allowed the automatic renewal of import licenses. Most importantly, a free list was introduced in 1962
which was considered most market friendly step towards trade from 1971 to 1977 government changed its
policies from liberalization of economy to nationalization program. Although this sudden shift towards
nationalization devastated the confidence of the private investors, the foreign investment was exempted from
the nationalization process. Zulfiqar Ali Bhutto liberalized the import licensing system and also passed the

foreign investment act to provide legal protection to the foreign investors. Thats is the reason we didnt see a
rapid downfall in FDI in his regime, despite his nationalization policy.
Under the regime of Zia, we see a substantial growth in FDI. The inflow of US aid during the Afghan war was
the main reason for the increased FDI. Some of his denationalization policies to increase investors confidence
and the political stability in the country also helped the cause.
The liberalization policy which was implemented in the early 1990s, attracted FDI like never before. FDI
grew at an annual rate of 9.8%. The governments of 1990s became very generous to FDI by providing fair
trade policy, fiscal incentives and tariff facilities to foreign investors to make Pakistan the most attractive
investment place in the region. The reason for such high FDI was the entry of foreign investment in the energy
sector, but we saw a sharp decline in the late 1990s. The reasons for that could be the repercussions of the
nuclear test. Pakistan faced sanctions after the nuclear test. Kargil war also deteriorated the overall prevailing
unstable political environment.
The most successful era of economic policies is considered from 2000 to 2007. The prime reason for this
increase in FDI was the participation of Pakistan in the War on Terror. Pakistan became the Frontline State
among all the allies and received enormous amount of foreign aid. The political condition of the country was
also relatively very stable. All of these factors along with sound economic policies helped in gaining foreign
investors confidence. Such increase in FDI was unforeseen.
This increasing trend in FDI stopped after 2008. Although the PPP government provided all the possible
incentives to foreign investors but the unstable condition of the state and the insurgencies by the Taliban led to
a sharp decrease in FDI, but we again see an increase in FDI after 2014.The military operation against the
Taliban and a stable law and order situation helped attracting FDI.
Reasons for low FDI in Pakistan

As compared to other developing countries, the amount of FDI inflow in Pakistan has been far from
encouraging, despite numerous highly attracted incentives. Statistics in the above table shows that India is
much more effective in attracting FDI in South Asia region than Pakistan and Bangladesh. The following
factors which are very crucial in attracting FDI, can explain the reasons of low FDI in Pakistan.

Political stability
Law and order situation
Economic strength
Governments change in policy
Infrastructure
Labor force

Foreign Aids in Pakistan

What is Foreign Aid?
Economic, technical, or military aid given by one nation to another for
purposes of relief and rehabilitation, for economic stabilization, or for mutual defense is called Foreign
Aids
TYPES AND FORMS OF AID/LOANS:
Foreign economic assistance broadly falls under the following two categories:
A) Foreign grants
B) Foreign loans and credits
Foreign Grants:
Foreign grants provided by the donor countries/agencies comprise the following:
i) Project Assistance
ii)
Commodity Assistance
iii)
Technical Assistance
iv)
Other Grants
External Debt: -{Foreign loans and credits}
External Debt can broadly be viewed from three angles:
a) By Borrower Type
i) Central Borrowing
ii) Guaranteed Loans
iii) Private Non-Guaranteed
b) By Utilization:
i) Project loans
ii) Non-project commodity loans or program loans.
c) By Creditor Type
i) Official Creditors
ii) Private
History of Foreign Aids in Pakistan:
Due to enormously large accumulated foreign debt, harsh terms and conditions of different types of
aid agencies, as well as economic and strategic interests of donors, Pakistans experience of foreign
aid over the last several decades has not been quite satisfactory. This grim reality has provoked a
vigorous debate on the effectiveness of aid to Pakistan.
Since independence aid inflow to Pakistan has a strong association with geo-political interest of
donors. Each successive government in Pakistan relied on foreign aid to finance a significant
proportion of investment and import requirement for self-sustaining economic growth. Pakistans
dependence on foreign aid started in the 1950s. The increase in aid inflow during the 1960s is
connected with Pakistans signing of mutual defence assistance agreements with the US in the cold
war era. Aid inflow of the 1980s can be visualised in perspective of the Afghan war. In the 1990s,
economic assistance to Pakistan was cut off by the US and other multilateral donors when the
Afghan war ended.
However, recently when the US has decided to withdraw its troops from Afghanistan, at the same
time its government has asked congress for a sharp reduction of economic and security aid to
Pakistan for the year 2014.
This pattern of aid flows from US clearly vindicates that geostrategic and political imperatives
determine the direction and amount of foreign aid. We have a chequered history of aid flows from
the US. The amount and flow of aid was not determined by the economic needs of the people of
Pakistan, but, rather, by the US geostrategic policies and priorities.
Regardless of knowing all these facts, Pakistan governments inability to provide for security and
prosperity of its own people has led to questions about its sovereignty whether in terms of its

monopoly of violence, fiscal solvency or human security. Despite receiving large quantities of
foreign aid, Pakistan is still away from the stage of self-sustaining economic growth.
Today countries help Pakistan because they expect that doing so will advance their interests, not
necessarily those of Pakistan and its citizenry. Pakistan will not free itself of manipulative outsiders
unless it raises its own revenue from domestic resources, exerts control over its own territory, takes
care of its citizens, and becomes a responsible partner in managing-rather than underminingregional and international security. In other words it must, first, exert its sovereignty itself.
To do this we need to reduce our dependence on aid through embarking on policies of self-reliance.
What we need is to put our house in order. Enhancement of the tax base, promotion of trade and
foreign direct investment, and development of credit markets can turn out to be better and longerterm alternatives to aid and can go a long way in ensuring sustainable economic growth.
Role of Donor Agencies and their Conditionalities
There are three leading multilateral agencies viz. IMF, World Bank and the ADB that provide loans
and credit on soft and hard terms. For Pakistan all the three agencies have contributed significantly in
providing assistance and almost 50 percent of our external debt is owed to these to these institutions.
a)International Monetary Fund (IMF):
The IMF was established in 1945 to promote international monetary co-operation, facilitate the
expansion and balanced growth in international trade, promote exchange rate stability and orderly
exchange arrangements among members, assist in the establishment of a multilateral system of
payments in respect of current transactions, give confidence to members by making the general
resources of the Fund temporarily available to them under adequate safeguards, etc.
IMF and its Conditionalities:
The primary objective of conditionalities in an IMF program is to restrain budget deficit and
reserve money growth to address the macroeconomic imbalances faced by a country.
The guidelines attached by the IMF with its credit programs generally include: adopting policies
of fiscal and budgetary austerity; exchange rate devaluation; "getting the prices right", stimulating
investment instead of consumption; cuts in real wages; cuts in public expenditure; prioritizing
external debt service; and import liberalization. Indebted states are required to comply with these
guidelines in return for balance of payments assistance.
The IMF has been the target of criticism for a number of years and it was heavily criticized in the
wake of the 1997-98 financial crises for failing to predict these crises and its ensuing crisis
management in the Asian countries.
In case of Pakistan, it had to take a dozen prior actions, fulfill 30 performance criteria and structural
benchmarks over a 15-month period in 2000-2001.
Pakistan and the IMF:
Pakistan entered into nine different Agreements with the IMF during the period 1988- 2000.
Pakistan did not accept the last of the 12 tranche PRGF program and seek any successor
arrangement. The program was discontinued by the Government of Pakistan given the strong state of
the economy and the foreign exchange reserves.
The major factors which contributed towards the motivation of obtaining loans from IMF included:
need to obtain financial resources for BoP problem, secure access of funds from other IFIs and
bilateral donors, to get debt relief and rescheduling in the post 1998 period.
During the period 1988-2000, the prolonged uses of Fund resources in Pakistan can be characterized
as less successful in achieving the desired objectives.
After 2000, the Stand-by Arrangement (SBA) was fully implemented and its progress on the poverty
reduction has also been on track.
B-International Bank for Reconstruction & Development (IBRD):

The IBRD was established in 1945. Initially, it was devoted to post-war reconstruction in Europe
and afterwards its aim has been to assist the economic development of member nations by making
loans where private capital is not available on reasonable terms. In 1980, the Bank introduced an
element of structural adjustment lending, which supports programs and changes necessary to
modify the structure of an economy so that it can restore or maintain its growth.
The World Banks Role in Pakistan:
The World Bank has played an important and essential role in the development process of
Pakistan particularly in modifying the structure of the economy to restore growth through the
structural adjustment-lending program introduced in 1980.
The Bank Groups assistance strategy focuses intently on supporting the governments
development strategy
The government of Pakistan has shown a strong commitment to reducing poverty and is
receiving support from the World Bank through around US$ 1.2 billion in financing for 18 active
projects and, over the past five years, an additional US$ 1.5 billion in adjustment lending to
strengthen the government's broader reform programs.
The Country Assistance Strategy (CAS), endorsed by the Bank in 2002, was designed to support
Pakistans reform program
The World Bank is the main financer of Pakistans Poverty Alleviation Fund, which provides
assistance to poor communities throughout the country. The Fund has been working with nearly 40
local organizations and has extended micro-credit loans to more than 275 thousand borrowers, of
which 45 percent are women.
Recently, Pakistan has sought additional soft-term loan facility from the World Bank for its
infrastructure development and poverty alleviation efforts through a long-term development
partnership to transform the country and facilitate second generation reforms
C - Asian Development Bank (ADB): The ADB, functioning since December, 1966, has been
engaged in promoting the economic and social progress of its developing member countries in the
Asia-Pacific region.
ADBs Role in Pakistan:
ADB in Pakistan is presently undertaking various initiatives to promote social protection and social
safety mechanisms, capital market reforms, reforms at the Provincial level, support for Devolution,
etc.
Eleven loans totaling US$870.7 million were approved in 2003.
Cumulative ADB lending to Pakistan as of 31 December 2003 was US$13.55 billion in the
form of 213 public sector loans. Of this amount, $6.4 billion was from the concessional Asian
Development Fund (ADF) and $6.8 billion from Ordinary Capital Resources (OCR).
The ADB public-private infrastructure finance (PPIF) project is the first major effort of any institution
to help accelerate infrastructure development through increased private sector participation in
infrastructure development in Pakistan.
Impact of Foreign Aid on National Economic Policy
Let us examine the facts about foreign aid and its importance in Pakistans economy and particularly
the widely held impression that we got a big bonanza after September 11, 2001.
The net flows as percentage of gross national income have gradually declined from 4.3% in 1970 to
1.5% in 2003 and net transfers from 3.6% to 0.7.
The popular myth that the economic turnaround in Pakistan can be attributed to September 11, 2001
events can be exploded by looking at the net flows and net transfers for 2002 and 2003. For both these
years they have actually declined as proportion of national income compared to 1999.

Looking at external debt and debt servicing, it can be seen that there was a big jump between 1990
and 1999 and 2003. In terms of external debt indicators the burden has actually fallen in the last four
years. The ratio for 2004 is even much lower.
Similarly, there has been a big drop in the debt servicing as the country has to pay only 16 percent of
export receipts as debt servicing compared to almost 29 percent in 1999.
Aid Effectiveness in the Education Sector of Pakistan
As far as education sector is concerned, the government of Pakistan has not been able to structure the
basic foundation of education system in last 60 years to meet its future challenges due its less
importance in the budget. According to Economic Survey of Pakistan 2006-2007, only 2.4% of GDP is
spent on education which is a very small amount as compared to our neighboring countries and other
developing countries of the world. A major drawback is that the government utilizes only a small
portion of foreign aid in the education sector while more funds should be generated for education
sector and less to other sectors
Current state of the Economic Policy
At the time of 1998-99 crises, Pakistan was facing multidimensional challenges
Since 1998-99, Pakistan has traversed the road from a difficult default situation on its external
payments to a vigilant program under the IMF and finally reestablished access to international capital
markets. This was possible mainly because of structural reforms
Pakistan's economy has gained more strength, underpinned by a buoyant private sector during
the current fiscal year. Acceleration in growth accompanied by a sharp pick up in industrial
production, a strong upsurge in investment, and a further strengthening of the external balance
of payments have been the hallmarks of performance of Pakistans economy in the current
year.
After a remarkably successful Euro bond issue in FY04, Pakistan re-entered the international
capital markets with a US$600 million offering in January 2005 named as Sukuk bond. The
bonds have a five-year maturity period, ending 2010.
Prospects and Challenges
At present there are two major challenges in the short and the long run to fight inflation (short run)
and to eradicate poverty (long run).
While inflation recently touched the double digit level, the persistence on inflation at higher levels
during FY05, could fuel the inflationary expectations. Major reasons for the current hike include: rise
in aggregate demand due to an unprecedented rise in private sector credit the oil price spike and the
food shortages.

Another challenge in the short run, though not as worrisome as inflation, is the increasing trade deficit. The
trade deficit is widening due to an unprecedented rise in imports due
(i)
(ii)

higher trade deficit and

Increase in imports of machinery.
The higher oil import bill due to higher international oil prices is a source of concern but is beyond
our control. The higher machinery import, on the other hand, is still welcome as it is a reflection of
the growing capacity of the economy.