Question: What are government policies and what are the practical implications of these

policies in Pakistan?

A policy is a principle or course of action proposed or implemented by a governing body.

Governing bodies are groups of people that act in unison to guide and support a community, unit,
business, institution, etc. Policies exist everywhere whether it is an institution, organization, or
even government. They help establish a set of rules by which a state is run. If policies are
implemented correctly, they help make lives of everyone in community better.

Like mentioned earlier, government policies are also implemented in an economy. A government
policy is a set of rules or principles that are established to guide in decision making and are made
to have positive outcomes for the enhancement of an economy. It contains the reasons why
certain things are to be done in a certain way and why. From this a set of procedures and
protocols are developed that are to be used in an appropriate manner. Mainly there are two types
of Government policies that are in working in the State of Pakistan. The first one is called
monetary policy and the second one is fiscal policy.

Monetary Policy

It is the type of policy that is related to macroeconomics and it is operated by the central bank. It
involves management of money supply and interest rates. It is used to control the circulation of
money in a state and it helps government achieve macroeconomic objectives such as inflation,
consumption, growth and liquidity. Monetary policy involves the efforts of central bank to
control interest rates and/or money supply in the economy to stabilize the prices of commodities.
Another purpose is that it can help financial markets stable. Having a strong monetary policy can
help an economy’s growth in the potential future. It decreases vulnerabilities about future costs of
products and enterprises.

The central bank of Pakistan is State Bank of Pakistan (SBP) and SBP’s monetary policy strives
to make balance among the economy. It includes: controlling inflation, ensuring payment system
and financial stability, preserving foreign exchange reserves and it helps support private
investment plans.
The changes in market interest rate influence the borrowing cost for consumer and businesses.
Generally, lower interest rates encourage people to save less and invest more and vise versa.

Fiscal Policy

It is the means by which government adjusts its spending levels and tax rates to monitor and
influence an economy. It is closely related to monetary policy (which we discussed previously).
Both of these policies are used together to direct a country’s economic goals. And, both of these
policies are under direct control of the state.
Fiscal policy refers to the use of government spending and tax policies to influence economic
conditions, including demand for goods and services, employment, inflation and economic
growth.

Fiscal Policy of Pakistan

The three main drivers of economic growth are:

1. Consumption
2. Investment
3. Savings.

The society of Pakistan is a slowly developing one, and it is a consumption oriented society
where the wealth is limited but concentrated. It has high marginal propensity to consume. The
private consumption expenditure in nominal terms reached to be 80.1% where the public
consumption expenditure was only 11.8% GDP.

In Pakistan, the government halves its budget into two parts. Public revenue and expenditure. The
key objective of this policy is to enhance the growth of economy and make it sustainable. The
goal is to also reduce unemployment and poverty. By increasing taxes, the government receives
revenue from the population which it spends on the people itself. The government spending take
in form of wages to the employees that are working in government, development expenditure, for
society’s own benefit such as health, education and defense.

The federal government of Pakistan has divided the expenditure into two parts mainly current
expenditure and development expenditure. The share of current expenditure in total public
spending is 82.19% and development spending is 17.81 in fiscal year 2014-15. The major parts of
total public spending are general public service which is 59.75%, defense is 17%