SUMIYYA QAMAR

13574

Riphah International University Faculty of Management Sciences

Instructions:
1. Attempt all questions.
2. Answers should be precise and relevant.
3. Open book
4. In case of any similarity with other class fellow, will be mark zero. However, plagiarism will
be checked.

Q: 1
Discuss how the following three factors can affect investments in Pakistan’s economy.

Change in income

Population

Existing stock of capital

Population:
THE increasing rate of population affects the investment, business people’s expectations are
changed they start to believe that some investments might be to be profitable.
Change in income:
When nominal income increases without any change to prices, this makes consumers able to
purchase more goods at the same price, and for most goods consumers will demand more.
Existing stock of capital:
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A larger capital stock enables more real production at a given price level, causing an increase in
both long-run and short-run aggregate supply.

Q: 2
Give an overview of monetary policy adopted by the State Bank of Pakistan over the past
twelve years (three governments) and how that can affect the future of Pakistan’s economy,
specifically under COVID19 scenario.
What is monetary policy?
Monetary policy is the term in macroeconomics this policy is used by the central bank. It is a
policy which is used by the government of a country to achieve macroeconomic objectives.
Monetary policy adopted by the State Bank of Pakistan over the past twelve years:
State Bank of Pakistan has taken a range of timely measures to address the challenges as and
when they emerged.
Specifically, subsidies on domestic petroleum products and the electricity tariffs have been
eliminated over the past few months.
General sales tax (GST) rate was raised by one percent.
Government has raised the wheat procurement price to stimulate production.
There is a resolution to assess and solve the problem of circular debt issue.
Some developments resulted in a further rise in headline as well as core inflation (20 percent
weighted trimmed measure) to 25 percent and 21.7 percent respectively in October 2008. These
developments have generated multiple and diverse set of debates.

In the monetary policy statement of February 2013, the SBP highlighted two main challenges for
monetary policy: to manage the balance of payment position and to contain the possible increase
in inflation. Since then, SBP’s foreign exchange reserves have declined by another $2billion;
from 8.7 billion at end-January 2013 to $6.7billion as of 5th April 2013, mainly due to debt
payments. Contrary to expectations, however, year-on-year inflation has come down by 1.5
percentage points; from 8.1 percent in January 2013 to 6.6 percent in March 2013. These
developments pose divergent policy choices for the SBP.
It is important to emphasize that it is not the size of the external current account deficit, which is
projected to be small and manageable, but the lack of adequate financial inflows that is exerting
pressure on the balance of payments.
The role of interest rate is also important in this context as it determines the return on rupee
denominated assets relative to foreign currency assets. During July –February, FY13, loans to
private businesses have increased by Rs173.3 billion as opposed to Rs56.8 billion during the
same period of last year. This has helped in a modest growth of 2.9percent in the Large Scale
Manufacturing (LSM) sector during July –February, FY13compared to 1.9percent in the
corresponding period of last year.
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Pakistan’s economic growth is going to achieve the highest level in the last eleven years.
Average headline inflation remains within the forecast range of SBP, but core inflation has
continued to increase.
However, largely due to high level of imports the current account deficit remains under pressure.
The progress in the real sector indicates that agriculture sector is set to perform better for the
second year in a row. Production of all major Kharif crops, except maize, has surpassed the level
of FY17. Benefiting from both infrastructure and CPEC related investments, construction and its
allied industries are expected to maintain their higher growth momentum.
While increase in international oil prices pose major risk to this assessment, managing overall
balance of payments in near term depends on the realization of official financial flows
Effect of monetary policies in the future of Pakistan’s economy, specifically under
COVID19 scenario:

The pandemic has severely affected the nation’s economy and virtually pushed it to the brink of
bankruptcy. While almost all nations have been substantially affected by the global health
emergency, Pakistan’s economy is not able to absorb the massive disturbance caused by the
pandemic.

Before the pandemic, the country managed to reduce the current account deficit (CAD) by over
70 percent in the first seven months of Financial Year (FY) 2019-20. However, this came at the
expense of economic growth, which fell from 5.6 percent in 2018 to 3.3 percent in 2019.

Amidst the ongoing COVID-19 pandemic, both these deficits are likely to re-emerge, with a
drastic decline in exports and foreign remittances. Pressure will also mount on the expenditure
front. In 2019, Pakistan’s military had voluntarily foregone any increase in the defense budget.
Now, it is likely to demand a substantial increase. Further, the government will be forced to
reverse the trend of cutting expenditure on health, education and other social service sectors.

The pandemic has forced most countries to break with the past and initiate deep reforms, not
only in the economy but also in politics and foreign and security policy, Pakistan is treating
COVID-19 as an opportunity to obtain concessions, bailouts and debt relief, to avoid undertaking
the reforms it had accepted as part of the 2019 IMF bailout. The country is also seeking bailouts
from China and Saudi Arabia. While helpful, these measures cannot replace the underlying need
for deep structural reform in Pakistan.

Q: 3
Give an overview of fiscal policy adopted by the government of Pakistan over the past
twelve years (three governments) and how that can affect the future of Pakistan’s economy,
specifically under COVID19 scenario.
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What is fiscal policy?

Monetary policy adopted by the State Bank of Pakistan over the past twelve years:

Fiscal year 2007‐08 has been a difficult year for Pakistan’s economy. Unstable political
environment and adverse security developments owing to the intensification of the war against
terror on domestic front; and unprecedented rise in oil, food and other commodity prices at
breakneck pace along with slowdown in global economic activity on external front, adversely
affected the performance of the economy in general and fiscal balance in particular.
Long delays in passing the large increases in international oil and food prices to the domestic
consumers resulted in deterioration of fiscal and external positions
The fiscal discipline shown between 2001‐02 and 2006‐07 has been reversed because of the
difficulties faced last year.
Fiscal performance in 2012-13 replicated the pattern of past years as expenditure outstripped
revenue by a wide margin, reflecting the continuation of excessive subsidies and lower tax
collection. The fiscal deficit includes Rs.322 billion on account of settlement of power sector
circular debt without which the fiscal deficit is calculated at 6.6 percent.

Overall, analysis of the last two decades of fiscal performance revealed that high subsidies
remained a major burden on fiscal account combined with falling tax to GDP ratio. Tax revenue
as a percentage of GDP stood on average at 13.7 percent during 1992-96, has decreased to an
average of 9.7 percent during 2008-2013.
Low tax to GDP ratio has also translated into falling total revenue to GDP ratio, as it decreased
from an average 18 percent during 1992-96 to 13.4 percent during 2008-13. Interestingly, even
during the period of fiscal improvement (1999-2004), tax to GDP ratio continued to slide. Going
forward, both spending and revenue measures have important implications for the economy and
these implications need to be taken into account if the fiscal consolidation efforts underway are
to be sustainable.
COVID19 scenario:
The current account deficit is expected to continue narrowing to the equivalent of 2.8% of GDP
in FY2020 with a reduction in the trade deficit resulting from currency depreciation, the
imposition of regulatory duties to contain import demand, and continued recovery in workers’
remittances following declines in FY2016–FY2018. In the first half of FY2020, the current
account deficit narrowed sharply from 5.8% of GDP a year earlier to 1.5%. Modest growth in the
key exports textiles, rice, and leather was supported by loans under a central bank export finance
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scheme and long-term financing facility for exporters. This was complemented by a notable
reduction in imports restrained by higher import duties. Weaker demand under COVID-19 could
adversely affect exports, but on balance exports should strengthen due to policy stability,
improvement in ease of doing business, and lagged effects of currency depreciation. Thanks
primarily to the lower oil price, the current account deficit is projected to narrow further to equal
2.4% of GDP in FY2021.