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Fundamentals of Management

Assignment # 01

Name : M.Saad SiddiquiRoll No. : 06-0110Section : X

Date : 7th Nov 2008

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1. What official trade agreements affect Pakistan's economy and why?

There are many official trade agreements that affect Pakistan's economy. Some of themost important official trade agreements and their affects are mentioned in following paragraphs.

This Agreement on South Asian Free Trade (SAFTA) was signed at Islamabad during

12th

SAARC summit on Jan 6th

2004. This agreement came into force from 1st

January 2006. All theMember States have ratified the Agreement and the First tariff reduction under the Trade LiberalizationProgramme (TLP) has been affected from 1st July 2006. (Qureshi, Iftikhar Ali) India is giving specialemphasis to increase its trade with Pakistan under SAFTA agreement. It is exploring various sea routes.India and Pakistan have also set up a Joint Study Group at the level of Commerce Secretaries to adoptstrategy for enhancing trade between the two countries. A vigorous economic relationship betweenIndia and Pakistan is bound to have impact on their political relations. (Kumar, 2005) Naturally, if theirrelations get better in the long run they both can progress marvellously.

The Agreement on Early Harvest Programme (EHP) between Pakistan and China isoperational with effect from 1st January 2006. The EHP along with annexes relating to tariff

concessions and the time schedule for reduction of tariffs was signed and exchanged on 5th April 2005.(Qureshi, Iftikhar Ali) Also Pak China Free Trade Agreement was signed between China and Pakistanon November 24th 2006. Under the agreement Pakistan will get market access at zero duty on a lot ofitems.While China will also reduce its tariff by 50 percent on many items. (Qureshi, Iftikhar Ali) BothPakistan and China increased market access for each other on items of significant commercial interests.Both countries enjoy concessionary duty rate in comparison to exports of same products from othercountries. These Pak-China agreements have improved Pakistan's economy a lot and have contributedto make many things commercially available here. It is feared that many exports would reducesubstantially in the up-coming years because China is making efforts to become self-sufficient in everyfiled, this can produce negative impacts on Pakistan's economy. China has increased its exportsresulting in a persistent and growing trade imbalance. Since these are more economical, businessmen

are inclined to buy more from China. Pakistan therefore would be looking at China not simply as anexport market, but also as a primary source for import of capital goods and industrial raw material. Thiscan further enable to grow Pakistani industry and economy rapidly.

Pakistan has concluded a Free Trade Agreement (FTA) with Sri Lanka on August 1 st,2002, during the visit of the Chief Executive to Colombo from 31-07-2002 to 01-08-2002. Under the bilateral Free Trade Agreement, both sides have agreed to establish a Free Trade Area throughelimination of tariffs on the movement of goods and services. Pakistan-Sri-Lanka FTA becameoperational from 12th June 2005 (Qureshi, Iftikhar Ali). Dr. Sarath Amunugama said We are now in theprocess of accelerating growth as Sri Lanka has managed to attain sustained growth rate at around sixpercent during the past five years. We are expecting seven percent growth rate during current year,he added. There is also scope of investment in Tourism and Hoteling sector, he added. (SundayObserver, 2007) This shows that Pak-Sri-Lanka agreements can be very fruitful in the long run andthey have potential to boost-up Pakistan's economy.

The Agreement on the Early Harvest Programme (EHP) for the Free Trade Area (FTA)between Malaysia and Pakistan was signed on Saturday, 1st October 2005 in Kuala Lumpur. The Pak-Malaysia EHP was operational from January 1st 2006 and expired upon entry into force of the FTA or31st March 2007. (Huma, 2007)

There are more than nine FDI projects in Pakistan financed by Malaysia. A number of

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key Malaysian companies including Tenaga Nasional (power sector) and Telekom Malaysia (IT sector)have invested in the telecom sector, housing, land development projects, infrastructure and constructionprojects. The Malaysian national company, PETRONAS, is involved in numerous projects in Pakistan,including the exploration and drilling of gas and oil. The Malaysian construction industry has shown aninterest in working with Pakistan in infrastructure development such as roads, highways, and housing.In the banking arena, the agreement was between Pakistans National Institute of Banking and Finance

(NIBAF) and Malaysias International Centre for Education in Islamic Finance (INCEIF). The secondagreement was signed between Pakistans National Highway Authority (NHA) and MalaysiasMinconsult International Limited, under which Malaysia will provide financial and technical help inthe construction of roads in Pakistan. These moves led to such an increase in confidence that, in 2006,Pakistans Software Export Board signed an accord with a Malaysian firm to build IT parks in threecities in Pakistan, with a Memorandum of Understanding signed between Multimedia Super CorridorDevelopment Corporation (MDeC). In February 2005, Telekom Malaysia announced a joint venturefibre-optic backbone project, thereby providing Pakistan with electronic information and data networkoperation services.(Huma, 2007) This has helped Pakistan to improve IT, telecom and finance sectors,and gave significant advantage to Pakistan's economy.

Pakistan has offered transit facilities to Afghanistan under the Afghan Transit TradeAgreement (ATTA) 1965. The transit facilities were also misused and a number of items weresmuggled into Pakistan. It not only hurt the local industry, but also has an adverse impact on therevenue collection of Pakistani government. Therefore, during 1996, GOP notified a negative list of 17items, the transit of which through Pakistan borders was prohibited. However, on the request of theAfghan government the negative list was reduced to six items in 2004. The list was further reduced tothree items in 2005.

CONCLUSION

The official trade agreements that affect Pakistan are South Asian Free Trade Agreement(SAFTA), Pak-China Early Harvest Programme (EHP) and Pak-China Free Trade Agreement (FTA),Pak-Sri Lanka Free Trade Agreement (FTA), Pak-Malaysia Early Harvest Programme (EHP) and Pak-Malaysia Free Trade Agreement (FTA) and Afghan Transit Trade Agreement (ATTA). Majority of tradeagreements are positively affecting Pakistan, while few have negative impact.

REFERENCES

Kumar, Anand. SUCCESSFUL IMPLEMENTATION OF SAFTA COULD GIVE SUBSTANCE TOSAARC Paper no.1653 [online] 26-12-2005 [cited 6 October 2008].

Sri Lanka pursuing tri-pronged economic policy Sunday 18th Feb 2007 SUNDAY OBSERVER[cited 6 October 2008] .

Huma Nawaz Syal 2007 PAKISTAN AND MALAYSIA: ECONOMIC AND TRADE RELATIONS[online] [cited 6 October 2008] .

Qureshi, Iftikhar Ali. ACS/Incharge Computer Section (no date) [Pak-Sri Lanka FTA Details] [online][cited 6 October 2008] 2008 Pakistan-Sri Lanka: Free Trade Agreement.

Qureshi, Iftikhar Ali. ACS/Incharge Computer Section (no date) [Agreement on South Asian Free

http://www.southasiaanalysis.org//papers17/paper1653.htmlhttp://www.issi.org.pk/journal/2007_files/no_1/article/a1.htmhttp://www.commerce.gov.pk/PSFTA.asphttp://www.southasiaanalysis.org//papers17/paper1653.htmlhttp://www.issi.org.pk/journal/2007_files/no_1/article/a1.htmhttp://www.commerce.gov.pk/PSFTA.asp

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Trade Area (SAFTA) details] [online] [cited 6 October 2008] 2008 Agreement on South Asian FreeTrade Area .

Qureshi, Iftikhar Ali. ACS/Incharge Computer Section (no date) [online] [cited 6 October 2008]Year Book 2006-2007, Government of Pakistan, Ministry of Commerce, Islamabad.

Qureshi, Iftikhar Ali. ACS/Incharge Computer Section (no date) [Pak-China Free Trade Agreement(FTA) Details] [online] [cited 6 October 2008]2008 Islamic Republic of Pakistan-Peoples republic of China: Free Trade Agreement.

Qureshi, Iftikhar Ali. ACS/Incharge Computer Section (no date) [Pak-China Early Harvest Programme(EHP) Details] [online] [cited 6 October 2008] 2008 Pakistan-China: Early Harvest Programme (EHP).

http://www.commerce.gov.pk/SAFTA.asphttp://www.commerce.gov.pk/Downloads/YEAR_BOOK_2006_07.pdfhttp://www.commerce.gov.pk/PCFTA.asphttp://www.commerce.gov.pk/PCEHP.asphttp://www.commerce.gov.pk/SAFTA.asphttp://www.commerce.gov.pk/Downloads/YEAR_BOOK_2006_07.pdfhttp://www.commerce.gov.pk/PCFTA.asphttp://www.commerce.gov.pk/PCEHP.asp

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2. Over the last 10 years has Pakistan's economy moved towards a 'market

economy' or 'command economy'. Give reasons/examples to justify your claim?

INTRODUCTION

The financial sector is central to economic development as it serves the role ofintermediary by mobilising savings and subsequently allocating credit for productive activities.

However, in many developing countries including Pakistan, administered interest rate, domestic creditcontrols, high reserve requirements, use of captive banking system to finance large budgetaryrequirements of the government and controls on international capital inflows have remained the mainfeatures of the monetary policy. These repressive policies had their repercussions in the form of excessliquidity with the banking system, disintermediation of cash flows, segmentation of financial markets,underdeveloped money and capital markets, etc. [McKinnon (1973) and Shaw (1973)], therefore,argued that low interest rate ceilings unduly restrict the real flow of loan-able funds, thus depressingthe quantity of productive investment (Hasan, M.Aynul. et al, 1996). On January 2, 1972 PrimeMinister Zulfiqar Ali Bhutto announced the nationalisation of all major industries and thus Pakistan hada command economy at that time.

DISCUSSIONFinancial liberalisation is defined as policy measures designed to deregulate certain

operations of the financial system and transform its structure with a view to achieving a liberalisedmarket oriented system (market economy) with an appropriate regulatory framework. The financialsector reforms can lead to increase in loan-able funds by attracting more household savings to bankdeposits due to higher interest rates and, this in turn, can result in greater investment and fastereconomic growth.

In Pakistan, various measures have been undertaken in the early 1990s to liberalise thefinancial sector as part of the overall Structural Adjustment Programme (SAP) with the aim to improvethe effectiveness of monetary policy. These policies were implemented by making a shift from direct to

indirect monetary control and greater reliance on market forces. The main financial liberalisationpolicies were aimed at liberalising interest rates, reducing controls on credit, enhancing competitionand efficiency in the financial system, strengthening the supervisory framework, promoting growth anddeepening of the financial markets. In this context, measures were implemented as part of the broaderfinancial sector reforms. (Hasan, M. Aynul. et al, 1996). And these reforms were the first major step formoving towards a market economy.

In 1997 - 1998 the private sector investment increased from less than 8 percent to 9.4percent and in 1998 - 1999 it fell to 8.4 percent. (Gopal Joshi, 2000).

In 2004, the government reformed its priorities and set forward four major policy

objectives on economic front from which the second one was to revive economic growth and restoreinvestors' confidence (Ashfaque H. Khan, 2004). This proved to be fruitful by the privatization of 26percent share of the PTCL amounting to $ 2.6 billion which was the single largest privatizationtransaction in the countrys history. It was the largest ever expansion of private sector credit (AshfaqueH. Khan, 2005). The investment upturn gained a stronger footing, particularly the private sectorinvestment which remained buoyant owing to a rare confluence of various positive developments.Similarly, an increase in credit to private sector of Rs. 390.3 billion reflected investors' growingconfidence on the future prospects of Pakistans market economy (Ashfaque H. Khan, 2005).Accordingly, three years of strong economic growth has given rise to the average income of the people.

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Such increases in income levels have led in 2003 - 2004 to a sharp increase in consumer spending real private consumption expenditure grew by 8.2 percent and further by 16.8 percent in 2004 - 2005(Ashfaque H. Khan, 2005). Also to bring public and private sectors across the entire urban regions, toformulate and carry out a coordinated set of targeted investments, the Mega City Development Projectwas launched (Ashfaque H. Khan, 2005). Thus, during the last three years (2004 - 2007), Pakistansmarket economy continued to perform impressively and its economic fundamentals gained further

strength. A sharp pick up in overall investment reached a new height of 23 percent of GDP and mostnotably, private investment remained buoyant owing to the persistence of strong consumer demand,despite of monetary policy tightening the credit to private sector, it continued to grow strongly by 24.6percent at the back of improving investment climate (Ashfaque H. Khan, 2007).

CONCLUSION

By now, Pakistan meets most of the essential requirements that the foreign businessesand investors are looking for deep-rooted structural reforms, high standards of economic governance,outward looking orientation, liberalized trade and investment regime, easy access to policy makers, lowproduction costs, sophisticated financial sector and Pakistans location as a regional hub make it ahighly attractive country for market economy. It is clear from the facts and figures that in 1973 Pakistanwas completely a command economy, and later the governments changed their priorities and broughtreforms in important areas like finance to increase privatization. The statistics of several years asshown above makes it clear that privatization has increased massively which indicates that Pakistan hasgradually moved towards market economy over the last ten years.

REFERENCES

Kemal, A.R. (1996). Why regulate a privatised firm? [Online].04 Oct.2008 [cited 5 October 2008], p.1. accessed on :

Kemal, A.R. (2000) Privatization in Pakistan.in

Joshi, Gopal (ed.)privatization in south asia: minimizing negative social effects through restructuring. India.International Labour Office, pp. 143-169

Hasan, M. Aynul, H. Khan, Ashfaque and Ali, S. Sajid (1996).Financial sector reform and its impact on investment and economic growth: an econometric approach[online] [cited 5 October 2008], accessed on:

H. Khan, Ashfaque (2007) Three Years of Prime Minister Shaukat Aziz Government. PakistanObserver10 Sept 2007. p.4.

H. Khan, Ashfaque (2005) Economic Achievements: First Year of Prime Minister Shaukat AzizGovernment.Pakistan Observer29 August 2005. p.4.

H. Khan, Ashfaque (2004) Pakistan Economy: From Peril to Stability.Pakistan Observer28 August 2004. p.4.

H. Khan, Ashfaque (2004) Economic Turnaround and Shaukat Aziz. The Nation.14 August 2004. p.3.

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