Contents

Fiscal policy: .................................................................................................................................................. 2

Objectives of fiscal policy: ......................................................................................................................... 2
Fiscal policy with reference to underdeveloped countries: ......................................................................... 3
Fiscal policy with reference to Pakistan:....................................................................................................... 3
Budget strategy: ........................................................................................................................................ 3
Fiscal policy statement 2016: ................................................................................................................... 4
Fiscal performance during 2015-16: ............................................................................................................. 4
Total revenue: ........................................................................................................................................... 4
FBR Collection: .......................................................................................................................................... 5
Sales Tax: ................................................................................................................................................... 5
Customs duty: ........................................................................................................................................... 5
Conclusion ................................................................................................................................................. 5
Monetary Policy: ........................................................................................................................................... 6
Objectives of monetary policy: ................................................................................................................. 6
Types of monetary policy .......................................................................................................................... 7
Contractionary/tight monetary policy .................................................................................................. 7
Expansionary/ easy monetary policy .................................................................................................... 7
Tools of monetary policy .......................................................................................................................... 7
Quantitative tools ................................................................................................................................. 7
Qualitative tools .................................................................................................................................... 8
Targets for money supply ......................................................................................................................... 8
Monetary policy in pakistan: ........................................................................................................................ 8
Working procedure of monetary policy:................................................................................................... 8
Monetary policy framework in pakistan: .................................................................................................. 9
Monetary policy decision making in pakistan:.......................................................................................... 9
Monetary policy statements of SBP in year 2017: ........................................................................................ 9
Monetary policy statement: ..................................................................................................................... 9
References: ................................................................................................................................................. 11

Prepared by: Ghulam Ali

Fiscal policy:
The deliberate changes in government expenditure and taxes to achieve certain national
econonmic goals is called fiscal policy.

In other words of F.R Glahe; “ By fiscal policy is meant the regulation of the level of government
expenditure and taxation to achieve full employment without inflation in the economy”

Objectives of fiscal policy:

1) The objectives of fiscal policy differ from state to state
depends upon their economical power. In advanced
countries the objective of fiscal policy is the achievement of
full employement and to stablise business cycles. In
developing countries the objectives of fiscal policy are to
achieve maximum level of employement , stablize prices,
and reduce in equalities in income.
2) Fiscal policy can play a major role in lifting the economy out
of depression and closing the deflatory gap. When the
economy is in depression it is faced with rising
unemployement , falling income, severe declining
investment and shrinking of economic activities. The govt
by taking public works programe, increases its expenditure
which helps in raising the level of aggregate demand out
employement in the economy.
3) While facing inflatory gap the anticyclical fiscal policies
should be adopted to bring down the prices and for closing
the inflationary gaps the main fiscal measures to bring
down the excess demand in the economy are reduction in
government expenditure, increase in taxes , budget surplus.
4) Fiscal policy is to minimizefluctuations in aggregate denand
so that economy is always at its target and potential level of
income. The fluctuations in the economy which are
associated with the bussiness cycles can be smoothed in a
various ways. Damping down the expansionary phase,
reducing government expenditure and raising taxes.
5) The modern economists are of the view that fiscal policy
should be employed to promote economic growth in the
country. Economic growth can be achieved and accelerated
through the tax policies which encourage incentives to save
invest and work. The instrument of fiscal policy as used for

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 increasing the production capacity of the economy will
autometically help in fine tuning the economy achieving the
goals of equity , stability and economic efficiency.
6) The level of income is also affected by the balance of
payments position of the country.if a country has
favourable balance of payments, it will lead to increase in
income. The rise in aggregates demand will increase the
demand curve upward and increase the level of national
income. The deficit in the balance of payment has the
opposite effect. The government uses fiscal policy in such a
way that it helps in keeping balance of payments in
equilibrium.

Fiscal policy with reference to underdeveloped countries:

t he role of fiscal policy in less developed countries differs from that in developed countries. In
the developed countries , the role of fiscal policy is to promote fall employement without
inflation through its spending and taxing powers . whereas the position of the developing
countries is very much different. The LCD’S or backward countries are caught in a vicious circle
of poverty. The vicious circle of low income, low consumption, low savings, low rate of capital
formation and therefore low income has to be broken by a suitable fiscal policy. Fiscal policy in
developing countries is thus used to achieve objectives which are different from the advanced
countries.

Fiscal policy with reference to Pakistan:

Budget strategy:
The key aspects of budget strategy are given as;

 Containment of fiscal deficit at 5 percent of projected GDP.

 Enhancement of consolidated revenues to Rs 4,221 to 6 billion.
 Improvement of tax GDP ratio to 17 percent.
 Rationalization of subsidies and discouraging its indiscriminate
use.
 Realization of low cost foreign borrowings to finance fiscal
deficit and reduce the burden of debt servicing.
 Rationalization of current expenditure to improve efficiency.
 Enhancement of efficiency of the tax machinary by removing
anomalies and dissertion in the current tax system.

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Fiscal policy statement 2016:
Budget 2016 mainly focused on key areas of revenue mobilization and curtailment of
expenditure. It stressed upon protection of vulnerable groups through a range of measures to
minimize the impact of fiscal consolidation policies on such groups. On expenditure side focus
was on austerity measures to contain rising current expenditure and increase development
expenditure on an equitable basis. The budget envisaged economic reforms to stablize the
economy and control the rising burden of public debt.

The decade of 1990’s experienced high fiscal imbalances. The fiscal performance of the country
saw considerable improvement during the period starting from 2002-03 to 2006-07 primarly
because of rescheduling of foreign debt of US dollar 12 billion that brought down the debt
serving from 42 percent in 2000-01 to 22 percent of the revenue in 2005-06 and huge flows of
foreign grants and inflows from coalition support fund that increased non non-tax revenue.
Post 2006-07 fiscal performances declined considerably as the average fiscal deficit remained
around 7 percent of GDP during 2008-13. It was mainly due to challenges on internal and
external fronts and policy inaction on important matters including adverse security situation,
energy shortages,lower tax base, persistent losses posted by ailing PSEs , floods, and torential
rains, increasing debt servicing requirements. Higher than the budgeted subsidies and gradual
dilapidation in the socio-economic infrastructure.

An analysis of the last two decades of fiscal performance reveals that high subsidies remained
a major burden on fiscal account combined with falling tax to GDP ratio. Interestingly even
during the period of fiscal improvement (1999-2004), tax to GDP ratio continued to decline.
Tax revenue as percentage of GDP which stood at an average of 13.7 percent during 1992-96
decreased to an average of 9.7 percent during 2008-13 low tax to GDP ratio has also translated
into falling total revenue to GDP ratio as it decreased from an averege of 18 percent during
1992-96 to 13.4 percent during 2008-13. The fiscal performance improved considerably during
last two years both in terms of revenue mobilization and expenditure management.

Fiscal performance during 2015-16:

Total revenue:
Total revenue of the government comprises tax revenue and non tax revenue. Tax revenue
includes direct taxes and indirect taxes while non-tax revenue mainly consists of government
receipts on its its investments and provision of services. Total revenue grew by 8 percent and
despite non-tax revenue exceeding the budget target by 3 percent total revenue slightly missed
its budgetary target to achieve 93 percent for year 2015-16 as compared to last year’s 100
percent. The budget 2015-16 envisaged a growth rate of 30 percent in total taxes major part of
which was to be collected by FBR; however actual growth rate of taxes realised during the year

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was around 18 percent. The reason for the daviation from budgatry target was less collection in
tax revenue which could achieve 90 percent of its annual target mainly owing to decline in
international oil prices which resulted in lesser collection on account of indirect tax revenue.

FBR Collection:
FBR collected Rs 2588 billion against target of Rs 2810 billion for 2015-16 which represented an
achievement of around 92 percent against the target a same level achieved last year. FBR tax
collection grew by 14 percent during 2015-16 as compared to last year’s 16 percent . the over
all tax to GDP ratio improved slightly to 14.4 percent from last year’s 14.3 percent.

The tax collection target of Rs 2810 billion was challenging due to multifaceted issues like
energy crisis and law and order situation. This target set assuming FBR revenue collection at Rs
2275 billion during 2014-15 which was based on projected growth in GDP, inflation, tax
buoyancy and other major economic indicators. However tax collection fell short by rs 21 billion
against the budget target and stood at Rs 2254 billion in 2014-15 resulting in a revised target of
Rs 2605 billion for 2015-16.

Sales Tax:
Sales tax was the largest contributer constituting 42 percent of total tax revenue and grew 9
percent during 2015-16. Out of total gross sales tax collection more than half of total sales tax
is contributed by the sales tax collected on domestic products amounting Rs 579 billion while
rest is collected from sales tax on imports. However in net terms the sales tax collection on
imports surpassed the sales tax collection on domestic products.

Customs duty:
Customs duty used to be the largest revenue source but faded away on account of trade
liberalization in 1990’s. during 2015-16 custom duty contributed around 20 percent and 12
percent in the indirect taxes and total taxes respectively. Dutiable imports constituted around
57 percent in 2015-16. Achieving 119 percent of its budget target and stood at Rs 306 billion
against Rs 241 billion collected in 2014-15. This is mainly due to necessary actions taken by the
government for withdrawl of exemptions/ concessionary grants and replaced zero percent slab
by one percent.

Conclusion
after several year’s of weak economic performance most of the macroeconomic indicators
witnessed improvement during the last two fiscal year’s. during 2015-16 GDP growth slightly
increased while key macroeconomic indicators such as fiscal and current account balance
improved inflation rate declined, foreign exchange reserves increased and public debt to GDP
ratio declined. Most of the public debt sustainability indicators improved as the government
was able to further lenthen the maturity profile of its domestic debt and accordingly

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refinancing and refinancing and interest rate risks reduced. External debt sustainability also
improved owing to increase in debt carrying capacity of the country.

The near-term economic outlook for pakistan is now broadly favourable, although,structural
bottlenecks may impede higher potential growth. Almost all the components of fiscal
operations have achieved their budget targets and support that the the current policy is
operational in the right direction to ensure macroeconomic stabbility and conductive
environment for development. The central element of government’s economic program was to
reduce the budget deficit through a combinatin of raising tax revenue and reducing current
expenditure especially untargeted subsidies and restructing of ailing PSE’s to estimate of 8.8
percent of GDP during 2014-15. Fiscal deficit was brought down to 8.2 percent before the
actual close and from there on it has been reduced to 5.3 percent in 2015-16.

Fiscal policy should continue to explore opportunities for augmenting the resource envelop. At
the same time revenue mobilizationshould be given priority along with rationalization of
current expenditure as envisaged in budget 2015-16. The elements of the vision presented
were ;a)GDP growth to gradually rise to 7 percent by 2017-18 b) inflation will be contained to
single digit c)investment to GDP ratio will rise to 20 percent in the medium term d) fiscal
deficit would be brought down to 3.5 percent of GDP e) tax to GDP Ratio will be increased to
13 percent and f)foreign exchange reserves would be maintaned at a sustainable level.
Further the principles of sound fiscal and debt management as outlined in the fiscal
responsibility and debt limitation act 2005 shall be adhered to the coming years.

Monetary Policy:
“ Monetory policy is concerned with deciding how much money the economy should have or
prhaps more correctly deciding whether to increases or decrease the purchasing power of
money”

According to maccenol “ Changing the money supply to assist the economy to achieve a full
employement”

Objectives of monetary policy:

Objectives are classified in to two aspects.

1) Under developed countries

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 2) Developed countries

Under developed countries:

 To achieve full employement

 To have high efficiency
 To have large scale of recources mobilization
 To increase exports
 To have high investment
 To provide price and exchange stability
 To have efficient allocation and utilization of resources
 To raise living standards

Developed countries:

 To have high aggregate demand without inflation

 Eradicate inflationary and deflationary gap
 High research/ further development
 Providing assistance to other countries
 Gaining monetary control over others

Types of monetary policy

Contractionary/tight monetary policy

Tight monetary policy also called contractionary monetary policy tends to curb inflation by
contracting or reducing the money supply.

Expansionary/ easy monetary policy

Easy monetary policy is also called expansionary monetary policy tends to encourage growth by
expanding the money supply.

Tools of monetary policy

Quantitative tools
 Open market operation
 Bank rate
 Cash reserve requirment
 Liquidity ratio
 Special deposit

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Qualitative tools
 Credit rationing
 Credit ceiling
 Moral persuation
 Direct action
 Advertisement

Targets for money supply

Employement , economic growth , and inflation can not control directly, it must choose
settings, or targets, for variables that it can control in order to best achieve its goals.

Monetary policy in pakistan:

Monetary policy involves central bank’s use of instruments to influence interest rates and or
money supply in the economy with the objective to keep overall prices and financial markets
stable. Monetary policy is essentially a stablization or demand management policy that cannot
impact long term growth potential of an economy. Permeable to SBP act 1956 envisages
monetary policy to secure monetary stability and attain fuller utilization of economy’s
productive resources. In SBP’s view , the best way to achieve these objectives on a sustainable
basis is to keep inflation low and stable.

Working procedure of monetary policy:

State bank of Pakistan signals its monetary policy stance through adjustments in the policy rate
that is; the SBP target rate for the overnight money market repo rate. Changes in the policy
rate impact demand in the economy through several channels and with a lag. In the first place ,
changes in policy rate influence the interst rates determined in the inter bank market at which
financial institutions lend or borrow from each other. The market interest rates are also
influenced by central bank interventions in money and and foreign exchange markets as well as
by its communication.

The changes in the market interest rates influence the borrowing cost for consumers and
bussiness as well as the return on deposits for savers. Generally lower interest rates encourage
people to save less and invest or consume more and vice versa. Changes in the policy rate also
influence the value of financial and real assets , impacting people’s wealth and their spending.

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The adjustment in demand finally affects the general price level and thus inflation in the
economy.

Monetary policy framework in pakistan:

the preamble of SBP act 1956, envisages these objectives as ‘whereas it is necessary to provide
for the constitution of pakistan through state bank to regulate the monetary and credit system
of pakistan and to foster its growth in the best national interest with a view to securing
monetary stability and fuller utilization of the countries productive resources.

SBP focuses on achieving monetar stability by controlling inflation close to its annual and
medium term targets set by the government at the same time SBP also aims to ensure financial
stability, particularly the smooth functioning of the financial market and the payment system.
Consensus in literature as well as country experiences suggest s that price and financial
stability facilitate the achievement of sustained economic growth in the long run.

Monetary policy decision making in pakistan:

Monetary policy committee is responsible and fully empowered to decide the monetary policy
stance. Section 9E of the SBP Act 1956, lays out the powers and functions of the monetary
policy committee that have been mainly identified as to ;

(a) Formulate, support and recommend the monetar policy ,including ,as appropriate ,
decisions relating to intermediate monetary objectives, key interest rates and the supply
of reserves in pakistan and may make regulations for their implementation.
(b) Approve and issue the monetary policy statement and other monetary policy measures.

Monetary policy statements of SBP in year 2017:

Monetary policy statement:

The average inflation clocked in at 3.9 percent during the first half of the year , lower than the
earlier projections due to smooth supply of perishable items, stable exchange rate , and
government’s absorption of the impact of higher international prices. The current trend
suggests that the actual inflation would be lower than the target rate of 6 percent in FY17.

Growing CPEC related imports, decline in exports, absence of coalition support fund and slow
down in remittances, pushed the current account deficit to USD 3.6 billion in the first half of
FY17 from USD 1.7 billion in the same period last year. The higher deficit was financed by an

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increase in bilateral and multilateral funding along with pickup in investment flows. Overall
surplus in the balance payments stands at USD 0.2 billion in the first half of the current year.
Going forward , with the aformensioned risks to external sector , the need of financial inflows
would grow further.

A sizeable net retirement of Govt borrowings to scheduled banks and an increase in bank
deposits helped increase private sector credit. Benefitting from the historic low interest rates,
private bussiness are actively borrowing from the banking sector for upgrading and expanding
their bussiness processes. Private sector borrowed Rs 375 billion in first half of FY17 as
compared to Rs 282.6 billion availed in the corresponding period of last year. Loans for fixed
investments increased by Rs 134.1 billion in the first half of FY17 compared with an expansion
of Rs 83.3 billion in the same period of last year.demand for consumer financing,especially for
auto loans, also gathered pace during the first half of the year.

Healthy credit expansion, along with higher production of kharif crops, visible improvements in
energy supply and upbeat business sentiments signals recuperating real economic activities.
Large scale manufacturing grew by 3.2 percent during the first five months of the current fiscal
year and further increase in expected on account of growing infrastructure spending and recent
policy support for export oriented sectors.

Based on an assessment of the above developments and after detailed deliberations, the
monetary policy committee has decided to keep the policy rate unchanged at 5.75 percent.

The inflation expectations in the current fiscal year continue to remain well anchored. This has
been largerly due to the near absence of any major supply side pressures. However , rising real
incomes in a low interest rate environment since FY14 are indicating signs of pick up in
domestic demand, which is broadly reflected in the core inflation measures. Going forward ,
improving consumer confidence, as depicted by IBA-SBP consumer confidence survey of March
2017, indicates further increase in consumer demand. Hence barring any major cost shocks
domestic demand will define the underlying trend of headline inflation in FY18.

The real economic activity continues to gather pace at the back of better agricultural output,
increase in key large scale manfacuring sectors and a healthy upstick in the credit to private
sector. This expansion is helped by a range of factors including low cost of inputs, upbeat
economic sentiments, improved energy supplies, and CPEC related investments as a result GDP
growth is expected to further Improve in year17.

Real GDP growth in FY17 is provisionally estimated at 5.3 percent representing a 10 year high
specially the revival of domestic demand has been instrumental in the current upturn. The
major thrust has come from the ongoing public and private investment particularly in
infrastructure and power sector. Furthermore consumer spending has also expanded with a
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stable inflationary environment and banks renewed interest in consumer financing. On other
the supply side , recovery in major crops from last year better energy supplies , and a broad
based increase in large scale manufacturing have facilitated this expansion.

Going forward , official inflows are expected to provide support to foreign exchange reserves.
A sustained increase in other private inflows foreign direct investments and expoert earning in
particular is required to fully finance the surge in imports. In thisd regard accompanied with
expected improvemebts in global demand the currebt compositiion of imoorts mainly
machinary bodes well for the future economic activities . furthermore the currentv growth
momentum kled by CPEC rekated investnents is likely to boost foreign direct investment inflows
keeping these factors under shadow the monetary policy commmittee of SBP has decided to
keep the policy rate in changed at 5.75 percent.

References:
 Economics textbook written by Professor M Saeed Nasir
 Google “fiscal and monetary of pakistan”
 Wikipedia
 Website of Debt policy coordination office ministry of
finance Goernment of Pakistan

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