CIA 2 ( Report )A.ECO.3.01

A Literature Review of the “State Bank of Pakistan’s Annual Report of the Economy 2012” with commentary and from the “International Monetary Fund’s Pakistan Report, 2013” and other studies

Keywords/Key – Footings:

Savingss, Investment, Twin Deficit Hypothesis, Economic Growth, Economic Development.


2012 being a pre-election twelvemonth and the 3rd back-to-back twelvemonth of surrogate drouth and terrible implosion therapy in Pakistan was a challenge for the State Bank of Pakistan ( SBP ) as it had to conflict many macroeconomic jobs ; from about dual digit rising prices caused by the Pakistan Government’s financial shortage ballooning from a forecasted 4.7 % of GDP to 8 % of GDP, no uncertainty caused by the halfhearted revenue enhancement disposal reform push of the incumbent Pakistan People’s Party and a crisp addition in election run support, to the PKR 1 trillion bail-out of the country’s weakening energy sector therefore doing a 24.6 % addition in Pakistan’s public debt in a individual financial twelvemonth entirely. Due to the crisp addition in debt, foreign influxs into Pakistan’s “financial account” , the primary beginning of support for the Current Account Deficit hit a low of net influxs of $ 0.3 billion which, coupled with the refund of the Extended Fund Facility ( EFF ) to the IMF caused the Current Account Deficit to make 2.5 % of GDP and reduced the foreign exchange militias to a 55 month depression of $ 6 billion, plenty to cover merely 14.3 hebdomads of imports. Not surprisingly, the Pakistani Rupee depreciated 6.5 % against the US Dollar which should hold boosted both foreign purchases of Pakistani assets and exports but failed to make so due to fall ining agricultural outputs ( 30 % of exports ) and a deterioration jurisprudence and order state of affairs ( discouraging foreign buying in Pakistan’s capital market- Karachi Stock Exchange 100 ) . Therefore in this study, the SBP focuses on how it resorted to unconventional methods to seek and resuscitate specific sectors of the economic system, when typical Keynesian steps, such as a 300 footing point cut in the redemption option “repo” rate, failed to better the glooming macroeconomic environment. Some of these steps include concentrating on clime alteration and its impact on agribusiness ( a vital comparing is made with the author’s mentor’s assigned state Togo ) , puting up a National Insurance Scheme and presenting “branchless banking” to the hapless within a twelvemonth to protect them from natural catastrophes. The SBP besides resorted to really neo – broad economic thoughts such as the theory of Rational Expectations to construct an ambitious rising prices aiming mechanism to disinflate the economic system and thereby better the economy and investing clime.

Brief of the Report: The Chapter on “Savings and Investment”

The Report studied by the writer is about the public presentation of the Pakistani economic system. Having a really fundamental cognition of economic sciences the writer believes that this chapter forms the Southern Cross of the study because Savings and Investment and the individuality “S = I” are the basic barometer of the wellness of an economic system. The remainder of the study contained chapters about “Inflation and Monetary Policy” , “Fiscal Accounting” and the “External Sector” which are all discussed with regard to the relationship between nest eggs and investing. For illustration, the National Income Growth Rate ( NIGR ) can be calculated by the expression and the surplus/deficit of private nest eggs in the economic system in bend helps find the degree of authorities adoptions from the money market ( shortage spending/”crowding out” of private investing ) harmonizing to the individuality and besides, harmonizing to the “Twin Deficit Hypothesis” ( Aristovnic – Djuric, 2010 ) determines the degree of trade shortage i.e. surplus of foreign channelized nest eggs ( foreign investing ) over national channelized nest eggs ( domestic investing ) which is an extension of individuality. Pakistan is one state where the above mentioned indexs appear highly hebdomad ; the National Savings Rate ( inclusive of nest eggs of Overseas Pakistanis ) has dropped from 15.4 % of GDP in 2006-07 to merely 10.8 % in 2011-12. Bucking the tendency Gross Public Investment has dropped from a high of 4.8 % of GDP in 2007-08 to merely 3.9 % in 2012-13 ( based on probationary informations ) and Gross Private Investment has slumped to merely 8.7 % of GDP, ranking Pakistan a lowly 157 out 0f 192 states by degree of Investment ( IMF Working Paper, 2013 ) manner below its South Asiatic neighbors. Therefore the State Bank of Pakistan has repeatedly urged the Government of Pakistan to concentrate on developing both salvaging wonts amongst rural Pakistanis, where the economy rate is lower than the urban economy rate ( SBP Report Statistical Supplement, 2012 ) , every bit good as advanced salvaging instruments as options to feudal-landlord nest eggs strategies which still cater to the banking demands of 67 % of the population. However, due to the General Election of 2013, the Federal Government had stepped up outgo on fabrication and defence by offering 58.7 % of all loanable financess and 3 % of GDP severally ( non including pecuniary assistance for military intents from the United States as portion of the Coalition Support Fund – CSF ) while apportioning merely 3 % to Financial and Insurance Expansion ( SBF Annual Survey, 2012 ) . Therefore the SBP has taken its ain steps of trying to better cardinal indexs particularly for the rural population ; the nationalisation ( by Acquisition by Pakistan Telecommunication Limited ) of Rozgar Microfinance ( now renamed U Microfinance ) , a trade brokered under the directives of SBP. U Microfinance with the backup of the telecommunications industry and Pakistan’s impending auctioning off of 3-G spectrum licensing, the SBP is seeking to convey about “branchless banking” an advanced manner of utilizing already established assets in a peculiar country to carry on microfinance services. The two possibilities SBP has come up with are first, the Armed Forces of Pakistan which has a well-developed web within Pakistan or 2nd, the fact that Pakistan which has 118 million nomadic phone endorsers and the highest grade of nomadic incursion in South Asia ( PTA, 2012 ) could get down availing of Mobile banking services. The SBP, partnering with the World Bank has begun the FIRST enterprise which came up in response to the Indus River Floods of 2010. Harmonizing to informations provided in the Appendices to this study, all Macroeconomic Indicators, particularly National Savings and Additions to Stock collapsed between 2010 and 2012 when the Indus River burst its bank and afloat 37 % of the state and an country chiefly cultivated by hapless subsistence husbandmans. FIRST and the Securities and Exchange Commission of Pakistan ( SECP ) have collaborated to explicate the National Agricultural Insurance Scheme which aims to take studies of all types of harvests grown, farm animal reared, sum of farming area and other general demographics of a certain country and so find Torahs related sing some of these “fixed assets” in instance of natural catastrophes. To guarantee equality in payment of insurance premium, the SECP has decided to associate premiums to input cost/acre to so the richest husbandmans are forced to pay the highest premium for insurance hence non striping hapless husbandmans of such economy and insurance instruments. The SBP has picked a dual border attack to fring Pakistan of macroeconomic jobs by taking to disinflate the economic system with highly tight pecuniary and rising prices aiming. This attack benefitted the economic system in many ways. First, by raising the repo rate by 375 footing points over the 2008 – 2011 period the SBP helped collar the slide of the Pakistani rupee, which came under force per unit area and lost 11 % of its value after the US Sovereign Debt Rating was downgraded, by cut downing its supply in the economic system. Second by raising the repo rate, the SBP offset the inflationary consequence of a ballooning financial shortage financed by the federal government’s borrowing from Commercial, Islamic Banks and NBFCs. The rise in the repo rate efficaciously raised the rate of return on Federal Government T – Bills ( 3 months ) to around 11.8 % from 10 % which attracted the Bankss and thereby easy absorbed liquidness from the economic system. Third, Pakistani authorities debt began to look more attractive to aliens who increased their investing because they were eventually acquiring positive rates of return on their investing. Fourthly and most significantly, based on the theory of Rational Expectations proliferated by Robert Lucas, by remaining militant on rising prices, the SBP tamed the general public’s and firm’s future outlook of rising prices. Having lowered their rising prices outlooks all agricultural houses stopped stashing green goods and started selling it at predominating monetary value ( believing it to be the highest ) . This coupled with easing international oil monetary values and a US backed $ 700 million Coalition Support Fund ( CSF ) to be spent over 5 old ages, resulted in rising prices falling to 9.7 % after 10 old ages which made nest eggs instruments like Jinnah Saving Scheme and Kisan Rozgar Certificate and even Islamic Bank Salvaging Instruments like “Murabaha” and “Ijara” give existent rates of return thereby increasing the salvaging rate ( including remittals saved ) and later the Investing Rate in the state by 4 % of GDP and 3 % of GDP severally. A subsequent autumn in the rising prices rate to 7.5 % in early 2013 prompted the SBP to cut the repo rate by 300 footing points to 9.25 % which did increase investing but failed to light growing which remained an anaemic 1.4 % .

This chapter is hence a testimonial the SBP’s attempts to better macroeconomic indexs with a really limited infinite due to the approaching elections. In a comparatively modest and conservative society like Pakistan’s where 67 % of the work force is still employed in the primary sector and where national defence is given the highest precedence over substructure, health care and instruction, it is hard for ordinary citizens to acquire entree to “safe” recognition which is precisely what the SBP purposes to accomplish. It besides had to confront stiff competition from Islamic Banks which offer involvement free loans ( but a batch of other overhead payments ) and local feudal landlords who still pattern bonded labour. Bettering the nest eggs rate, investing rate and all other indexs related to the individuality, S = I despite all the odds is model for other Cardinal Banks to follow. In a ulterior subdivision, the advanced steps brought approximately by the SBP will be compared to those taken by the Togolese authorities which administers a hapless, agricultural economic system which has political tensenesss rise, putschs and wars ( similar to Pakistan ) .

Significance of the Report for Macroeconomics

The writer of this study was taught that Macroeconomists determine the wellness of the economic system by looking at indexs like the Inflation Rate, the National Income Growth Rate, etc. This study non merely contains these constructs but commentary on these figures by taking economic experts in Pakistan. Besides, the study contains a big quantum of informations and expressions which can be used to cipher and understand the above mentioned indexs. Students can even pull out this information and run their ain arrested developments and utilize it to turn out or confute different Macroeconomic theories ( as is done subsequently in this study ) related to the state. This study is besides interesting in the fact that it engages the reader with modern developments taking topographic point in the state, for illustration, an full subdivision of the study is devoted to explicating the relation between the intimacy of elections ( both federal and provincial ) and macroeconomic indexs like the financial shortage, substructure outgo, investing outgo and even interesting variables like “ % of GDP spent on the armed forces” which highlights the relation between the elections and the Pakistani Army ( a major policy regulator ) . Another ground why this study is important is because it is non nescient of microeconomics. It surveies the consequence of macroeconomic policy on cardinal microeconomic units of the state such as the farm sector, the troubled energy and electricity coevals sector and the provincial economic systems ( Punjab, Sindh, Balochistan and Khyber Pakhtunkhwa ) each of which is starkly different from the other but requires rigorous federal ordinance to maintain in control from fall ining. Therefore this study attains a perfect balance between being enlightening and informative.

Lessons Learnt

This exercising forced the pupils to larn how to make a “Literature Review” of the selected study. It is an of import method of developing critical reading accomplishments and pull outing information from a study.


NIGR= [ Vt/Vto ]t-to– 1

Where Vt is the concluding degree of Investment Outgo for the clip period “t” and Vto is the concluding degree of Investment Expenditure in clip period “to” . Since it is a ratio, the value [ Vt/Vto ] t-to is subtracted from “1” .

[ V ( T ) /V ( to ) ] ^ ( t-to ) ] -1 Where V ( T ) is the concluding Degree of Investment Expenditure and V ( To ) is the initial degree of Investment Outgo at clip periods T and To severally. The ( -1 ) is added at the terminal as V ( T ) /V ( to ) is a ratio and therefore the alteration is observed from “1”

  1. GDPMilitary policeman= C + I + G + NX where C = Final Consumption Expenditure, I = Gross Fixed Capital Formation, G = Government Final Consumption Expenditure and NX = Net Exports = ( X – M )
  1. Disposable Income = Yvitamin D= GDPMilitary policeman+ TR – TA where TR is the reception of all transportation payments to the private sector and TA is all revenue enhancements ( indirect, direct, personal and corporate ) accruing to the authorities.
  1. Yttriumvitamin D= C + S i.e. all disposable income is either consumed or saved. Here Salvaging is aescapei.e. it is non channelized into the Circular Flow of Income.

Therefore replacing ( 3 ) in ( 2 ) and so in ( 1 ) , we get:

  1. C + S – ( TR – TA ) = C + I + G + NX which gives us:
  2. ( S – I ) = G + ( TR – TA ) + NX

G + ( TR – TA ) can be called the financial balance, “Fiscal Deficit”-FDi.e. surplus of Government Spending ( G + TR ) over gross ( TA ) .

  1. ( S – I ) = FD +NX.

Multiplying both sides by a ( -1 ) gives us

  1. ( I – S ) = ( M – X ) – FD

( X – M ) is defined as theTrade Deficit – TDi.e. surplus of purchase of foreign goods over foreign purchase of domestic goods. Therefore we get the concluding individualities:

  1. I – S = TD – FD
  2. I + FD = TD + S

Identity ( 9 ) is known as theTwin Deficit Hypothesis/ Twin Deficit Theorywhich states that due to the equality mark “ = ” in the individuality, a rise in the Fiscal Deficit will ensue in the private sector salvaging alternatively of puting and/or a rise in the Trade Deficit, the continuity of which are harmful to the economic system. If the degree of Investment in the economic system increases ( represented by I on the LHS ) so either people would hold to salvage more or increase the trade shortage which means the degree of foreign investing ( Idegree Fahrenheit) is higher than domestic investing ( Ivitamin D) where

  1. I = Idegree Fahrenheit+ Ivitamin D