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7. Relatively Recent Macroeconomic
Performance
Key Variables relative to GDP
25.0
20.0
15.0
10.0
5.0
0.0
00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08
Total Investment National Savings
Total Revenue Total Expenditure
Total Exports Total Imports
9. Pressing Macroeconomic
Issues
• Four major concerns that haunted
the economy in 2008 were:
– Spiraling Inflation
– High (and widening) Fiscal
Deficit
• Re-emergence of Primary
Deficit
– High Trade Deficit and Rising
CAD
– Pressure on Currency and
Foreign Exchange Reserves
10. Pressing Macroeconomic
Issues
• Soaring Inflation
– Possible Causes
• Monetary Phenomenon (accommodating to generate
growth thru reduced cost of borrowing)
• Supply Constraints (sugar, wheat etc)
• Imported (POL, edible oil, other primary products)
• Adverse Expectations
– Possible Remedies
• Adopt Tight Monetary Stance – it may retard Growth
• Improve Supply Shortages; Better Storage Capacity
• Reduce Reliance on Imports – self-sufficiency,
conservation
• Transmit ‘right’ signals
11. Pressing Macroeconomic
Issues
• High Fiscal Deficit due to fiscal
indiscipline
– Expenditure over-runs leading to
abnormally high borrowings from SBP
• Huge subsidy payments for oil,
power, wheat, and fertilizer;
• Substantial increase in interest
payment on domestic debt – sheer
callousness and bad sequencing;
• Conscious policy inaction
– Shortfall in Revenue Collection
12. Pressing Macroeconomic
Issues
• High Trade Deficit and Rising CAD
– Poor export performance, paying price for
heavy reliance on textile;
– The export to import ratio declined from 56%
to 48%;
– Seven items -- POL, Edible Oil, Wheat,
Cotton, Fertilizer, Iron & Steel, and oil rigs
had additional cost of Rs. 477.4 Billion in the
overall imports of Rs. 2242.3 B till May over
last year. The rest of the import bill was just a
routine matter. Thus, the real concern and
policy action should have revolved around
these items only.
13. Pressing Macroeconomic
Issues
• Currency Depreciation and
Depletion of Foreign
Exchange Reserves
• Inability to generate external
financing due to deteriorating
rating
• Inability of SBP to intervene
• Speculators had a field day
14. Pressing Macroeconomic
Issues
• Serious Law and Order situation
on the domestic front
• Political unrest and transitional
phase of the government
• Serious energy crisis having
adverse impact on growth of
manufacturing sector
• Falling external demand due to
onset of recession in the west
15. Corrective Measures:
Natural or Otherwise
• Move towards fiscal discipline
– Reduction in Expenditure
– Withdrawal of Subsidies
– Policy Reversal in Taxation Policy
• Further tightening of Monetary Policy
• IMF Program once again
• Falling petroleum prices, Falling prices
of edible oil, other primary products
• Lots of PDL
16. Future Prospects
• Difficult period to continue for some
time to come
• Fiscal and Monetary Policies are
contractionary in nature, Growth
retarding.
• Manufacturing sector still facing high
cost of borrowing, reduced domestic
and foreign demand
• Slowdown in services sector
• Stabilization Program is mostly painful
with severe conditionalities*** End of Lec
2
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