PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions

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Management of Financial Institutions - MGT 604

Lecture # 13

PAKISTAN ECONOMIC AID & DEBT

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 four-year, 2006-2009, 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.

The major causes of poverty in Pakistan

1. Lack of employment opportunities, which in the rural setting is caused by the absence of

rural-urban linkages.

2. A slowdown in the pace of economic growth in the 1990s

3. With the burgeoning debt obligations, a decline in the public sector development

program.

Key challenges facing the Government of Pakistan

1. Restoring economic growth-constrained further by a drought-affected agriculture sector

2. Managing the large debt burden with international financial institutions.

3. Promoting domestic and foreign investors' confidence

4. Increasing exports to generate foreign exchange,

5. Maintaining a level of social development spending to stem the deteriorating social

indicators.

6. Law and Order, or Terrorism

Future Prospects for Pakistan's Economy

Pakistan's long term prospects will depend upon the interplay of evolution in political and

social developments, economic policies to be pursued, the quality of governance and

institutions, and most important investment in the human capital. It has become quite

obvious from both Pakistan's own history and the experience of the developing countries

that sustained economic growth and poverty reduction cannot take place merely on the

strength of economic policies. Political stability, social cohesion, supporting institutions,

and good governance are equally important ingredients coupled with both external

environments for achieving economic success.

Macroeconomic Stability

Pakistan must strive to maintain its present level of macroeconomic stability. The most

important thing needed is the will power of the ruling elite and the continuity of structural

reforms undertaken by the military government. The country is now on the path to

macroeconomic stability and is less vulnerable to external shocks than it was a decade ago.

There has been improvement in all of the major macroeconomic indicators. The growth rate

of the economy, which was under 4 percent during the 1990s, has shown considerable

improvement.

Management of Financial Institutions - MGT 604

Strengthening Institutions

Recent empirical evidence suggests that sound economic policies cannot make any

difference in the lives of the common citizens if the country does not have strong

institutions to implement such policies. Pakistan inherited a strong civil service, judiciary,

and police, which satisfied the demands of millions of people. But as its population

expanded, the nature of governance became more complex and the capacity of these

institutions did not keep pace with the emerging demands of the economy. These

institutions were weakened by a succession of non-professional peoples. Finally, there is a

need to improve the institutions of inter-provincial harmony to help in eradicating inter-

provincial competition and jealousy. The Council of Common Interest, National Economic

Council, and National Finance Commission are three institutions that are concerned with the

distribution of the resources among the provinces. If these institutions were strengthened,

policies that favor one province over another would not be adopted, which has been quite

common in the past.

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