Fundamentals of Management Assignment # 01

Name : Roll No. : Section : Date :

M.Saad Siddiqui 06-0110 X 7th Nov 2008

1. What official trade agreements affect Pakistan's economy and why?
There are many official trade agreements that affect Pakistan's economy. Some of the most important official trade agreements and their affects are mentioned in following paragraphs. This Agreement on South Asian Free Trade (SAFTA) was signed at Islamabad during 12 SAARC summit on Jan 6th 2004. This agreement came into force from 1st January 2006. All the Member States have ratified the Agreement and the First tariff reduction under the Trade Liberalization Programme (TLP) has been affected from 1st July 2006. (Qureshi, Iftikhar Ali) India is giving special emphasis to increase its trade with Pakistan under SAFTA agreement. It is exploring various sea routes. India and Pakistan have also set up a Joint Study Group at the level of Commerce Secretaries to adopt strategy for enhancing trade between the two countries. A vigorous economic relationship between India and Pakistan is bound to have impact on their political relations. (Kumar, 2005) Naturally, if their relations get better in the long run they both can progress marvellously.

The Agreement on Early Harvest Programme (EHP) between Pakistan and China is operational with effect from 1st January 2006. The EHP along with annexes relating to tariff concessions and the time schedule for reduction of tariffs was signed and exchanged on 5th April 2005. (Qureshi, Iftikhar Ali) Also Pak China Free Trade Agreement was signed between China and Pakistan on November 24th 2006. Under the agreement Pakistan will get market access at zero duty on a lot of items.While China will also reduce its tariff by 50 percent on many items. (Qureshi, Iftikhar Ali) Both Pakistan and China increased market access for each other on items of significant commercial interests. Both countries enjoy concessionary duty rate in comparison to exports of same products from other countries. These Pak-China agreements have improved Pakistan's economy a lot and have contributed to make many things commercially available here. It is feared that many exports would reduce substantially in the up-coming years because China is making efforts to become self-sufficient in every filed, this can produce negative impacts on Pakistan's economy. China has increased its exports resulting in a persistent and growing trade imbalance. Since these are more economical, businessmen are inclined to buy more from China. Pakistan therefore would be looking at China not simply as an export market, but also as a primary source for import of capital goods and industrial raw material. This can further enable to grow Pakistani industry and economy rapidly. Pakistan has concluded a Free Trade Agreement (FTA) with Sri Lanka on August 1st, 2002, during the visit of the Chief Executive to Colombo from 31-07-2002 to 01-08-2002. Under the bilateral Free Trade Agreement, both sides have agreed to establish a Free Trade Area through elimination of tariffs on the movement of goods and services. Pakistan-Sri-Lanka FTA became operational from 12th June 2005 (Qureshi, Iftikhar Ali). Dr. Sarath Amunugama said “We are now in the process of accelerating growth as Sri Lanka has managed to attain sustained growth rate at around six percent during the past five years”. “We are expecting seven percent growth rate during current year”, he added. There is also scope of investment in Tourism and Hoteling sector, he added. (Sunday Observer, 2007) This shows that Pak-Sri-Lanka agreements can be very fruitful in the long run and they have potential to boost-up Pakistan's economy. The Agreement on the Early Harvest Programme (EHP) for the Free Trade Area (FTA) between Malaysia and Pakistan was signed on Saturday, 1st October 2005 in Kuala Lumpur. The PakMalaysia EHP was operational from January 1st 2006 and expired upon entry into force of the FTA or 31st March 2007. (Huma, 2007) There are more than nine FDI projects in Pakistan financed by Malaysia. A number of

key Malaysian companies including Tenaga Nasional (power sector) and Telekom Malaysia (IT sector) have invested in the telecom sector, housing, land development projects, infrastructure and construction projects. The Malaysian national company, PETRONAS, is involved in numerous projects in Pakistan, including the exploration and drilling of gas and oil. The Malaysian construction industry has shown an interest in working with Pakistan in infrastructure development such as roads, highways, and housing. In the banking arena, the agreement was between Pakistan’s National Institute of Banking and Finance (NIBAF) and Malaysia’s International Centre for Education in Islamic Finance (INCEIF). The second agreement was signed between Pakistan’s National Highway Authority (NHA) and Malaysia’s Minconsult International Limited, under which Malaysia will provide financial and technical help in the construction of roads in Pakistan. These moves led to such an increase in confidence that, in 2006, Pakistan’s Software Export Board signed an accord with a Malaysian firm to build IT parks in three cities in Pakistan, with a Memorandum of Understanding signed between Multimedia Super Corridor Development Corporation (MDeC). In February 2005, Telekom Malaysia announced a joint venture fibre-optic backbone project, thereby providing Pakistan with electronic information and data network operation services.(Huma, 2007) This has helped Pakistan to improve IT, telecom and finance sectors, and gave significant advantage to Pakistan's economy. Pakistan has offered transit facilities to Afghanistan under the Afghan Transit Trade Agreement (ATTA) 1965. The transit facilities were also misused and a number of items were smuggled into Pakistan. It not only hurt the local industry, but also has an adverse impact on the revenue collection of Pakistani government. Therefore, during 1996, GOP notified a negative list of 17 items, the transit of which through Pakistan borders was prohibited. However, on the request of the Afghan government the negative list was reduced to six items in 2004. The list was further reduced to three items in 2005. CONCLUSION The official trade agreements that affect Pakistan are South Asian Free Trade Agreement (SAFTA), Pak-China Early Harvest Programme (EHP) and Pak-China Free Trade Agreement (FTA), Pak-Sri Lanka Free Trade Agreement (FTA), Pak-Malaysia Early Harvest Programme (EHP) and PakMalaysia Free Trade Agreement (FTA) and Afghan Transit Trade Agreement (ATTA). Majority of trade agreements are positively affecting Pakistan, while few have negative impact.

Kumar, Anand. “SUCCESSFUL IMPLEMENTATION OF SAFTA COULD GIVE SUBSTANCE TO SAARC” Paper no.1653 [online] 26-12-2005 [cited 6 October 2008] < >. Sri Lanka pursuing tri-pronged economic policy Sunday 18th Feb 2007 SUNDAY OBSERVER [cited 6 October 2008] <>. Huma Nawaz Syal 2007 “PAKISTAN AND MALAYSIA: ECONOMIC AND TRADE RELATIONS” [online] [cited 6 October 2008] < >. Qureshi, Iftikhar Ali. ACS/Incharge Computer Section (no date) [Pak-Sri Lanka FTA Details] [online] [cited 6 October 2008] 2008 Pakistan-Sri Lanka: Free Trade Agreement <>. Qureshi, Iftikhar Ali. ACS/Incharge Computer Section (no date) [Agreement on South Asian Free

Trade Area (SAFTA) details] [online] [cited 6 October 2008] 2008 Agreement on South Asian Free Trade Area <>. Qureshi, Iftikhar Ali. ACS/Incharge Computer Section (no date) [online] [cited 6 October 2008] Year Book 2006-2007, Government of Pakistan, Ministry of Commerce, Islamabad <>. Qureshi, Iftikhar Ali. ACS/Incharge Computer Section (no date) [Pak-China Free Trade Agreement (FTA) Details] [online] [cited 6 October 2008] 2008 Islamic Republic of Pakistan-Peoples republic of China: Free Trade Agreement <>. Qureshi, Iftikhar Ali. ACS/Incharge Computer Section (no date) [Pak-China Early Harvest Programme (EHP) Details] [online] [cited 6 October 2008] 2008 Pakistan-China: Early Harvest Programme (EHP) <>.

2. Over the last 10 years has Pakistan's economy moved towards a 'market economy' or 'command economy'. Give reasons/examples to justify your claim?
INTRODUCTION The financial sector is central to economic development as it serves the role of intermediary by mobilising savings and subsequently allocating credit for productive activities. However, in many developing countries including Pakistan, administered interest rate, domestic credit controls, high reserve requirements, use of captive banking system to finance large budgetary requirements of the government and controls on international capital inflows have remained the main features of the monetary policy. These repressive policies had their repercussions in the form of excess liquidity with the banking system, disintermediation of cash flows, segmentation of financial markets, underdeveloped money and capital markets, etc. [McKinnon (1973) and Shaw (1973)], therefore, argued that low interest rate ceilings unduly restrict the real flow of loan-able funds, thus depressing the quantity of productive investment (Hasan, M.Aynul. et al, 1996). On January 2, 1972 Prime Minister Zulfiqar Ali Bhutto announced the nationalisation of all major industries and thus Pakistan had a command economy at that time. DISCUSSION Financial liberalisation is defined as policy measures designed to deregulate certain operations of the financial system and transform its structure with a view to achieving a liberalised market oriented system (market economy) with an appropriate regulatory framework. The financial sector reforms can lead to increase in loan-able funds by attracting more household savings to bank deposits due to higher interest rates and, this in turn, can result in greater investment and faster economic growth. In Pakistan, various measures have been undertaken in the early 1990’s to liberalise the financial sector as part of the overall Structural Adjustment Programme (SAP) with the aim to improve the effectiveness of monetary policy. These policies were implemented by making a shift from direct to indirect monetary control and greater reliance on market forces. The main financial liberalisation policies were aimed at liberalising interest rates, reducing controls on credit, enhancing competition and efficiency in the financial system, strengthening the supervisory framework, promoting growth and deepening of the financial markets. In this context, measures were implemented as part of the broader financial sector reforms. (Hasan, M. Aynul. et al, 1996). And these reforms were the first major step for moving towards a market economy. In 1997 - 1998 the private sector investment increased from less than 8 percent to 9.4 percent and in 1998 - 1999 it fell to 8.4 percent. (Gopal Joshi, 2000). In 2004, the government reformed its priorities and set forward four major policy objectives on economic front from which the second one was to revive economic growth and restore investors' confidence (Ashfaque H. Khan, 2004). This proved to be fruitful by the privatization of 26 percent share of the PTCL amounting to $ 2.6 billion which was the single largest privatization transaction in the country’s history. It was the largest ever expansion of private sector credit (Ashfaque H. Khan, 2005). The investment upturn gained a stronger footing, particularly the private sector investment which remained buoyant owing to a rare confluence of various positive developments. Similarly, an increase in credit to private sector of Rs. 390.3 billion reflected investors' growing confidence on the future prospects of Pakistan’s market economy (Ashfaque H. Khan, 2005). Accordingly, three years of strong economic growth has given rise to the average income of the people.

Such increases in income levels have led in 2003 - 2004 to a sharp increase in consumer spending – real private consumption expenditure grew by 8.2 percent and further by 16.8 percent in 2004 - 2005 (Ashfaque H. Khan, 2005). Also to bring public and private sectors across the entire urban regions, to formulate and carry out a coordinated set of targeted investments, the Mega City Development Project was launched (Ashfaque H. Khan, 2005). Thus, during the last three years (2004 - 2007), Pakistan’s market economy continued to perform impressively and its economic fundamentals gained further strength. A sharp pick up in overall investment reached a new height of 23 percent of GDP and most notably, private investment remained buoyant owing to the persistence of strong consumer demand, despite of monetary policy tightening the credit to private sector, it continued to grow strongly by 24.6 percent at the back of improving investment climate (Ashfaque H. Khan, 2007). CONCLUSION By now, Pakistan meets most of the essential requirements that the foreign businesses and investors are looking for deep-rooted structural reforms, high standards of economic governance, outward looking orientation, liberalized trade and investment regime, easy access to policy makers, low production costs, sophisticated financial sector and Pakistan’s location as a regional hub make it a highly attractive country for market economy. It is clear from the facts and figures that in 1973 Pakistan was completely a command economy, and later the governments changed their priorities and brought reforms in important areas like finance to increase privatization. The statistics of several years as shown above makes it clear that privatization has increased massively which indicates that Pakistan has gradually moved towards market economy over the last ten years.

Kemal, A.R. (1996). Why regulate a privatised firm? [Online]. 04 Oct.2008 [cited 5 October 2008], p.1. accessed on : <> Kemal, A.R. (2000) Privatization in Pakistan. in Joshi, Gopal (ed.) privatization in south asia: minimizing negative social effects through restructuring. India. International Labour Office, pp. 143-169 Hasan, M. Aynul, H. Khan, Ashfaque and Ali, S. Sajid (1996). Financial sector reform and its impact on investment and economic growth: an econometric approach [online] [cited 5 October 2008], accessed on: <> H. Khan, Ashfaque (2007) Three Years of Prime Minister Shaukat Aziz Government. Pakistan Observer 10 Sept 2007. p.4. H. Khan, Ashfaque (2005) Economic Achievements: First Year of Prime Minister Shaukat Aziz Government. Pakistan Observer 29 August 2005. p.4. H. Khan, Ashfaque (2004) Pakistan Economy: From Peril to Stability. Pakistan Observer 28 August 2004. p.4. H. Khan, Ashfaque (2004) Economic Turnaround and Shaukat Aziz. The Nation. 14 August 2004. p.3.

H. Khan, Ashfaque (2003) Federal Budget 2003-04: A Response to Critiques. The DAWN. 23 June 2003. p.6.

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