Economy of Pakistan

Printed by: Daniyal Hussain

What is economics?Economics is the science of wealth, material, scarcity, choice, growth, and efficiency.What is economic growth?Economic growth may be defined as a long term process wherein the substantial and sustained rise in real national income, total population and real per capita income takes place. What are the elements of economic growth?Main elements of economic growth?

1. Long term process: It is a long term process involving a period of many decades (10 years)

2. Growth rate higher than population growth.3. Rise in total population and decline in death rate.4. Rise in labor productivity.

Q4. What is the economic development?The economic development is a comprehensive term which signifies both economic growth as well as structural changes.Structural changes.

1. Changing Occupational structure of national output. It means primary sector falls and output from secondary and territory sectors increase.

2. Technological progress.3. Social institutional changes, Means adoption of modern methods of thing acting,

producing, consuming.What are the most important methods by which economics department is measured?National IncomePer Capita incomeHDI (Human development index)

What is HDI?It is composite measure of economic development. It combines life expectancy educational attainment and income indicators to give a composite measure of human progress.What is Capability Poverty Measure (CMP)?It is new concept introduced in 1997 to show the hidden dimension of poverty. According to this concept people’s lives are not to be measured by income alone. The expansion of basic human capabilities and the productive use of these capabilities is more important.

What is Human Development?It is the process of enabling people to essential facilities of life. Like health, education, a good physical environment, freedom of expression and freedom of action.

What are important steps of human development?The elimination of poverty.A reduction in population growthMore equitable distribution of resources.Good education

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Better trained people/ skilled people /leadersHealthier environmentHealth facilitiesGood infrastructural facilities

What is methodology of National Income GNP estimation in Pakistan?National Income, at market price approach.National Income at factor cost approachExpenditure approach

a) National income at market price approach is applied for measuring income from agriculture, minning, manufacturing and construction sectors.

b) National income at factor cost approach is used for measuring income from Banking, public administration, insurance etc.

c) Expenditure approach is used for measuring income from electricity, Gas and Water.

What is GDP?GDP is the sum total amount of all capital which is generated from internal or domestic resources.What is GNP?GNP is sum total of all goods and services which is generated from domestic as well as external resources. In addition to GDP it includes remittances and foreign loans etc.

What are the social obstacles in growth of economy in Pakistan?Administration has failed to perform its duties and thus conspired to retard the economic growth.What are political constraints to Pakistan’s economy?Political instability in Pakistan has resulted in related economics growth. This includes:

1. frequent changes in government2. Unstable law and order situation.3. Nepotism and favoritism of political leaders.

What is BIG push?It is that strategy, by which vicious circle of poverty is broken, it includes.

1. Loans from private and Government agencies.2. Foreign private investment3. New technology.

What is a stage of Growth?The stages of economics growth describes a series of stages though which all economies must pass in the course of economics development stages.

1. the traditional society2. the pre-conditions for take-off3. take off4. the drive to maturity5. The age of high mass consumption.

How to overcome economics obstacles in Pakistan?1. Direct and indirect taxes should be increased (for generating revenue and bridging

budge deficit)

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2. Tax on agriculture should be increased.3. Export led growth should be carefully chalked out.4. Industrialization should be promoted.5. Improvements should be made in transport, roads, banking, education sectors.6. Stable fiscal and monetary policies should be chalked out.7. New technology must be introduced in industries and agriculture.8. Decrease in population growth.9. Suitable packages must be formed for the agriculturists.10. Self-reliance should be cultivated.11. Less dependence on foreign loans.12. Scientific packages for inputs should be introduced in agriculture sectors.

What are determinants or pre-requisites of economic development?The department of economic development is those factors which are essential for economic growth.There are two categories of economic determinates.Economic and Non-Economic. An economic department of economic department includes.

1. Natural resources2. Capital accumulation by saving, capital market and investment.3. Transport and communication4. Education and training.

Non Economic Determinants includes.1. Social attitudes, values and institutions.2. Political stability3. Administration.

What are the causes of deficit financing in Pakistan?1. The govt’s receipts through taxes, borrowing etc are not adequate to finance the

development expenditures.2. The people in Pakistan are consumption oriented are there are low savings.3. Inadequate Banking facilities4. Rapid growth of population.

What are the sources of revenue?There are two sources of revenue

1. Revenue receipts2. Capital receipts.

What do you know about Revenue receipts?The revenue receipt is the major source of revenue which includes Tax revenue, Non Tax revenue, surcharge etc.

1. Tax revenue ( the revenue which is generated from direct taxes and indirect taxes)a. Income tax and wealth tax. These are the taxes which are levied on the income of the individuals and profits of corporate bodies.b. Custom Duties. The taxes on import and export are known as custom duties.

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c. Central Excise Duty. It is a sort of tax, which is levied on production of selected industries, hotels, restaurants, and advertisements.It is the 2nd major source of revenue.d. Sales TaxThe tax which is levied on the sale price of sale goods is known as sales tax.

2. Non-tax Revenue These include income from the government property and enterprises and receipts from the civil administration and other functions. Like Fees, cess, fine, forfeiture, escheats, tribunals and indemnities.3. Surcharges. Surcharges are the difference between the maximum sale price and the production cost. Ex: fertilizer, Petroleum goods etc.

What do you know about Capital Receipts?The capital receipts include external borrowing and internal non-bank borrowing.

What do you mean by Direct Tax?A tax which is paid by the person on whom it is legally imposed is called a Direct tax.Examples: Income tax, Wealth tax, Property tax.

Advantages of Direct tax?Equitable: Direct taxes are more equitable. First progression is determined and then tax is levied.Economical: They are economical as the cost of collection is small and there is no intermediary b/w the tax payers and state.Elasticity: Direct taxes have a high degree of elasticity.Productive: Direct taxes are very productive.Disadvantages of Direct taxInconvenient: Direct taxes are very inconvenient to pay.Unpopular: Direct taxes are very unpopular because they are directly paid from the pocket of tax-payers.Discourages Savings and Investment: if taxes are too heavy, discourage savings and investment.Evasion: there is always a possibility of tax evasion in the case of direct taxes. People do not show their correct incomes to the tax officials to avoid taxation.Arbitary: the direct taxes are arbitary in the sense that the rates are fixed arbitrarily by the govt: without consulting the business community.

What are Indirect taxes?If impact of tax falls on one person and incidence on another, the taxed is called indirect. These taxes are paid in the first instance by one person and are then shifted on some other person.Examples: 1. corporate tax. 2. Sales tax. 3. Excise duty. 4. Custom duties 5. VAT (Value added tax)

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Advantages of Indirect taxes.Convenient: these taxes are convenient to pay. We pay tax when we buy commodity.No Evasion: It is difficult to evade an indirect tax, because it is mixed up with the proce of the commodity one purchase.Equitable: Indirect taxes are equitable by being imposed and articles generally consumed by the rich.Elastic: these taxes are fairly elastic taxes.What are the disadvantages of Indirect taxes?Uncertain: There is a wide range of uncertainty in Indirect tax.Regressive: The real burden of tax on the poor is greater than on the rich.Inflationary: They contribute to the inflationary pressure in the economy by adding taxes to the commodities, their prices become high enough.

What is Deficit financing?If the government expenditure exceeds the government revenue during a given period of time and the excess of expenditure is met by 1- Borrowing from central bank. 2. Getting aid or printing extra currency, it is called deficit financing.It also means the creation of additional purchasing power in the form of currency notes.

In which situation Deficit financing becomes necessary?1. For prosecuting war.2. For fighting depression3. For financing economic development

What are the effects of deficit financing?1. Inflation : It results in inflation2. Adverse effect on saving: Because it discourages savings.3. Easy availability of credit will lead to speculative and hoarding operations.4. It discourages investment in essential goods.

What are the reasons for deficit financing in Pakistan?Receipt Expenditure Gap. The receipts through taxes, borrowing etc, are not adequate to finance the development expenditure.Low Saving Rate. The people of Pakistan society are consumption oriented. Poor banking system and inadequate banking facilities.High growth rate of PopulationUncertainty of foreign aid.Debt servicing.

What measures should be taken to minimize Deficit financing?1. the government should introduce anti-inflationary fiscal policies.2. the government should formulate effective monetary policy, which should

discourage the non-essential investment and encourage the expansion of essential investment in economy.

3. Economic Controls: The govt: should have an effective control on supply and prices of essential commodities in the country.

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4. Suitable import and export policy.5. the government should discourage hoarding so that essential goods and

commodities are made available to a common man

How deficit financing causes still higher inflation?Largest money supply leads to higher process, lead to bigger deficit and again bigger deficit leads to still more money supply and this cycle goes on resulting in inflation.

What is Domestic aid?The loan or aid that government may borrow from its own people for promoting economic growth.

What is foreign aid/ assistance or foreign capital inflow?Foreign economic aid is the flow of resources and technical; assistance from a developed country or an international organization to stimulate domestic development efforts of a less developed country.

Which are two main sources which provide foreign aid?They are bilateral and multilateral.

1. In case of bilateral, it is the government of the donor country.2. Whereas multilateral sources are international aid giving agencies such as world

bank, IMF, IBRD, IDA, IFC etc.

What are the different forms of Foreign Economic Aid provided to Pakistan?There are two forms of Foreign aid.Grants: the grants are provided to the poor nations in the time of emergency like floods, earthquake and famine etc.Foreign Loans: In the form of foreign exchange, machinery and technical services. It is repaid by the recipient country along with interest in installments.

What do you mean by Soft loans?If a loan is given at a nominal rate of interest ranging form 1-3% and repayable after 25 years. It is called soft loans.

What do you mean by Hard Loan?In case the rate of interest on a loan is high than 3% and repayable with 25 years, it is called Hard Loan.

What are sources of Foreign Loans to Pakistan?Pakistan has been receiving foreign aid from three main sources.

1. Consortium or Pakistan Development Forum.2. Non-Consortium.3. Islamic Countries.

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1. Pak-Dev Forum: Pakistan development forum is the single largest source of foreign aid to Pakistan which provides 80% of the total foreign aid.

The forum is composed of 11 countries.1. USA 2. UK 3. Canada 4. France 5. Germany 6. Italy 7. Japan 8. Netherlands 9.

Norway 10. Belgium 11. Sweden.

Non Consortium: The members of non-consortium provided 8% of total assistance, while Islamic countries is only 5% of the total.

What are the benefits of foreign Economic aid?1. Foreign loans bridge saving gap.2. The foreign exchange gap caused by excess of import/ export is being filled up by

foreign aid.3. Provides greater employment opportunities.4. Increases productivity of various economics sectors.5. It gives an opportunity to erect modem industries in the country providing good

quality products.6. Increase in tax revenue.

Why the developed nations are kind in giving aid to the developing countries?According to the rich nations, aid is given for a combination of humanitarian and self-interest reasons.Humanitarian Ground: If a country is faced with famine, drought, epidemic, diseases, earthquake etc, the developed countries provide grants to under-developed countries on humanitarian grounds.Self-Interest: Foreign economic assistance is also provided on the basis of self-interest.Foreign Aid: Is also given for increasing the cap followers of the donor country.

Why Pakistan needs foreign aid?Pakistan has been relying on foreign economic assistance. Since early 1950’s. The reasons are that the:-

1. Country’s capital is poor.2. The domestic savings are not sufficient to meet its development requirements.

So the foreign aid was acquired to overcome the balance of payments difficulties in the process of development.

What is Debt servicing?Debt servicing is the sum of interest payments and repayments of principal on the external guaranteed debt.

What steps have Pakistan taken to reduce debt burden?The Government of Pakistan has introduced

1. National debt retirement program such as2. Special drive to boost export.3. Liberal incentives to attract foreign investment.4. Improving national savings to reduce the burden of debt.

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When SBP was established?SBP was established on 1 July, 1948.It was established in order “to regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest.”

What are the functions of SBP (State Bank of Pakistan)?1. State bank is the bank of issue of notes except one rupee note and subsidiary coins

which re issued by the government.2. SBP is the bank of Govt. all transactions of Federal and provincial govt are

carried out in this bank.3. Banker to Govt: all the cash balances of the central and Provincial govts. Are

deposited with SBP and Bank does not pay interest on them.4. SBP is banker’s bank.5. SBP acts as a clearing house for the commercial banks.6. SBP acts as financial adviser to the govt.7. SBP lends money to other commercial bank.8. SBP I controller of credit.

What is the role of SBP in Economic development of Pakistan?

1. SBP is the financial adviser to the govt.2. It has established a net work of banking.3. It provides financial assistance to various financial institutions, like:-a. ADBPb. HBFCc. IDBPd. NDFCe. ICP4. Measures taken in pursuing a monetary policy which aims at checking

inflationary pressure.5. Under Finance scheme of SBP, the banks are providing finance to the exporters.6. It has implemented a program of Islamic modes of financing from July-1-1985.7. It established a Banking publicity Board in 1959 for developing banking habit

among the people for savings.8. Training program to bank professionals for trained bankers and financial experts.

When SBP was made autonomous?

SBP was declared autonomous by Mr.Moeen Qureshi, the former caretaker Prime Minister, by amending SBP Act, 1956 on Oct 6, 1993.

What is monetary policy?The measure taken by the Central Bank of country in controlling the money and credit supply in a country, so as to bring about desired changes in the econmy is called monetary policy.

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What is Bank Rate?Bank rate is also called discount rate. It is the official rate at which SBP rediscounts the first class securities at is counter. (The SBP raises or lower the discount rate from time to time in accordance with the credit requirements of the country)

What are open market operations?The sale and purchase of government securities in the open market by the central bank of the country is know as Open Market Operations.

Can we establish Islamic Banking system in Pakistan?No, we cannot establish it because of various reasons.

1. The interest charged by the modern banking is not prohibited by Islam.(The term “Riba” used in the Quran is for usury and not the “Interest”)2. The abolition of interest will result in the collapse of entire economic

system.3. Savings will decline with the elimination of interest.4. There will be failure of banks if profit and loss system is introduced.5. people would prefer depositing their savings in the branches of foreign

banks operating in the country.

What do you mean by QARZE HASSNA?There are interest free loans granted by nationalized banks to the students who do not have sufficient means to pursue their education.

What is Markup?The mark up or Bat Muajjal is purchasing goods by banks and their sale to clients at an appropriate mark up in price on deferred payments basis.

What are types of Non-interest based investment modes of Finance?There are five modes.

1. Musharika2. Modaraba3. PTC (Participation term certificate)4. EPPS(Equity participation and purchase of shares)5. Rent sharing

What is Musharika?It is an agreement b/w the Bank and its client to participate in business as temporary partners by providing agreed amounts of funds for sharing profits or losses during a specific period of time.

What is Modarabad?Modaraba means the business in which the subscriber participates with the money and the manager (modaraba) with the knowledge and skill.

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What is PTC?

Partition term certificate is an instrument of finance issued by a company for meeting its medium and long term capital needs.

What is leasing?

A leasing is an arrangement where an asset owner. Leasor confers the rights of usage of the asset to the lessee, in return for a rental for a specific period of time.

What is difference between Markup and Interest?

1. Interest is released to “Lending –Borrowing” transaction. Let suppose and lent Rs.100/- and recovers 120/- excess recovery of Rs.20/- interest.

2. Mark-up is related to “Trade” transaction. Let suppose one purchase an article for Rs.120/- and sells it customer for Rs.120/- this excess Rs.20/- is markup.

What do you mean by Balance of Trade?

It is the difference b/w the values of exports and imports of physical terms (goods) of a country, during given period of time.

What are the main causes of unfavorable balance of trade in Pakistan?

1. Narrow export base, it is concentrated in relatively low value added products.2. Imported oriented industries3. Consumption oriented society4. Less modernization of machinery.5. Increase in sick industrial units.6. Political uncertainty7. The repeated devaluation’s of rupee against USA dollar.8. Rise in freight rates.9. Pakistan is spending a huge amount on the import of oil.

What is Fiscal Plan?

It is define as the purpose of shaping govt, taxation and govt. expenditure so as to achieve desired economic and social objectives.

What is budget?

A budget is financial statement which forecasts the income and expenditure for the financial year ahead.

Tell about Federal Budget of Pakistan?

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The federal budget of Pakistan is divided into two main sectors.1. Revenue2. Capital budget

What do you know about the revenue federal budget of Pakistan?

The revenue budget is an account of the anticipated revenue and the proposed expenditure for the fiscal year ahead. It includes taxes revenue and Non-tax revenue.

Tell about Non-tax revenue of the federal budget of Pakistan?

1. Non- tax revenue sources are:2. Income from mines, forests, canal water etc.3. Profit from post office and telegraph dept.4. Trading profit earned from Rice Export Corp., Cotton-trading corporation.5. Interest receipts.Note: Main head of Federal Budge are:

1. General administration2. Defense expenditure3. Law and Order4. Community and Economic services5. Debt servicing

What are the main sources of federal capital Budget?

There are two sources of capital budget:Internal resourcesExternal resources

Internal resources:a. recoveries of Investmentb. State tradingc. Recoveries of Loans and advancesd. Domestic debte. Deposits bearing interest.

External Resources:a. Project Aid(from friendly countries and aid giving agencies)b. Food aidc. Other aid from developed countries.

What is difference b/w Zakat and Tax?ZAKAT TAX

Zakat is paid by the Muslims only Non-Muslims and other communities

Imposed on savings and other property

It is imposed on income

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Payment of Zakat is a religious duty By GovernementZakat has fixed rate Rate of tax varies

What are the mineral resources of Pakistan?1. Natural Gas 2. Oil 3. Coal 4. Chloride 5. Barite 6.Gypsum 7. Limestone 8. Rock

Salt. Name some Mineral Development Agencies Operating in Pakistan?

1. Resources Development Corporation (RDC)2. Gemstone Corp. of Pakistan Ltd.(GEMP)3. Pakistan Mineral Development Corporation(PMDC)4. Geological survey of Pakistan(GSP)

Which are the Power resources of Pakistan?

1. Coal based project 2. Oil 3. Natural Gas 4. Nuclear Energy 5. Solar Energy Projects 6. Wind Energy Projects.

What is Budget Deficit?

Budget deficit is the gap b/w projected revenue income and expenditure, during the period of one year.

What is the difference b/w public and private limited company?

Public Limited company Private Limited Company

Company that sells shares in the open market is know as PLC

The company with restricted membership an no public share issue is know as Private Company

What are the causes of Poverty?

1. Overpopulation and insufficient resources to meet the challenges2. unequal distribution of resources in the world3. High standards of living and costs of living4. Illiteracy and low education system-most people cannot find income generation

work.5. In many parts of the world, environment degradation and the deterioration of

forests- is an important cause of poverty.6. Lack of resources causes unemployment which ultimately results in poverty.

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7. unemployment8. lack of resources

What is privatization? Should policy of privatization be persuading in which sector?Privatization: The process of the transfer of state owned enterprises to the private sector.

SHOULD POLICY OF PRIVATIZATION BE PURSED?Yes off course privatization should be pursued for number of reasons.

1. It reduces the drain of government resources caused by the losses of the state owned enterprises.

2. 2. It creates greater opportunities for the private sector to expand and modernize enterprises.

3. It improves productivity efficiency and profitability of these assets.4. It develops viable capital market.5. To release resources of the government for the development of social and physical

infrastructure.6. It helps in modernization of the enterprise.7. It encourages modernization of enterprises.

What are the short falls of Pakistan’s Economy?

1. Foreign debt2. Fiscal deficit3. Inconsistent policies4. Negative balance of payments5. Overpopulation6. Constraints in agriculture sector.

What is capital expenditure?Expenditure of Federal budget.The main heads of the expenditure of the federal budget are:-

1. General Administration2. Defense Expenditure3. Maintenance of Law and Order and police force.4. Expenditure on community, social and economic services for the welfare of the

people. It includes expenditures on Roads, Railways, Water supply Broadcasting, Transport and Communication.

5. Debt servicing is the most important item of expenditure of the Federal Government.

What is Inflation?

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It is defined as a situation where the general price level is persistently and substantially moving upward in a country due to huge money in circulation. The most common feature of inflation thus is the persistent upward movement in the average level prices.

What are the main types of Inflation?When demand increases. The causes of Demand Pull inflation in Pakistan are:

1. Increase in non-development expenditure.2. Slower growth of the economy.3. Rapid monetary expansion.4. Deficit financing (Population explosion, black money)5. Foreign economic assistance.6. Consumption habits of the people (use things used in abroad)7. Capital class is shy of investing money in capital intensive projects.8. Population expansion9. Black Money.(Black money is the unaccounted money receipts. It is generated

through smuggling, tax evasion, price control etc.)Cost Pull Inflation: (What cost increases). The causes are:-

1. Increase in wages which are less backed by increase in productivity.2. Rising prices of imported goods.3. Rise in POL, Gas, Excise duty, Sales tax on a number of items, has greatly

contributed to the cost pull effect.4. Rise in procurement prices of agricultural goods.5. Devaluation of Rupee.6. Indirect taxes (as taxes are added to the cost of production of goods).

Tell about the types of inflation?

1. Demand pull Inflation (DPI): DPI is generated when the aggregate demand for goods in the community tends to be excessive in relation to the supply of output.

2. Cost pull Inflation (CPI): The inflation caused by rising costs of the factors of production is called CPI.

How devaluation of Rupee cause Inflation?

The devaluation of rupee causes increase in the world price of imports and declaration of the Pakistan currency, which ultimately causes inflation.

What measure should be adopted to decrease inflation?

1. Tight monetary policy2. Borrowing for budgetary support.3. reduction in baking rate4. Reducing fiscal deficit.5. To increase productivity of agriculture.

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What measures are taken by Pakistan Govt. for combating inflation in the country?

1. Import of essential items like wheat, pulses etc has been arranged.2. Packages for agricultural development have been announced.3. Utility store have been established; where commodity prices are comparatively

cheaper.4. Friday, Sunday and Tuesday, Wednesday Bazaars are held, where commodities

are provided at controlled process.5. Government has imposed restriction on excessive expenditure on marriage

ceremonies and other social events.What are the causes of Low foreign development investment?

1. Tax structure of the country is not up to the mark and fluctuations are made frequently. Previous government increased the tax rates which discouraged the foreign investors.

2. Political instability and poor law and order situation.3. Inconsistent economic policies which change from time to time.4. Red tapism of Bureaucracy/ bureaucratic hurdles. Custom officer, delay in

clearance, Board of Investment (There was much corruption)5. Cumbersome Un widely labor laws.

Give suggestions for adverse Balance of Payments?

The adverse balance of payments can be decreased in three ways.1. The foreign exchange earnings should be increased by export led growth.2. The import should be curtailed to essential items only.3. The payments on invisible imports like shipping, insurance, banking services

payments to technocrats working in various establishments should be curtailed.

Debt problems – solution.

As the solution of the debt problem is concerned, it needs a gigantic approach. The most important steps are:

1. Revenue should exceed expenditure by means of Tax reforms and accountability.2. Export led growth must be encouraged and dependence on imports must be

minimized. Export base should be widened.3. People should be given awareness about savings. So savings must be encouraged.4. Population growth rate should be curtailed.5. Foreign investment must be encouraged.6. Privatization must be encouraged.7. Sick industrial units must be revitalized.

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Economy of Pakistan

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