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Finding solutions for a better Pakistan
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Policies For Growth
&
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Stability of Pakistans Economy
Committee: Economics
Version # 001
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Committee on Economics Policies for Growth & Stability of Pakistans Economy
Insaf Research Wing (IRW) is part of Pakistan Tehreek-e-Insaf (PTI) reporting to the secretary general. IRW was
created in 2009 to carry out research in order to find solutions for problems in Pakistan. The foremost goal of
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Table of Contents
Introduction 04
Unemployment 5-6
Recommendations/Suggestions 9-11
Bibliography 12
Policies for
Banks, fiscal policy by Treasury or Ministry of
Finance and direct policies by Ministry of
Commerce. Similarly in Pakistan monetary
Growth & policy is the responsibility of State Bank of
Pakistan (SBP), Fiscal policy is formulated by
Pakistans
Commerce.
Consumer Price Index (CPI) was also accepted that the high interest
rates and government spending and deficit
FY General Food Non-Food has crowded out the private sector
investment and growth. But the excuse given
2008 12.0 17.6 7.9 for tight monetary policy was that as the
energy crises and law and order conditions
2009 20.8 23.7 18.4
are not v er y f a v o r a b l e i t is less likely
2010 11.7 12.5 11.1 t h a t th e p r i v a t e s e c t o r w o u l d b e
encouraged by the low interest rates. In very
mild language the governments trade policy
(support price of wheat) was also criticized.
Source: State Bank of Pakistan (SBP)
An interesting point here is although the SBP
The inflation statistics of Federal Bureau of agrees that tight monetary policy is harmful for
Statistics (FBS) from January to January economic growth lead by private investment
each year tells the worsening situation. and reason of inflation is not growth in money
supply, yet the bank is persistent on its
contractionary stance. In a latest statement
made by t h e SBP (2011) structural deficit
and excessive government borrowing from
SBP w e r e s t a t e d as reasons for high
inflation and external account imbalance.
countries there is no job seeker support o r the world. The GDP growth had been very
allowance for the unemployed in Pakistan. In slow in the last few years.
present situation the rate of unemployment is
very high reflected by the following statistics: Gross Domestic Product (GDP)
Constant Prices
Rate of Unemployment (2003- 2011) Year GDP Growth (%)
2003 4.86
Year Unemployment Rate Change 2004 7.38
(%) (%) 2005 7.67
2006 6.15
2003 7.80 2007 5.64
2008 1.64
2004 7.70 (1.28) 2009 3.37
2010 4.79
2005 8.30 7.79
Source: IMF World Economic Outlook (2010)
2006 6.60 (20.48)
The period of moderate growth from 2004-07
2007 6.50 (1.52)
did not last long and growth slumped in 2008.
2008 5.60 (13.85) Increasing population also fads away the
economic growths impact on society. If we
2009 7.40 32.14 decompose the GDP, services (including
public sector and defense services)
2010 14.00 89.14 contributed more than half of total towards
national income.
2011 15.00 7.14
Pakistan Gross Domestic Production
(Sector wise)
Source: CIA World Fact book
Slow growth and poor contribution of sector to borrow at high cost of capital. The
agriculture and industry to the national income credit for working capital rose to 97% in t h e
also results in poor contribution to tax revenues first half of FY-2011 as compared to the
and exports. It further results in twin deficits same period in previous year, but the credit
i.e. fiscal and balance of payment. for fixed investment declined from Rs. 43.4
billions to Rs. 6.7 billion. Another problem
Twin Deficits (Fiscal & Balance of visible in the banking sector is the decline in
Payment credit to deposit ratio although the deposits in
banking sector increased. Most probably it has
Pakistan is running a deficit in its both
been due to the high level of nonp erforming
balance of payment and fiscal account. The
loans w h i c h reached close to Rs 500 in t h e
debt to GDP has risen to 49.9% with $ 58
first quarter of the current financial year
billion of external debt. The statistics
(SBP: 2011), which discouraged banks to
released by SBP (2011) showed that deficit
lend to private sector. Moreover, the high
commitment at the beginning of fiscal year
demands of public sector enterprises also
was 4% of GDP (Rs. 685 billion) after t h e
limited the availability of credit to the private
floods to 4.7% of GDP (Rs. 812 billion).
sector.
Moreover the deficit in current account was
$ 3.9 billion in 2010. Alarmingly the government borrowing from
SBP increased to 1500 billion in mid
The trade imbalance (exports minus imports)
December (SBP: 2011). This shows a huge
was $ 11.5 billion, which has made significant
disproportion between public and private
contribution towards the current account
sector borrowing, which indicates that tight
deficit.
monetary policy, is discouraging private
A major positive contribution was remittances sector to contribute to national income a n d
of $ 8.9 billion, which absorbed the trade j o b c rea tion . Although t h e private sector is
imbalance to some extent. It is worth more efficient and innovative than public
mentioning here that in Coalition Support Fund sector but the motivation is profit. High cost
( CSF) only $ 0.743 billion were realized. of production and energy crisis adversely
Exports growth had been faster (2.9%) than effects private sector initiatives and results in
imports which declined by -1.7 %. huge trade imbalances
If we look on the balance of payment account In future the governments intention to reduce
it is very clear that major reason of deficit is its deficit, which could ease the inflation
trade imbalance, imports are well above the pressure, seems unrealistic. The reforms on
exports. Therefore, even the huge general sales tax (GST) have been postponed,
remittances could not fully balance the trade. moreover continuous subsidy on energy and
It i s u s e f u l t o m e n t i o n here that the legal restrictions on government borrowing
remittances are less volatile than other limit have not been implemented. It clearly
elements of balance of payment account as shows that the government is not going
overseas Pakistanis consistently make further with its own plans due to its credibility
contribution. Therefore we need to focus more and political unpopularity.
on trade imbalances.
Financial Instability
After t h e recent banking crisis (2008-09) in
major economies of the world started by the
financial services industry. The role of the
financial sector in economic growth and
stability cannot be neglected. A s a r e s u l t
economic stability is now associated with
financial stability.
were made to introduce Islamic banking in volatility of market is very high KSE-100 index
Pakistan but the model failed due to certain has declined from 15500 points in April to
reasons w h i c h cannot be covered under 2008 to below 5000 points in January
t h e scope of this paper. However in January 2009, although it has significantly
2002 new license was issued to Al-Meezan recovered in January 2011(Bloomberg: 2011)2.
Investment Bank Ltd to open a fully This level of volatility discourages investors;
operational Meezan Islamic Bank. At present poor law and order situation, sluggish
there are 6 licensed Islamic B anks (IBs) and industrial growth and insiders trading are
12 conventional banks w h i c h have licenses major problems for Pakistani stock markets.
to operate Islamic banking branches (IBBs). Tight monetary policy (high interest rates)
According to SBP1 the total assets of the also negatively affects stock markets by
Islamic banking industry are over Rs. 225 announcement and credit channels. Moreover
billion as of 30th June 2008, which accounts the discounted value of future profits also
for a market share of 4.5% of t h e total decreases, which discourages investment in
banking industry assets. Total branch the equity markets. These effects are
network of the industry comprises more than prominent in Pakistani markets since the SBP
330 branches with presence in over 50 cities tightened its stance3.
and towns covering all the four provinces of
the country and AJK. The development of Recommendations
Islamic banking in Pakistan is appreciable;
Considering the present situation of the
however there is a lot more this sector can
Pakistani economy. The author would like to
contribute to the economy in future.
make the following recommendations.
The Small & Medium Enterprises (SMEs)
Monetary Policy
play an important role in economic
development; Taiwan, Korea and China are 1) The State Bank must abandon its tight
prime examples of the role of SMEs in the monetary policy to support economic growth
development of these counties. In Pakistan and development. As it is acknowledged by
unfortunately t h e financial sector has not the SBP that the inflation is not due to
played significant role to improve SMEs excessive monetary growth but other factors
culture. There had been two institutions e.g. fiscal deficit, energy crisis and supply
established SMEDA and SME Bank, however shock. There is no reason to adopt a tight
poor condition of SMEs reflects performance of monetary stance. It is important to mention
these institutions. Although there are some here that interest payment leaves less money
measures SBP is considering taking e .g . for tax deductions, therefore high interest rates
d r a f t p r u d e n t i a l regulations for the SMEs, also results in less revenue for the treasury.
consideration of the credit information bureau
and urging banks to lend to the SMEs; 2) Banking sector should be encouraged to
however no efforts have been made practical. supply liquidity to the production sector
Together w i t h the energy crisis, law and (agriculture & industry) and investment
order situation, high inflation and limited activities. Interest rates must be dropped
availability of low cost capital to the SMEs, significantly to enable banking sector to
there are no signs of development in this perform its role. Economic growth by these
sector. measures would stabilize economy by
decreasing output gap and bringing down
There are three stock markets in Pakistan; prices by matching demand.
Karachi Stock Exchange is the largest with
total capitalization of Rs. 3, 388, 801, 907 .65 2
and 655 listed companies. However the http://www.bloomberg.com/apps/quote?ticker=K
SE100:IND
3
http://www.bloomberg.com/apps/news?pid=news
1
http://www.sbp.org.pk/departments/pdf/Strategic archive&sid=aDFkw4sRLuk8&refer=world_indic
PlanPDF/Strategy%20Paper-Final.pdf es
3) Particularly for the development of SMEs imports. Moreover road tax particularly on
and industry in rural areas, SBP should vehicles would contribute to increasing
provide loans to t h e banking sector at low revenue.
discount rates. Banks must be bound to use
these funds for SMEs and industry 9) In Information Technology, gaming is a big
development. Moreover, SMEs applying for industry, investment in professional education
loans should be registered with the credit to develop a work force specialized in game
rating agencies and their credit history software development would be very useful.
maintained. Furthermore, financial support to software
houses would also help to develop and grow
Fiscal Policy this industry.
6) The subsidies e.g. wheat price support puts 11) Infrastructure projects should be started in
huge pressure on the exchequer as the rich partnership with the private sector, particularly
class does not pay any tax and the salaried in t h e energy and development sector. It
class bear the burden. Therefore, subsidies could be in the form of shared equity, to
should be gradually eliminated. To keep low initiate the project and when the revenues
prices, export and smuggling of these items are realized the private partner could
should not be allowed. Moreover, imports gradually return the public sector investment.
from the international markets must be
allowed either at low tariff or no tariff to 12) Pakistan must use each and every
match the demand and keep the price at source of energy production i.e. Solar,
equilibrium. Best example is the sugar crisis Nuclear, Wind, Coal, Thermal etc. to produce
when artificial supply shock surged the prices more energy than its domestic requirement. It
to record high levels. is important to mention here that Pakistan has
t h e potential to produce energy from almost
7) The stance of t h e government has been every source and importantly there is an
to cut the demand to keep the prices low, increasing need of electricity in India in future
which is against the concept of welfare. The (approx 950,000 MW4).
supply should be increased to keep the prices
low; an example could be allowing import of
foods items and issuance of license to open
new sugar mills.
Financial Stability
[E-mail: ali_paf2002@yahoo.com]
Bibliogrpahy
Ahmad, N. & Ahmed, F. (2006) The Long-run
and Short-run Endogeneity of Money Supply in
Pakistan: An Empirical Investigation, SBP-
Research Bulletin, Volume 2, and Number 1.