Fiscal Imbalances in Pakistan

7/31/2019 Fiscal Imbalances in Pakistan

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Economics 2nd

Assignment

Fiscal ImbalancesGroup Members:

Saleh MuhammedAhsan-ul-HaqIrfanullahJamshaid Khan


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Mr.Saleh Muhammed

Economy of Pakistan

Main Concept of Fiscal Imbalances

Types & why is it happen?


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Fiscal Imbalances

Before going to understand Fiscal

Imbalances it is very important tostudy the economy of Pakistanfirst.


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Economy of Pakistan


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Economy of Pakistan

The economy of Pakistan is the 47th largest in theworld in nominal terms and 27th largest in the world

in terms of purchasing power parity (PPP). Pakistanhas a semi-industrialized economy, which mainlyencompasses textiles, chemicals, food processing,agriculture and other industries. Growth poles of

Pakistan's economy are situated along the IndusRiver; diversified economies of Karachi and Punjab'surban centers coexist with lesser developed areas inother parts of the country
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29http://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Textileshttp://en.wikipedia.org/wiki/Chemicalshttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Indus_Riverhttp://en.wikipedia.org/wiki/Indus_Riverhttp://en.wikipedia.org/wiki/Economy_of_Karachihttp://en.wikipedia.org/wiki/Punjab,_Pakistanhttp://en.wikipedia.org/wiki/Punjab,_Pakistanhttp://en.wikipedia.org/wiki/Economy_of_Karachihttp://en.wikipedia.org/wiki/Indus_Riverhttp://en.wikipedia.org/wiki/Indus_Riverhttp://en.wikipedia.org/wiki/Indus_Riverhttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Chemicalshttp://en.wikipedia.org/wiki/Textileshttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29


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Economy of Pakistan

Rank 25th(PPP)47th(Nominal)(IMF)

CurrencyPakistani Rupee (PKR)Rs. = 100Paisas

Fiscal yearJuly 1June 30

Trade organisations ECO, SAFTA,ASEAN, WIPO and WTO
http://en.wikipedia.org/wiki/Pakistani_Rupeehttp://en.wikipedia.org/wiki/Paisahttp://en.wikipedia.org/wiki/Fiscal_yearhttp://en.wikipedia.org/wiki/Economic_Cooperation_Organizationhttp://en.wikipedia.org/wiki/SAFTAhttp://en.wikipedia.org/wiki/ASEANhttp://en.wikipedia.org/wiki/WIPOhttp://en.wikipedia.org/wiki/WTOhttp://en.wikipedia.org/wiki/WTOhttp://en.wikipedia.org/wiki/WIPOhttp://en.wikipedia.org/wiki/ASEANhttp://en.wikipedia.org/wiki/SAFTAhttp://en.wikipedia.org/wiki/Economic_Cooperation_Organizationhttp://en.wikipedia.org/wiki/Fiscal_yearhttp://en.wikipedia.org/wiki/Paisahttp://en.wikipedia.org/wiki/Pakistani_Rupee


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Economy of Pakistan

Government finances

Fiscal budget summary

Fiscal year: 1 July - 30 June

Budget outlay: Rs 3.259 trillion (FY2010/11)

Revenues: $19.8 billion

Expenditures: Debt - external: $50 billion (2010 est.)

Economic aid - recipient: $1.2 billion (FY2010/11)


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Statistics

GDP $174.8 billion (nominal)(2010) $464 billion (GDP-PPP)(2009)

GDP growth2.2% (2011) GDP per capita$2400 (2010)

GDP by sector agriculture: 19.6%, industry: 26.8%, services:53.7% (2007)

Inflation (CPI)16.17% (2009-2010)

Population below poverty line40% (2010) Labour force55.88 million (2009 est.)

Unemployment15.2% (2009 est.)

Main industries textiles, chemicals, food processing, steel,transport equipment, automobiles, telecommunications,

machinery, beverages, construction, materials, clothing, paper.
http://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Consumer_price_indexhttp://en.wikipedia.org/wiki/Poverty_linehttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Textileshttp://en.wikipedia.org/wiki/Chemical_industryhttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Steelhttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Automobileshttp://en.wikipedia.org/wiki/Telecommunicationshttp://en.wikipedia.org/wiki/Machineryhttp://en.wikipedia.org/wiki/Beverageshttp://en.wikipedia.org/wiki/Constructionhttp://en.wikipedia.org/wiki/Materialshttp://en.wikipedia.org/wiki/Clothinghttp://en.wikipedia.org/wiki/Paperhttp://en.wikipedia.org/wiki/Paperhttp://en.wikipedia.org/wiki/Clothinghttp://en.wikipedia.org/wiki/Materialshttp://en.wikipedia.org/wiki/Constructionhttp://en.wikipedia.org/wiki/Beverageshttp://en.wikipedia.org/wiki/Machineryhttp://en.wikipedia.org/wiki/Telecommunicationshttp://en.wikipedia.org/wiki/Automobileshttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Steelhttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Chemical_industryhttp://en.wikipedia.org/wiki/Textileshttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Poverty_linehttp://en.wikipedia.org/wiki/Consumer_price_indexhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Gross_domestic_product


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External

Exports $25 billion (2011 est.)

Export goods textile goods (garments, bed linen, cotton cloths,

and yarn), rice, leather goods, sports goods, chemicalsmanufactures, carpets and rugs

Main export partners United States 22.4%, UAE 8.3%, UK6%, China 15.4%, Germany 4.7% (2006 est.)

Imports$41 billion (2011 est.)

Import goods Petroleum, Petroleum products, Machinery,Plastics, Transportation equipment, Edible oils, Paper andpaperboard, Iron and steel, Tea

Main import partnersChina 14.7%, Saudi Arabia 10.1%, UAE8.7%, Japan 6.5%, United States 5.3%, Germany 5%, Kuwait4.9% (2006 est.)
http://en.wikipedia.org/wiki/Textilehttp://en.wikipedia.org/wiki/Garmentshttp://en.wikipedia.org/wiki/Yarnhttp://en.wikipedia.org/wiki/Ricehttp://en.wikipedia.org/wiki/Leatherhttp://en.wikipedia.org/wiki/Sportshttp://en.wikipedia.org/wiki/Carpetshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/UAEhttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/UAEhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/UAEhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/UAEhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Carpetshttp://en.wikipedia.org/wiki/Sportshttp://en.wikipedia.org/wiki/Leatherhttp://en.wikipedia.org/wiki/Ricehttp://en.wikipedia.org/wiki/Yarnhttp://en.wikipedia.org/wiki/Garmentshttp://en.wikipedia.org/wiki/Textile


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Public finances

Public debt $60 billion (2011)

Revenues$23.21 billion (2009 est.)

Expenses$30.05 billion (2009 est.)

Credit rating Standard & Poor's:B- (Domestic)B- (Foreign)

B- (T&C Assessment)Outlook: Stable

Moody's: B3Outlook: Stable
http://en.wikipedia.org/wiki/List_of_countries_by_credit_ratinghttp://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://en.wikipedia.org/wiki/Moody%27shttp://en.wikipedia.org/wiki/Moody%27shttp://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://en.wikipedia.org/wiki/List_of_countries_by_credit_rating


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Fiscal Imbalances!!

Fiscal imbalance is the term used todenote a mismatch in the revenue

powers and expenditure responsibilities

of a government


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Types of Fiscal Imbalances..!!

1. Vertical Fiscal Imbalance

2. Horizontal Fiscal imbalance


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Reason..!!!!!!

mismatch in the revenue powers

and expenditure


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Mr.Irfannullah

Fiscal Imbalances


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Horizontal Fiscal Imbalances as

Differences in Net Fiscal Benefits :

A horizontal fiscal imbalance (HFI) emerges whensubnational governments have different abilities to

raise funds from their tax bases and to provideservices. This creates differences in net fiscal

benefits, which are a combination of levels of

taxation and public services. It is these NFBs which

are the main cause of horizontal fiscal disparitiesthat in turn generate the need for equalizationgrants. Prominent among the objectives commonlyattributed to intergovernmental fiscal transfers isequalization of fiscal capacities or resolution of

Horizontal Fiscal Imbalances


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Horizontal Fiscal Imbalances as

Differences in Net Fiscal Benefits :

Thus, the transfer system can promoteefficiency in the public sector and can levelthe field for intergovernmentalcompetition.[3]. The discussion of horizontalfiscal imbalance and equalisation was ofparticular importance in the drafting of the

new Iraqi constitution. It was a sticking pointfor the drafting processwith the oil richregions seeking to minimise the reallocationof revenue while other regions sought to

maximise equalisation payments.
http://en.wikipedia.org/wiki/Fiscal_imbalancehttp://en.wikipedia.org/wiki/Constitution_of_Iraqhttp://en.wikipedia.org/wiki/Constitution_of_Iraqhttp://en.wikipedia.org/wiki/Fiscal_imbalance


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Vertical Fiscal Imbalance as a

Particular Type of Fiscal Asymmetry :

Though there are multiple usages of the term in thefiscal federalism literature, yet, strictly speaking, it

shall only be used to denote a particular type ofrevenue-expenditure asymmetry (Sharma, 2011).This can be understood as follows:

Any existing revenue-expenditure asymmetry

between the two levels of a government shouldsimply be called, what it is, that is, a Vertical FiscalAsymmetry (VFA). The precise nature of thisasymmetry, in a particular country, is a matter of

research. There can be three types of VFAs:


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Vertical Fiscal Imbalance as a

Particular Type of Fiscal Asymmetry :

Fiscal asymmetry with fiscal imbalance: Vertical FiscalImbalance (VFI). This means inappropriate allocation of

revenue powers and spending responsibilities. This statecan be remedied by reassignment of revenue raisingpowers. 2. Fiscal asymmetry without fiscal imbalance butwith a fiscal gap: Vertical Fiscal Gap (VFG). This means adesirable revenue-expenditure asymmetry but with afiscal gap to be closed. This state can be remedied by re-

calibration of federal transfers. 3. Fiscal asymmetrywithout fiscal imbalance and without fiscal gap: VerticalFiscal Difference(VFD). This means a desirable revenue-expenditure asymmetry without a fiscal gap ( i.e. gap isclosed). This is a state of fiscal asymmetry where there is"no imbalance and no gap" and thus needs no remedialmeasure.


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Mr.Ahsanullah

Related Concepts


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Current account deficit

Current account deficit for 2006-7 reached $7.016 billion up by41% over previous year's $4.490 billion.Since the beginning of2008, Pakistan's economic outlook has taken a dramaticdownturn. Security concerns stemming from the nation's role inthe War on Terror have created great instability and led to adecline in FDI from a height of approximately $8 bn to $3.5bnfor the current fiscal year. Concurrently, the insurgency hasforced massive capital flight from Pakistan to the Gulf.

Combined with high global commodity prices, the dual impacthas shocked Pakistan's economy, with gaping trade deficits,high inflation and a crash in the value of the Rupee, which hasfallen from 60-1 USD to over 80-1 USD in a few months.
http://en.wikipedia.org/wiki/War_on_Terrorhttp://en.wikipedia.org/wiki/War_on_Terror


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Fiscal Federalism

As a subfield of public economics, fiscal federalismis concerned with "understanding which functions

and instruments are best centralized and which arebest placed in the sphere of decentralized levels ofgovernment" (Oates, 1999). In other words, it is thestudy of how competencies (expenditure side) and

fiscal instruments (revenue side) are allocatedacross different (vertical) layers of the administration.An important part of its subject matter is the systemof transfer payments or grants by which a centralgovernment shares its revenues with lower levels ofgovernment
http://en.wikipedia.org/wiki/Public_economicshttp://en.wikipedia.org/wiki/Transfer_paymenthttp://en.wikipedia.org/wiki/Grant_%28money%29http://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Grant_%28money%29http://en.wikipedia.org/wiki/Transfer_paymenthttp://en.wikipedia.org/wiki/Transfer_paymenthttp://en.wikipedia.org/wiki/Transfer_paymenthttp://en.wikipedia.org/wiki/Public_economicshttp://en.wikipedia.org/wiki/Public_economicshttp://en.wikipedia.org/wiki/Public_economics


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Main Concepts

The concepts of fiscal federalism are related tovertical and horizontal fiscal relations. The notions

related to horizontal fiscal relations are related toregional imbalances and horizontal competition.Similarly the notions related to fiscal relations arerelated to vertical fiscal imbalance between the two

senior levels of government, that is the centre andthe states/provinces. While the concept of horizontalfiscal imbalance is relatively non controversial (asexplained above), the concept of vertical fiscalimbalance is quite controversial


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There can be three types of VFAs:

There can be three types of VFAs:

Fiscal asymmetry with fiscal imbalance: VERTICAL

FISCAL IMBALANCE (VFI). This means inappropriateallocation of revenue powers and spendingresponsibilities. This state can be remedied byreassignment of revenue raising powers.

Fiscal asymmetry without fiscal imbalance but with a

fiscal gap: VERTICAL FISCAL GAP (VFG). This means adesirable revenue-expenditure asymmetry but with afiscal gap to be closed. This state can be remedied by re-calibration of federal transfers.

Fiscal asymmetry without fiscal imbalance and without

fiscal gap: VERTICAL FISCAL DIFFFERENCE (VFD).This means a desirable revenue-expenditure asymmetry


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The economy today

Due to inflation and economic crisis

worldwide, Pakistan's economy reached astate of Balance of Payment crisis. "TheInternational Monetary Fund bailed outPakistan in November 2008 to avert a

balance of payments crisis and in July lastyear increased the loan to $11.3 billion froman initial $7.6 billion
http://en.wikipedia.org/wiki/Balance_of_Paymenthttp://en.wikipedia.org/wiki/Balance_of_Payment


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The economy today

4.76 Pakistani Rupees Exchange Rate(1960)

80+ Pakistani Rupees Exchange Rate(2011)


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Poverty in Pakistan

Pakistan government spent over 1 trillionRupees (about $16.7 billion) on povertyalleviation programs during the past fouryears, cutting poverty from 35% in 2000-01to 24% in 2006.Rural poverty remains a

pressing issue, as development there hasbeen far slower than in the major urbanareas


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Revenue

The Board of Revenue has collected nearlyone trillion rupees ($14.1 billion) in taxes inthe 2007-2008 financial year
http://en.wikipedia.org/wiki/Board_of_Revenuehttp://en.wikipedia.org/wiki/Board_of_Revenue


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Mr.Jamshaid

Foreign Exchange

External Imabalances


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Foreign exchange reserves

By October 2007, at the end of PrimeMinister Shaukat Azizs tenure, Pakistan

raised back its Foreign Reserves to $16.4billion. Pakistan's trade deficit was at $13billion, exports grew to $18 billion, revenue

generation increased to become $13 billionand the country attracted foreign investmentof $8.4 billion.


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Foreign trade

Pakistan is a member of the World TradeOrganization, and has bilateral and multilateral trade

agreements with many nations and internationalorganizations

In the six months to December 2003, Pakistanrecorded a current account surplus of $1.761 billion,roughly 5% of GDP. Pakistan's exports continue to

be dominated by cotton textiles and apparel, despitegovernment diversification efforts. Exports grew by19.1% in FY 2002-03. Major imports includepetroleum and petroleum products, edible oil,chemicals, fertilizer, capital goods, industrial rawmaterials, and consumer products.
http://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/World_Trade_Organization


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External Imbalances

Pakistan suffered a merchandise trade deficit of$13.528 billion for the financial year 2006-7. The gap

has considerably widened since 2002-3 when thedeficit was only $1.06 billion.[98] Services sectordeficit for 2006-2007 stood at $4.125 billion whichequals the services export of $4.125 billion for thesame year.[99]

The combined deficit in services and goods stand at$17.653 billion which is approx 83.5% of country'stotal export of $21.136 (Goods and services). Therise in the trade gap has been attributed to high oilimport bill, and rise in the prices of food items,machinery and automobiles
http://en.wikipedia.org/wiki/Economy_of_Pakistanhttp://en.wikipedia.org/wiki/Economy_of_Pakistanhttp://en.wikipedia.org/wiki/Economy_of_Pakistanhttp://en.wikipedia.org/wiki/Economy_of_Pakistan


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Economic aid

Pakistan receives economic aid from severalsources as loans and grants. The International

Monetary Fund (IMF), World Bank (WB), AsianDevelopment Bank (ADB), etc. provides long termloans to Pakistan. Pakistan also receives bilateralaid from developed and oil-rich countries.

The Asian Development Bank will provide close to$6 billion development assistance to Pakistan during2006-9. The World Bank unveiled a lending programof up to $6.5 billion for Pakistan under a new four-year, 20062009, aid strategy showing a significantincrease in funding aimed largely at beefing up thecountry's infrastructure.Japan will provide $500

million annual economic aid to Pakistan.
http://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Asian_Development_Bankhttp://en.wikipedia.org/wiki/Asian_Development_Bankhttp://en.wikipedia.org/wiki/Asian_Development_Bankhttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Asian_Development_Bankhttp://en.wikipedia.org/wiki/Asian_Development_Bankhttp://en.wikipedia.org/wiki/Asian_Development_Bankhttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/International_Monetary_Fund


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Conclusion:

Documents

Fiscal Imbalances in Pakistan