Pakistan’s economic turnaround during the last five years is even more
impressive because the country was faced with a critical and fragile regional and
domestic environment with constant threats to security (a result of playing key
role as a frontline state in the war against terrorism) a prolonged and severe
drought, tensions with India and high oil prices.
Macroeconomic Stability:
Macroeconomic stability has been achieved through reduction in fiscal
deficit, acquiring a surplus on the current account balance of payments, lowering
of inflation, and a transformation of external debt profile. These have been
brought about partially through the support of international financial institutions
and the Paris Club bilateral creditors which significantly eased the external
payments position that had been a major and consistent risk to the economy
since 1998.
Fiscal deficit was reduced by pursuing a combination of four set of policy
measures (i) mobilizing additional tax revenues (ii) reducing subsidies to public
enterprises and corporations and (iii) bringing about a significant decline in debt
servicing payments and (iv) containing defence expenditures.
Monetary policy was kept reasonably tight during the first two years with
money supply growth at about 9 percent. Expansion in private sector credit, in
the subsequent years, did not put much pressure as the government borrowing
was limited to a manageable level. As the monetary conditions improved the
interest rate came down gradually to a single digit and demand for credit by the
private businesses picked up resulting in higher capacity utilization in
manufacturing and increased industrial production.
External debt management focused on (a) reprofiling of the stock of official
bilateral debt, (b) substituting concessional loans for non-concessional from
international financial institutions, (c) pre-paying expensive loans and (d)
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