Economics 2nd Assignment

Fiscal Imbalances
Group Members: Saleh Muhammed Ahsan-ul-Haq Irfanullah Jamshaid Khan

Mr.Saleh Muhammed
Economy

of Pakistan Main Concept of Fiscal Imbalances Types & why is it happen?

Fiscal Imbalances
Before

going to understand Fiscal Imbalances it is very important to study the economy of Pakistan first.

Economy of Pakistan

Economy of Pakistan

The economy of Pakistan is the 47th largest in the world in nominal terms and 27th largest in the world in terms of purchasing power parity (PPP). Pakistan has a semi-industrialized economy, which mainly encompasses textiles, chemicals, food processing, agriculture and other industries. Growth poles of Pakistan's economy are situated along the Indus River; diversified economies of Karachi and Punjab's urban centers coexist with lesser developed areas in other parts of the country

Economy of Pakistan

Rank 25th(PPP)47th(Nominal)(IMF) Currency Pakistani Rupee (PKR)Rs. = 100 Paisas Fiscal year July 1June 30 Trade organisations ECO, SAFTA, ASEAN, WIPO and WTO

Economy of Pakistan

Government finances Fiscal budget summary Fiscal year: 1 July - 30 June Budget outlay: Rs 3.259 trillion (FY2010/11) Revenues: $19.8 billion Expenditures: Debt - external: $50 billion (2010 est.) Economic aid - recipient: $1.2 billion (FY2010/11)

Statistics

GDP $174.8 billion (nominal)(2010) $464 billion (GDP-PPP) (2009) GDP growth2.2% (2011) GDP per capita$2400 (2010) GDP by sector agriculture: 19.6%, industry: 26.8%, services: 53.7% (2007) Inflation (CPI)16.17% (2009-2010) Population below poverty line40% (2010) Labour force55.88 million (2009 est.) Unemployment15.2% (2009 est.) Main industries textiles, chemicals, food processing, steel, transport equipment, automobiles, telecommunications, machinery, beverages, construction, materials, clothing, paper.

External

Exports $25 billion (2011 est.) Export goods textile goods (garments, bed linen, cotton cloths, and yarn), rice, leather goods, sports goods, chemicals manufactures, carpets and rugs Main export partners United States 22.4%, UAE 8.3%, UK 6%, China 15.4%, Germany 4.7% (2006 est.) Imports$41 billion (2011 est.) Import goods Petroleum, Petroleum products, Machinery, Plastics, Transportation equipment, Edible oils, Paper and paperboard, Iron and steel, Tea Main import partnersChina 14.7%, Saudi Arabia 10.1%, UAE 8.7%, Japan 6.5%, United States 5.3%, Germany 5%, Kuwait 4.9% (2006 est.)

Public finances

Public debt $60 billion (2011) Revenues$23.21 billion (2009 est.) Expenses$30.05 billion (2009 est.) Credit rating Standard & Poor's: B- (Domestic) B- (Foreign) B- (T&C Assessment) Outlook: Stable Moody's: B3 Outlook: Stable

Fiscal Imbalances!!

Fiscal imbalance is the term used to denote a mismatch in the revenue powers and expenditure responsibilities of a government

Types of Fiscal Imbalances..!!

1.

Vertical Fiscal Imbalance 2. Horizontal Fiscal imbalance

Reason..!!!!!!

mismatch in the revenue powers and expenditure

Mr.Irfannullah
Fiscal

Imbalances

Fiscal Imbalances:

Fiscal imbalance is the term used to denote a mismatch in the revenue powers and expenditure responsibilities of a government. In the literature on fiscal federalism, two types of fiscal imbalances are measured: Vertical Fiscal Imbalance and Horizontal Fiscal Imbalance. When the fiscal imbalance is measured between the two levels of government (Centre and States or Provinces) it is called Vertical Fiscal Imbalance. When the fiscal imbalance is measured between the governments at the same level it is called Horizontal Fiscal imbalance. This imbalance is also known as regional disparity.

Horizontal Fiscal Imbalances as Differences in Net Fiscal Benefits :

A horizontal fiscal imbalance (HFI) emerges when subnational governments have different abilities to raise funds from their tax bases and to provide services. This creates differences in net fiscal benefits, which are a combination of levels of taxation and public services. It is these NFBs which are the main cause of horizontal fiscal disparities that in turn generate the need for equalization grants. Prominent among the objectives commonly attributed to intergovernmental fiscal transfers is equalization of fiscal capacities or resolution of Horizontal Fiscal Imbalances

Horizontal Fiscal Imbalances as Differences in Net Fiscal Benefits :

Thus, the transfer system can promote efficiency in the public sector and can level the field for intergovernmental competition.[3]. The discussion of horizontal fiscal imbalance and equalisation was of particular importance in the drafting of the new Iraqi constitution. It was a sticking point for the drafting processwith the oil rich regions seeking to minimise the reallocation of revenue while other regions sought to maximise equalisation payments.

Vertical Fiscal Imbalance as a Particular Type of Fiscal Asymmetry :

Though there are multiple usages of the term in the fiscal federalism literature, yet, strictly speaking, it shall only be used to denote a particular type of revenue-expenditure asymmetry (Sharma, 2011). This can be understood as follows: Any existing revenue-expenditure asymmetry between the two levels of a government should simply be called, what it is, that is, a Vertical Fiscal Asymmetry (VFA). The precise nature of this asymmetry, in a particular country, is a matter of research. There can be three types of VFAs:

Vertical Fiscal Imbalance as a Particular Type of Fiscal Asymmetry :

Fiscal asymmetry with fiscal imbalance: Vertical Fiscal Imbalance (VFI). This means inappropriate allocation of revenue powers and spending responsibilities. This state can be remedied by reassignment of revenue raising powers. 2. Fiscal asymmetry without fiscal imbalance but with a fiscal gap: Vertical Fiscal Gap (VFG). This means a desirable revenue-expenditure asymmetry but with a fiscal gap to be closed. This state can be remedied by recalibration of federal transfers. 3. Fiscal asymmetry without fiscal imbalance and without fiscal gap: Vertical Fiscal Difference(VFD). This means a desirable revenueexpenditure asymmetry without a fiscal gap ( i.e. gap is closed). This is a state of fiscal asymmetry where there is "no imbalance and no gap" and thus needs no remedial measure.

Mr.Ahsanullah
Related

Concepts

Current account deficit

Current account deficit for 2006-7 reached $7.016 billion up by 41% over previous year's $4.490 billion.Since the beginning of 2008, Pakistan's economic outlook has taken a dramatic downturn. Security concerns stemming from the nation's role in the War on Terror have created great instability and led to a decline in FDI from a height of approximately $8 bn to $3.5bn for the current fiscal year. Concurrently, the insurgency has forced massive capital flight from Pakistan to the Gulf. Combined with high global commodity prices, the dual impact has shocked Pakistan's economy, with gaping trade deficits, high inflation and a crash in the value of the Rupee, which has fallen from 60-1 USD to over 80-1 USD in a few months.

Fiscal Federalism

As a subfield of public economics, fiscal federalism is concerned with "understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government" (Oates, 1999). In other words, it is the study of how competencies (expenditure side) and fiscal instruments (revenue side) are allocated across different (vertical) layers of the administration. An important part of its subject matter is the system of transfer payments or grants by which a central government shares its revenues with lower levels of government

Main Concepts

The concepts of fiscal federalism are related to vertical and horizontal fiscal relations. The notions related to horizontal fiscal relations are related to regional imbalances and horizontal competition. Similarly the notions related to fiscal relations are related to vertical fiscal imbalance between the two senior levels of government, that is the centre and the states/provinces. While the concept of horizontal fiscal imbalance is relatively non controversial (as explained above), the concept of vertical fiscal imbalance is quite controversial

There can be three types of VFAs:

There can be three types of VFAs: Fiscal asymmetry with fiscal imbalance: VERTICAL FISCAL IMBALANCE (VFI). This means inappropriate allocation of revenue powers and spending responsibilities. This state can be remedied by reassignment of revenue raising powers. Fiscal asymmetry without fiscal imbalance but with a fiscal gap: VERTICAL FISCAL GAP (VFG). This means a desirable revenue-expenditure asymmetry but with a fiscal gap to be closed. This state can be remedied by recalibration of federal transfers. Fiscal asymmetry without fiscal imbalance and without fiscal gap: VERTICAL FISCAL DIFFFERENCE (VFD). This means a desirable revenue-expenditure asymmetry

The economy today

Due to inflation and economic crisis worldwide, Pakistan's economy reached a state of Balance of Payment crisis. "The International Monetary Fund bailed out Pakistan in November 2008 to avert a balance of payments crisis and in July last year increased the loan to $11.3 billion from an initial $7.6 billion

The economy today

4.76 Pakistani Rupees Exchange Rate (1960) 80+ Pakistani Rupees Exchange Rate(2011)

Poverty in Pakistan

Pakistan government spent over 1 trillion Rupees (about $16.7 billion) on poverty alleviation programs during the past four years, cutting poverty from 35% in 2000-01 to 24% in 2006.Rural poverty remains a pressing issue, as development there has been far slower than in the major urban areas

Revenue

The Board of Revenue has collected nearly one trillion rupees ($14.1 billion) in taxes in the 2007-2008 financial year

Mr.Jamshaid
Foreign Exchange External Imabalances

Foreign exchange reserves

By October 2007, at the end of Prime Minister Shaukat Azizs tenure, Pakistan raised back its Foreign Reserves to $16.4 billion. Pakistan's trade deficit was at $13 billion, exports grew to $18 billion, revenue generation increased to become $13 billion and the country attracted foreign investment of $8.4 billion.

Foreign trade

Pakistan is a member of the World Trade Organization, and has bilateral and multilateral trade agreements with many nations and international organizations In the six months to December 2003, Pakistan recorded a current account surplus of $1.761 billion, roughly 5% of GDP. Pakistan's exports continue to be dominated by cotton textiles and apparel, despite government diversification efforts. Exports grew by 19.1% in FY 2002-03. Major imports include petroleum and petroleum products, edible oil, chemicals, fertilizer, capital goods, industrial raw materials, and consumer products.

External Imbalances

Pakistan suffered a merchandise trade deficit of $13.528 billion for the financial year 2006-7. The gap has considerably widened since 2002-3 when the deficit was only $1.06 billion.[98] Services sector deficit for 2006-2007 stood at $4.125 billion which equals the services export of $4.125 billion for the same year.[99] The combined deficit in services and goods stand at $17.653 billion which is approx 83.5% of country's total export of $21.136 (Goods and services). The rise in the trade gap has been attributed to high oil import bill, and rise in the prices of food items, machinery and automobiles

Economic aid

Pakistan receives economic aid from several sources as loans and grants. The International Monetary Fund (IMF), World Bank (WB), Asian Development Bank (ADB), etc. provides long term loans to Pakistan. Pakistan also receives bilateral aid from developed and oil-rich countries. The Asian Development Bank will provide close to $6 billion development assistance to Pakistan during 2006-9. The World Bank unveiled a lending program of up to $6.5 billion for Pakistan under a new fouryear, 20062009, aid strategy showing a significant increase in funding aimed largely at beefing up the country's infrastructure.Japan will provide $500 million annual economic aid to Pakistan.

Conclusion: