The Role of Foreign Aid in the Pakistan Economy EMBA-BFS-2nd BATCH Page 1 of 18 INTRODUCTION The misery

of Under Developed Countries like Pakistan, which have the resources to become a prosperous country, however, have not fully achieved their potential, is mainly associated with the problem of poverty. Because of low incomes, the saving ratios also remain low, resulting in low investment levels. At the same time, due to low income the taxable capacity remains lower, i.e. government earnings also remain low. Due to low levels of investment along with the low income on the part of the government the country faces saving-investment deficit as well as the deficit in balance of payments. The theory of Two Gap Model suggests that the economic development policy focuses on two constraints: the need for savings to finance investment, and the need for foreign exchange to finance imports´. The Two-Gap Model suggests that developing countries have to rely on the Foreign Inflows to fill these two gaps. The Foreign Inflows are available in various manifestations to a country, which includes the grants, loans, foreign direct investment (FDI), export credit, project/non-project assistance, technical assistance and emergency relief etc. Moreover, the nature of the FI available to a country also depends upon various factors however mainly on the size of the country its economic circumstances. African nations rely mainly on the foreign aid however countries in East Asia enjoy the benefit of foreign direct investments owing to their investor friendly policies and the availability of infrastructure in the form of land and human resource. In case of Pakistan the foreign aid is mainly in the form of foreign aid because it lacks physical, financial & human capital as well as political & macroeconomic stability, which are the main attraction for foreign direct investments.

PURPOSE OF THE STUDY As mentioned in the captioned subject, our purpose of the study is to assess the role of foreign aid in the economy of Pakistan. In this regard we would explore a) Sources of the Foreign Inflows available, b) The Role of Donor Agencies , c) Assessing the impact of Foreign Aid, d) Trends and Composition of Aid; and e) Conclusion The Role of Foreign Aid in the Pakistan Economy SOURCES OF FOREIGN INFLOWS

These grants could be in the form of project assistance. transfer of technology and expertise. For example. namely: Grants Foreign Direct Investments Loans and credits Foreign Grants: Grants. technical assistance and emergency relief etc. which includes the grants. private organizations. following objectives could be broadly categorized: a) As a signal of diplomatic approval. to provide infrastructure needed by the donor for resource extraction from the recipient country. c) Aid may be given by individuals. nevertheless. foreign direct investment (FDI). or to gain other kinds of commercial access. to extend the donor's cultural influence. We can categorize foreign inflows under following main categories. the United Statesincluded military assistance in its aid figure until 1957 but no longer does. overseas aid. project/non-project assistance. to reward a government for behavior desired by the donor. export credit. There are two types of FDI: inward foreign direct investment and outward foreign direct investment. . resulting in a net FDI inflow (positive or negative). or foreign aid. significant motivations for the giving of aid. or to strengthen a military ally. Standards delimiting exactly the kinds of transfers that count as aid vary. are a voluntary transfer of resources from one country to another. loans. joint-venture. The Role of Foreign Aid in the Pakistan Economy EMBA-BFS-2nd BATCH Page 4 of 18 Foreign Direct Investment: Foreign direct investment (FDI) refers to long term participation by country into another country. The objectives behind these inflows vary from political to humanitarian grounds however. or governments. technical assistance or other assistance such as relief aid and foreign aid. aid figuresmay or may not include transfers for military use: to cite one instance. It usually involves participation in management. commodity assistance. b) Humanitarianism and altruism are. otherwise known as international aid.There are many forms of the FCIs.

We can categorize the sources of these loans as official creditors such as World Bank.Loans and Credits: External loan (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. Asian Development Bank and Industrial Development Bank and bilateral loans by governments and their agencies. .

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