One of the Key Functions of the

Government
• STABILIZATION OF THE ECONOMY /
MACROECONOMIC MANAGEMENT
• Useof Fiscal And Monetary Policy To stabilize the
economy

• Control Business Cycle – Removal of inflationary &

Deflationary impact on the economy e.g. Recession And
Inflation etc.
Economic Policy
Making
Economic Policy Monetary Fiscal Trade Investment
Policy Policy Policy Policy

Tax
Tariffs;
Interest exemptions;
Public subsidies;
rates and protection;
Instruments expenditures refinancing;
money facilitation;
and revenues trade
supply value-
agreements
chains

Fiscal
Price
Objectives Balance ,
stability,
Fiscal Enhance
Removal of
Incentive & trade Productive
Inflationary
disincentive volume and investments
and
framework, exports
deflationary
Equitable
pressures
distribution
of wealth

Growth (Savings. Investment, Employment), Development

and Prosperity

17
Economic Policy Making
(Cont…)
Monetary Fiscal Investment
Economic Policy Trade Policy
Policy Policy Policy

Ministry of
Planning
State Bank Commerce/
Ministry of Commission
Institutions of Pakistan NTDC/
Finance /Board of
(Central Bank) Textiles
Investment
Ministry

Disclosure Monetary Annual Budget; Trade policy; Document:

Policy Fiscal Statement; Strategic policy Why invest in
Statement Debt Statement framework Pakistan

Effective Implementation of policy and managing expectations

18
 Basic Understanding of Economy

Agriculture • Crops
• Livestock, Fisheries, Forestry
(19% to GDP)
• Large scale Manufacturing (LSM)
Industry (21% •
•
Small Scale Manufacturing
Construction, Mining
to GDP) • Electricity generation and distribution, Gas
Distribution

Services (60% • Wholesale and Retail trade, Transport,

Communication
to GDP) • Finance and Insurance, General Govt. Services
Economic Survey of Pakistan 2020-21 -
Highlights

• GDP Growth rate = 3.94pc

• Agriculture = 2.8pc
• Industry = 3.6pc
• Services = 4.4pc
• GDP= Rs. 47,709 billion
• In Dollar terms = $299 billion
Business Cycle Explained
 What is Aggregate Demand?

• Aggregate demand is the total amount of goods and

services in an economy that consumers are willing to
pay for within a certain time period
• Aggregate demand is calculated as the sum of
consumer spending, investment spending,
government spending, and the difference between
exports and imports.

• AD = C+I+G+(X-M)
 What is Fiscal Policy?
“The use of government spending and taxation to influence
the economy.”

Arthur Smithies points out, “Fiscal policy is a policy under

which the government uses its expenditure and revenue
programmes to produce desirable effects and avoid
undesirable effects on the national income, production and
employment.”

19
Objectives of Fiscal Policy / Importance /
Significance of Fiscal Policy
➢ To stabilize the economy
➢ To control inflationary or deflationary pressures
➢ Equitable distribution of wealth
➢ Mobilization and optimum utilization of all available
economic resources
➢ To obtain full employment
➢ To promote development of the private sector
(Rebates, Reliefs, Depreciation Allowances) :
Encouraging/discouraging private sector
➢ To promote economic growth and development
(specially in developing economies)
 Limitations of Fiscal Policy

➢ Current Expenditures are uncontrollable

➢ Low tax to GDP ratio
➢ Large undocumented economy / Cash based
economy
➢ Administrative and bureaucratic delays
➢ Uncertainty (Future is unpredictable)
 Types of Fiscal Policy

Fiscal Policy

Expansionary Contractionary
 Tools of Fiscal Policy

Tools of Fiscal
Policy

Govt. Spending
Taxation
(Expenditure)
 Types of Fiscal Policy
❑An expansionary fiscal policy lowers tax rates or
increases spending to increase aggregate demand and
fuel economic growth.
❑Lower Taxes
❑Increase Spending

❑A contractionary fiscal policy raises tax rates or cuts

spending to slow down economic growth.
❑Raise Taxes
❑Cut Spending
 Expansionary Fiscal Policy

Reduced Taxes/Increase spending

More Personal Disposable Income

More Aggregate Demand

More Production /Products

Stimulate Growth
 Contractionary Fiscal Policy

Increased Taxes/Decrease spending

Less Personal Disposable Income

Less Aggregate Demand

Less Production /Products

Slow down economic growth /

Induce recession
 Major Fiscal Indicators
• Revenues
• Tax Revenues
• FBR Taxes
• Direct Taxes
• Indirect Taxes
• Non Tax Revenues
• Expenditures
• Current expenditure
• Development expenditure
 Public
Receipts
8.49 Trillion Rs (FY 21-22)

Capital Receipts +
Borrowing + cash balance +
Gross Revenue Receipts privatization proceeds
7.9 trn Rs
3.9trn Rs
Tax Non- Tax (Gross Revenue
5.8 trn Rs 2.1 trn Rs Receipts -
Provincial
Share)=
FBR 5.83 trn Rs Other Taxes
0.5 trn Rs
Net Revenue
Receipts
FBR FBR Indirect Taxes 7.9-3.4=
direct Taxes 4.5 trn Rs
2. 2 trn Rs 3.6 trn Rs
Budget 2021-22 at aglance-GOP
 Budget
FY 2021-2022

3.9 trn
6.3% of GDP
FY 2021-2022

6.3%
Uncertain fiscal position :Huge
Fiscal deficit
External
Sector:
Components of CurrentAccount
Components of CapitalAccount
 Some
Explanations:
• The current account is one of the components of the balance of payments. It mainly
shows the value of movements in exports and imports and income derived form
transactions related to net purchases of goods and services. As stated in the sixth
edition of the Balance of Payments Manual (BPM), by the International Monetary Fund,
“the current account shows flows of goods, services, primary income, and secondary
income between residents and nonresidents”.

• “The goods and services account shows transactions in items that are outcomes of
production activities”. The first thing to mention is that, even though goods are
physical/tangible, and services are intangible, or facilitates some kind of exchange,
both are considered as products, and are measured at the moment of exchange and at
market value.

• “The primary income account shows primary income flows between resident and
nonresident institutional units”. In other words, these are income flows concern to
some extent governments and other institutions. For instance, taxes, subsidies or other
income associated with the production process and with the ownership of financial
assets and renting naturalresources.

• “The secondary income account shows current transfers between residents and
nonresidents”. These transfers, which might be in cash or in kind, do not include capital
transfers, which are shown in the capital account.
• What Is Direct Investment?
Some Explanations:
• Direct investment is more commonly referred to as foreign direct investment (FDI). FDI
refers to an investment in a foreign business enterprise designed to acquire a controlling
interest in the enterprise.
• Direct investment provides capital funding in exchange for an equity interest without
the purchase of regular shares of a company's stock.
• Direct investment may involve a company in one country opening its own business
operations in another country. There are three general types of direct investment:
vertical, horizontal, or conglomerate investment.
• Direct investment can also involve acquiring control of a business's assets already
operating in the foreign country.

• What Is a Portfolio Investment?

• A portfolio investment is ownership of a stock, bond, or other financial asset with the
expectation that it will earn a return or grow in value over time, or both.
• It entails passive or hands-off ownership of assets as opposed to direct investment,
which would involve an active management role. So A portfolio investment is passive,
unlike a direct investment, which implies hands-on management
• . a portfolio investment can be any possession that is purchased for the purpose of
generating a return in the short or long term.
 BOP situation
Pakistan
Pakistan’s external account improved significantly during FY21.
• The current account deficit fell to a 10-year low of US$ 1.9 billion, primarily on
the back of surging remittances and export proceeds.

• The Covid-related air travel restrictions, along with the market-based exchange
rate, helped divert remittances to formal channels and curtailed services
imports.

• Pakistan benefited from the G-20’s Debt Service Suspension Initiative and the
reduction in global benchmark interest rates, which reduced the interest
payments on external debt.

• The IMF program resumed in FY21, and facilitated the country’s continued
access to external financing from other multilateral agencies, and commercial
and bilateral creditors.

• Pakistan also reentered the international capital markets after a gap of over 3
years and raised US$ 2.5 billion from Eurobonds, and a state-owned firm
capitalized on the global appetite for sustainable financing instruments by
raising US$ 500 million from a green bond.
 BOP situation
Pakistan
Under these dynamics, the country’s FX reserves increased by US$ 5.5 billion during
FY21 to US$ 24.4 billion, and the PKR appreciated 6.7 percent against the US Dollar.
These positive developments notwithstanding, some challenges emerged, as

• The accommodative post-Covid policies and the resultant pick-up in industrial

activity necessitated higher imports of both energy and non-energy products.

• Supply-side challenges around wheat, sugar and cotton necessitated imports at

elevated global commodity price points.

• To ensure the external account’s sustainability, the policy focus was on diversifying
the source of forex earnings. This involves engaging the overseas diaspora to
undertake investments, including into the Naya Pakistan Certificates, via the
Roshan Digital Accounts, and incentivizing export-oriented industries.
 Domestic &
External Debt:
Reference: Chapter 5
Annual report 2021-2022
State Bank of Pakistan
 THANKS

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