Economics and Finance of Pakistan

Authored by Chair and Co-Chair

Discussing Foreign Direct Investment and Inflation in Pakistan during Pakistan Young Leaders Conference 2012 DELEGATES ARE SUGGESTED TO THINK BIG AND SHARE IDEAS THAT CAN IMPROVE THE CURRENT SITUATION OF PAKISTAN IN THE ECONOMIC AND FINANCE FRONTS

Economic and Financial Affairs of PAKISTAN

INTRODUCTION The Economic and Financial Affairs of a country are at the backbone of survival of states in the global arena. They form the central consideration for domestic and foreign policies charted the world over, and thus hold immense importance. The economy of Pakistan is the 43rd largest in the world in nominal terms and 25th largest in the world in terms of purchasing power parity (PPP).The economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with neighboring India. However, IMFapproved government policies bolstered by foreign investment and renewed access to global markets, have generated solid macroeconomic recovery the last decade. Substantial macroeconomic reforms since 2000, most notably at privatizing the banking sector have helped the economy. The Committee consists of deliberation upon the Economic aspects as well as the financial one of the country. These are supervised by the Economic Affairs Division and The Finance Ministry of Pakistan. Economic Affairs Division Economic Affairs Division is responsible for assessment of requirements, programming and negotiations of external economic assistance related to the Government of Pakistan and its constituent units from foreign Governments and multilateral agencies. The issues regarding external debt management and matters relating to technical assistance to foreign countries, credit to friendly countries on lending / re-lending of foreign loans and monitoring of aid utilization are being handled by this division. ( www.ead.gov.pk, 2012). Finance Ministry Pakistan The Finance Division deals with the subjects pertaining to finance of the Federal Government and financial matters affecting the country as a whole, preparation of annual budget statements and supplementary/excess budget statements for the consideration of the parliament accounts and audits of the Federal Government Organization etc. as assigned under the Rules of Business, 1973.

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Document is compiled by Chair Shfa'at Gilani and Co-chair Yasir Nazar Momin

Moreover, Finance Division maintains financial discipline through financial advisors organization attached to each Ministry/Division etc. (http://www.finance.gov.pk/, 2012).

TOPIC 1: Ways to decrease FDI and increase local growth and investment.
Foreign Direct Investment FDI does well, but on the other hand, it destroys local economy and takes the profit or money outside the country. Roughly speaking: the turnover of Shell alone is more than our GDP. You could also possibly discuss the ways via which FDI can be utilized effectively in helping the country sustain a stable growth. There are two angles to this debate. The Infant Industry argument: A popular argument against freer trade is that infant industries in developing countries cannot compete against foreign counterparts, unless they are protected. According to arguments that focus on competitive pressures, a combination of international trade and foreign direct investment (FDI) squeezes the profitability of firms in developing countries, thereby inhibiting their investment in cost-reducing capital and technology. Firms might seek loans for such investments but capital markets in most developing countries cannot provide such loans; firms must then rely on retained earnings to fund investment. In such a context, protection can boost domestic firms prices and profitability, facilitating their investment in capital and technology. In realizing the benefits of cost-reducing technology, the firms become more efficient and, once trade barriers are removed, are more prepared for international competition. (Available at: The Infant Industry Argument ) The Economic Growth Perspective: Given its fragile balance of payments position and urgent need to boost industrial production, Pakistan needs to significantly increase its mobilization of foreign resources. However, longterm official assistance will become increasingly scarce, while promoting large portfolio investments is not a proper policy option due to Pakistan's underdeveloped and narrow capital market. Significant increases in commercial borrowings are also not desirable. It is therefore crucial to accord high priority to foreign direct investment (FDI). Previous inflows of FDI in Pakistan were meager, accounting for only 0.2% of the world total and less than one percent of the Asian subtotal each year in the 1990s. Among the major impediments are urban violence, inconsistent economic policies, and government bureaucracy.
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Document is compiled by Chair Shfa'at Gilani and Co-chair Yasir Nazar Momin

Remedial policy actions are essential. Another major problem is the concentration of FDI on the power sector, a domestic-oriented sector, which results in large foreign exchange costs and remittances. This has serious balance of payments implications.

Lessons learned from the Pakistan experience are: developing economies should attach shortterm priority to attracting FDI to the foreign exchange earning sector, or, at least, both the foreign exchange earning sector and other sectors simultaneously. Multilateral development organizations, including the Asian Development Bank, should also take this into account in their private sector operations, particularly the build-own-transfer type, to develop economic infrastructures in developing economies. (Available at: FDI in Pakistan ) References for reading material FDI Pros and Cons FDI Stats in Pakistan Indian FDI in Pakistan? Economic Effects of FDI in Pakistan

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Document is compiled by Chair Shfa'at Gilani and Co-chair Yasir Nazar Momin

TOPIC 2 INFLATION IN PAKISTAN

The inflationary impact has been equivalent for all the income groups as increase has been witnessed in variety of products consumed by different sections of the society, said an economist at the Planning Commission. Experts said that the inflationary trend is likely to continue in the country for the coming week as the prices of CNG, electricity, diesel and edible oil/ ghee have increased significantly after March 1, 2012. (Dawn.com , 2011) It is since long that Pakistan is witnessing constant rise in inflation with every regime change. The cost of the ever worsening problem is constantly being paid by the people of Pakistan without any iota of respite. Today the state of inflation has reached at such a level which is causing devastating effects to the countrys very survival, integrity and sovereignty. The urgency of the situation calls for an in-depth appraisal of the prevailing dilemma. According to the World Bank (2009) report; people living below the poverty line (based on $2-aday criterion) account for more than 80 percent of the population in India, Bangladesh and Nepal, 73.6 percent in Pakistan, and 41.6 percent in Sri Lanka. In a country like Pakistan where nearly 40% people (based on one $ per day income) live below poverty line and per capita income is less then 1000$, the majority of population suffered from inflation because their income level moves upward with very marginal speed than rate of persistent price hike. As inflation rises, every rupee you own buys a smaller percentage of a good or service. The inflation rate in Pakistan was last reported at 10.8 percent in March of 2012. From 2003 until 2010, the average inflation rate in Pakistan was 10.15 percent reaching an historical high of 25.33 percent in August of 2008 and a record low of 1.41 percent in July of 2003. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.

Inflation effects the different sectors of the economy. ( Effects on the distribution of income and wealth, Effects on production, Effects on the Government, Effects on the Balance of Payment, Effects on Monetary Policy, Effects on Social Sector, Effects on Political environment)
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Document is compiled by Chair Shfa'at Gilani and Co-chair Yasir Nazar Momin

and different classes of the people (Debtors & Creditors, Salaried Class, Wages earners, Fixed income group, Investors and shareholders, Businessmen, Agriculturists)

Trend of Inflation in Pakistan

References for reading material Dailytimes.com Pakistantimes.com OPF Blog abasynuniv.edu.pk/fwvol32/1.doc News feed on Inflation in Pakistan

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Document is compiled by Chair Shfa'at Gilani and Co-chair Yasir Nazar Momin