new eco assignment

8/7/2019 New Eco Assignment

1/28

MONETARY POLICY OF PAKISTAN

Monetary policy is one of the tools that a national Government uses to influence its economy.Using its monetary authority to control the supply and availablity of money, a governmentattempts to influence the overall level of economic activity in line with its political objectives.Usually this goal is "macroeconomic stability" - low unemployment, low inflation, economicgrowth, and a balance of external payments. Monetary policy is usually administered by aGovernment appointed "Central Bank", the Bank of Canada and the Federal Reserve Bank in theUnited States.

Central banks have not always existed. In early economies, governments would supply currencyby minting precious metals with their stamp. No matter what the creditworthiness of thegovernment, the worth of the currency depended on the value of its underlying precious metal. A

coin was worth its gold or silver content, as it could always be melted down to this. A country'sworth and economic clout was largely to its holdings of gold and silver in the national treasury.Monarchs, despots and even democrats tried to skirt this inviolate law by filing down theircoinage or mixing in other substances to make more coins out of the same amount of gold orsilver. They were inevitably found out by the traders, money lenders and others who dependedon the worth of that currency. This the reason that movies show pirates and thieves bitingSpanish dubloons to ascertain the value of their booty and loot.

The advent of paper money during the industrial revolution meant that it wasn't too difficult for acountry to alter its amount of money in circulation. Instead of gold, all that was needed toproduce more banknotes was paper, ink and a printing press. Because of the skepticism of all

concerned, paper money was backed by a "promise to pay" upon demand. A holder of a "poundsterling" note of the United Kingdom could actually demand his pound of silver! When goldbecame the de facto backing of the world's currency a "gold standard" was developed wherenations kept sufficient gold to back their "promises to pay" in their national treasuries. Theproblem with this standard was that a nation's economic health depended on its holdings of gold.When the treasury was bare, the currency was worthless.

In the 1800s, even commercial banks in Canada and the United States issued their ownbanknotes, backed by their promises to pay in gold. Since they could lend more than they had tohold in reserves to meet their depositers demands, they actually could create money. Thisinevitably led to "runs" on banks when they could not meet their depositers demands and werebankrupt. The same happened to smaller countries. Even the United States Treasury had to berescued by JP Morgan several times during this period. In the late 1800s and early 1900s,countries legislated their exclusive monopoly to issue currency and banknotes. This was inresponse to "financial panics" and bank insolvencies. This meant that all currency was issued andcontrolled by the national governments, although they still maintained gold reserves to supporttheir currencies. Commercial banks still could create money by lending more than theirdepositors had placed with the bank, but they no longer had the right to issue banknotes.


2/28

Modern Monetary Policy

Modern central banking dates back to the aftermath of great depression of the 1930s.Governments, led by the economic thinking of the great John Maynard Keynes, realized thatcollapsing money supply and credit availability greatly contributed to the savagery of this

depression. This realization that money supply affected economic activity led to activegovernment attempts to influence money supply through "monetary policy". At this time, nationscreated central banks to establish "monetary authority". This meant that rather than acceptingwhatever happened to money supply, they would actively try to influence the amount of moneyavailable. This would influence credit creation and the overall level of economic activity.

Modern monetary policy does not involve gold to a great extent. In 1968, the United Statesrescinded its promise to pay in gold and effectively removed itself from the "gold standard".Since then, it has been the job of the Federal Reserve to control the amount of money and creditin the U.S. economy. I doing this, it wants to maintain the purchasing power of the U.S. dollarand its comparative worth to other currencies. This might sound easy, but it is a complex task in

an information age where huge amounts of money travels in electronic signals in microsecondsaround the world.

The Effectiveness of Monetary Policy

Economists debate the relevant measures of money supply. "Narrow" money supply or M1 iscurrency in circulation and the currency in easily accessed chequing and savings accounts."Broader" money supply measures such as M2 and M3 include term deposits and even moneymarket mutual funds. Economists debate the finer points of the implementation and effectivenessof monetary policy but one thing is obvious. At the extremes, monetary policy is a potent force.In countries such as the Russian Republic, Poland or Brazil where the printing presses run full

tilt to pay for government operations, money supply is expanding rapidly and the currencybecomes rapidly worthless compared to goods and services it can buy. Very high levels ofinflation or "hyperinflation" is the result. With 30-40% monthly inflation rates, citizens buy hardgoods as soon as they receive payment in the currency and those on fixed income have theirinvestments rendered worthless.

At the other extreme, restrictive monetary policy has shown its effectiveness with considerableforce. Germany, which experienced hyperinflation during the Weimar Republic and never forgot,has maintained a very stable monetary regime and resulting low levels of inflation. WhenChairman Paul Volcker of the U.S. Federal Reserve applied the monetary brakes during the highinflation 1980s, the result was an economic downturn and a large drop in inflation. The Bank ofCanada, headed by John Crow, targeted 0-3% inflation in the early 1990s and curtailed economicactivity to such an extent that Canada actually experienced negative inflation rates in severalmonths for the first time since the 1930s.

Without much debate, the effectiveness of monetary policy, its timing and its eventual impactson the economy are not obvious. That central banks attempt influence the economy throughmonetary is a given. In any event, insights into monetary policy are very important to the


3/28

investor. The availability of money and credit are key considerations in the pricing of aninvestment.

Operations of a Modern Central Bank

The Central Bank attempts to achieve economic stability by varying the quantity of money incirculation, the cost and availability of credit, and the composition of a country's national debt.The Central Bank has three instruments available to it in order to implement monetary policy:

1. Open market operations2. Reserve requirements3. The 'Discount Window'

Open market operations are just that, the buying or selling of Government bonds by the CentralBank in the open market. If the Central Bank were to buy bonds, the effect would be to expandthe money supply and hence lower interest rates, the opposite is true if bonds are sold. This is themost widely used instrument in the day to day control of the money supply due to its ease of use,and the relatively smooth interaction it has with the economy as a whole.

Reserve requirements are a percentage of commercial banks', and other depository institutions',demand deposit liabilities (i.e. chequing accounts) that must be kept on deposit at the CentralBank as a requirement of Banking Regulations. Though seldom used, this percentage may bechanged by the Central Bank at any time, thereby affecting the money supply and credit

conditions. If the reserve requirement percentage is increased, this would reduce the moneysupply by requiring a larger percentage of the banks, and depository institutions, demanddeposits to be held by the Central Bank, thus taking them out of supply. As a result, an increasein reserve requirements would increase interest rates, as less currency is available to borrowers.This type of action is only performed occasionally as it affects money supply in a major way.Altering reserve requirements is not merely a short-term corrective measure, but a long-termshift in the money supply.

Lastly, the Discount Window is where the commercial banks, and other depository institutions,are able to borrow reserves from the Central Bank at a discount rate. This rate is usually setbelow short term market rates (T-bills). This enables the institutions to vary credit conditions

(i.e., the amount of money they have to loan out), there by affecting the money supply. It is ofnote that the Discount Window is the only instrument which the Central Banks do not have totalcontrol over.

By affecting the money supply, it is theorized, that monetary policy can establish ranges for

inflation, unemployment, interest rates ,and economic growth. A stable financial environment is

created in which savings and investment can occur, allowing for the growth of the economy as a

whole.


4/28

Conclusion:-

The Central Bank of Armenias (CBA) policy rate remains appropriate as a

signal of the monetary policy stance. To strengthen the interest rate channel of monetarytransmission, the CBA should continue to actively manage liquidity by using all available

monetary policy instruments to ensure that market rates are close to the policy rate. Measures

to strengthen the market for dram instruments and increase the use of dram transactions in

the economy are welcome, as these would help fight high dollarization, deepen financial

intermediation, and raise the effectiveness of monetary policy. The mission also welcomes

the authorities commitment to maintaining a flexible exchange rate policy which should

continue to aim at smoothing sharp fluctuations in the market, guarding foreign exchange

reserves, and ensuring that the economy remains competitive. At the same time, it is

important that competition and labor policies are supportive of the CBAs initiatives to

prevent temporary price increases of imported and domestic goods from becomingpermanent.

The banking sector proved resilient to the crisis. The authorities measures to ensure the

stability of the financial system by enhancing the capital base of banks, strengthening risk

management and the supervisory framework have helped at limiting financial sector

vulnerabilities. Measures to enhance crisis preparedness and contingency planning are also

welcome. Further measures to strengthen and develop the financial sector will be considered

under the forthcoming update of the Financial Sector Assessment Program in 2011.


5/28

CURRENT ECONOMIC SITUATION OF

PAKISTAN

Pakistans free fall, which had gained momentum in 2008, continued with an added velocitythrough 2009. By March 23, 2009, David Kilcullen, who advises United States CentralCommand (CENTCOM) commander, General David H. Petraeus, on the war on terror, waswarning that Pakistan "could collapse within six months if immediate steps are not taken toremedy the situation". This somewhat extravagant prophecy has, of course, been belied for thetime being. Nevertheless, the progression towards failure appears irreversible.

Terror now engulfs the entire nation. Militants have thrown up a serious challenge to theauthority of the Federal Government in every Province in the country Balochistan, North West

Frontier Province (NWFP), Punjab and Sindh as well as in the Federally Administered TribalAreas (FATA), Gilgit-Baltistan and Azad Jammu and Kashmir. Devoid of a strong politicalleadership and the necessary will to square up to terrorism, Islamabad, as always, has failed torespond adequately and recover some measure of control.

2009 has been the bloodiest year yet. As SAIR noted earlier, Pakistan was already being viewedas a place of instability and widespread strife by 2003. But 2009, with at least 11,585 fatalities(the actual numbers could be significantly higher, since Pakistan denies access to the media andindependent monitors in most areas of conflict) came very close to the cumulative fatalitiesbetween 2003 and 2008 at 13,485. Fatalities have augmented significantly each year since2003. At least 723 major incidents(involving three or more fatalities) were reported through

2009, according to the South Asia Terrorism Portal (SATP) database.

Annual Fatalities in Terrorist Violence in Pakistan, 2003- 2009

CiviliansSecurity Forces(SFs)

Terrorists Total

2003 140 24 25 189

2004 435 184 244 863

2005 430 81 137 648

2006 608 325 538 1471

2007 1523 597 1479 35992008 2155 654 3906 6715

2009 2307 1011 8267 11585

Total 7598 2876 14596 25070

Source: SATP Database


6/28

[Since media access is heavily restricted in the troubled areas of Pakistan, and there is only fitfulrelease of information by Government agencies and media reportage, the actual figures could bemuch higher].

Unsurprisingly, suicide attacks were at the forefront. As compared to 917 killings in 59 suicide

attacks in 2008, the year 2009 recorded a total of 80 suicide attacks, in which 1,018 persons werekilled.

Fatalities in Suicide Attacks: 2007- 2009

Total Number ofSuicide Attacks

Civilians SFs Militants Total

2007 58 552 177 58 787

2008 59 712 140 65 917

2009 80 735 196 87 1018

Source: SATP Database

Interior Minister Rehman Malik confirmed that those involved in the suicide bombings werePakistanis and that "the price of a suicide bomber is from Rs. 0.5 million to Rs. 1.5 million,while the family of the bomber gets Rs 0.5 million". In addition, the NWFP Senior MinisterBashir Ahmed Bilour said that 200 children between the ages 6 to 13 years had been recoveredfrom Malakand in the NWFP. The children had been completely brainwashed to conduct suicideattacks. Meanwhile, the Tehrik-e-Taliban Pakistan (TTP), on April 5, 2009, vowed to carry outtwo suicide attacks per week across the country. The latest in this series of suicide attacksoccurred in Karachi on February 5, 2010 in which 33 persons were reportedly killed.

Total fatalities did, however, decline in Balochistan, from 348 in 2008, to 277 in 2009. On firstsight, this would suggest some respite from terror. A closer scrutiny of the numbers, however, istroubling. Civilian fatalities rose to 152, from 130 in 2008, while there was a sharp decline in thenumber of militants killed by the SFs, which came down to 37 from 107. According to theSeptember 20, 2009, Balochistan Economic Report, Kohlu District, along with Quetta, theprovincial capital, and Sibi, represented over a quarter of the terrorist attacks. Balochistanaccounted for three-fifths of all terrorist attacks in Pakistan during 2006. According to the study,the security situation in Balochistan was "highly unsatisfactory".

Developments also suggest that peace will remain elusive in Balochistan. On January 4, 2009,

three pro-independence Baloch groups announced the formal end of a four-month-oldunilateral cease-fire announced in September 2008. Earlier, on January 1, 2009, the BalochRepublican Party Chief and militant leader Nawabzada Bramdagh Bugti urged all Balochnationalist groups to abandon parliamentary politics and form a united front in their struggle forfreedom. Further, on August 11, 2009, the Khan of Kalat (the title of former rulers of the State ofKalat, which is now part of Balochistan), Mir Suleman Dawood, announced the formation of aCouncil for Independent Balochistan and rejected any reconciliation with the Government ofPakistan without the mediation of the European Union and United Nations.


7/28

Apart from the Baloch Groups, the Taliban also continued its surge in the region. A formerSenator alleged that supporters of the Taliban had captured land worth PKR two billion in theeastern and western parts of Quetta with the covert support of the establishment, in order toundermine the Baloch nationalist movement and promote Talibanisation in Balochistan. Severalparts of the provincial capital have become no-go areas, where the Taliban and their supporters

have consolidated their position, the Senator added. The Quetta shura (executive council),which substantially controls the Taliban insurgency in Afghanistan, is based in the Balochcapital, with clear evidence of Islamabads complicity.

There have, of course, been several overtures by Islamabad to buy peace in Balochistan. OnMarch 26, 2009, President Asif Ali Zardari directed the Balochistan Government to constitute aParliamentary Committee to hold talks with disgruntled elements in the Province. A day later,he announced a PKR 46.6 billion development package for Balochistan. On November 24,2009, the Federal Government announced a five-tier multi-dimensional special package,named Aghaz-e-Haqooq-e-Balochistan(Commencement of the Rights of Balochistan) combining political, administrative and economic initiatives. However, exiled Baloch leaders

rejected the package on the grounds that it failed to address their principal problems.

Meanwhile, FATA emerged as the epicentre of lawlessness, with the Federal Government losingcontrol. At least 5,238 persons were killed in 3,836 incidence of violence in FATA in 2009, ascompared to 3,067 in 1,154 violent incidents in 2008. Talibans writ runs across the region. OnApril 10, 2009, the Taliban announced the enforcement of Sharia (Islamic law) in the BajaurAgency and stopped women from going outside without male relatives, banned the shaving ofbeards, and warned people against availing assistance from the Benazir Income SupportProgramme. The announcement was made by Maulvi Faqir Mohammad, the Taliban chief in theAgency, in a 40-minute speech delivered through his groups illegal FM radio channel. Earlier,on January 4, 2009, the Orakzai chapter of the TTP established Sharia courts in most part of theOrakzai Agency. On April 15, 2009 the Sikh community living in the Orakzai Agency concededto the Taliban demand to pay jizia a tax levied on non-Muslims living under Islamic rule andpaid PKR 20 million to the Taliban in return for their protection.

Amidst these developments, on June 19, 2009, the Government decided to launchOperation Rah-e-Nijat(Path to Salvation) against the chief of the TTP, Baitullah Mehsud and hisnetwork in the South Waziristan Agency (SWA). In a major breakthrough, Baitullah Mehsudwas killed in a US drone attack in SWA on August 5, 2009. He was succeeded by HakeemullahMehsud, who, according to emerging reports has also been killed in a drone attack in the NorthWaziristan Agency on January 14, 2010, along with Quari Hussain, the TTPs top trainer ofsuicide bombers.

Meanwhile, a July 1, 2009, Government report said that militancy in the FATA had cost Pakistanaround $2,146 million, while the fighting had killed over 3,000 civilians. The report Cost ofConflict in FATA prepared by the Planning and Development Wing of the FATA Secretariat,said the social cost of the militancy was far greater than the cost of infrastructure, economic andsubsequent environmental loss. However, it said the cost of the military operation "is beyond thescope of this report and would be worked out separately by the concerned agencies". The reportput the social cost of the conflict at $1,109 million, the cost to security and internal displacement


8/28

at $572 million, the environmental cost at $188 million, the economic cost at $119 million, andinfrastructure losses at $103 million. "Pakistan is suffering a series of overlapping crises due tothe conflict in FATA...," the report stated.

On the NWFP front, there was a sharp increase in fatalities, with 5,497 killed in 2009, as against

2,944 in 2008. There were significant increases in fatalities in all categories, with the number ofcivilians killed rising from 1,021 to 1,229; SFs from 281 to 471; and militants from 1,642 to3,797. The sharp increases in SF and militant fatalities suggest increasing frontal engagementwith the militants in the region. Ominously, TTP chief Baitullah Mehsud had, on May 30, 2009,ordered his followers to carry out bombings in small villages of Swat and FATA, and to establishhideouts in other areas of the country.

Despite the surge in violence the Government continued to flip-flop in its policy. Indeed, NWFPtells the story of Islamabads complete debacle in formulating any strategy to counter terrorismin the country. The Talibans 10-day cease-fire on February 15, 2009, was accepted by theGovernment and the Taliban in the Swat Valley received PKR 480 million (USD 6 million) in

compensation from the Government. Also, the Government and the extremist Tehreek-e-Nafaz-e-Shariat-e-Mohammadi (TNSM) reached an understanding about promulgating Sharia, termed'Nizam-i-Adl Regulation', in the Malakand Division. Military operations in Swat weresuspended. However, the deal, as has been the practice in the past, quickly collapsed and on May7, 2009, Prime Minister Syed Yousuf Raza Gilani ordered the Armed Forces to launchoperation Rah-e-Rast (Path to truth) against the militants in Swat and Malakand. On June 22,2009, the Inter Services Public Relations Director-General Major General Athar Abbas boastedthat the SFs were in the final phase of eliminating terrorist hideouts and camps inSwat. However, Owais Ahmad Ghani, the Governor of NWFP, had, on January 16, 2009, notedthat that there were approximately 15,000 militants in the tribal belt, who had no dearth of ration,ammunition or equipment and even according to the Armys data, this number is far frombeing accounted for.

There was, moreover, no dearth of finances for the TTP. Governor Ghani disclosed that a TTPcadre normally received PKR 6,000 to PKR 8,000 per month, while their leaders received PKR20,000 to 30,000 per month. Further, on July 26, the chief of the Government's Special SupportGroup, General Nadeem Ahmad, disclosed that disguised TTP militants may be getting moneymeant for Internally Displaced Persons (IDPs), that precautions to prevent this were not workingand that "it is certain that some of those receiving the money are Taliban, ready to return homeand wreak havoc". Reports also indicated that about PKR 40 billion had been spent by terroristsin the NWFP and FATA in the last 10 years, yet Islamabad continues to announce reliefpackages in the region without holding anyone accountable. On, February 1, the Centre releasedanother PKR 623 million to the NWFP and FATA Administrations to provide compensation tothe victims of militancy. PKR 283 million have been released for the FATA and another PKR340 million for the NWFP Administrations.

The surge in violence in Punjab, the Province in which the capital of the dwindling nation islocated, is more alarming. As many as 441 persons were killed in 2009, as compared to 304 in2008. Significantly, the number of suicide attacks increased from 12 to 19. In the deadliestattack, in Lahore on December 7, two bomb blasts killed at least 45 people, and injured more


9/28

than 100 at the crowded Moon Market in the Allama Iqbal area. The garrison town ofRawalpindi witnessed at least four suicide attacks, of which the most devastating was onNovember 2, when at least 35 persons, including two women and children, were killed and 63others sustained injuries, when a suicide bomber blew himself up outside a branch of theNational Bank of Pakistan (NBP) in Rawalpindi. In a daring attack on May 27, suicide bombers

detonated a vehicle loaded with 100 kilograms of explosives near offices of the Capital CityPolice Officer and the Inter-Services Intelligence (ISI) in Lahore killing at least 27 persons andinjuring 326 others. An ISI colonel and 15 Police officials were among those killed. In addition,at least five suicide attacks were carried out by the militants in the national capital, Islamabad. Inone such incident, eight Frontier Constabulary (FC) personnel were killed, and seven othersinjured, when a suicide bomber blew himself up at an FC check post on the Margala Road inIslamabad. Another daring attack, which had significant international repercussions, was carriedout on March 3, when the bus carrying Sri Lankan cricket team was attacked in Lahore. Whilenone of the cricketers lost their lives, at least seven of them, including the teams British coachwere injured, and eight others, mostly Police guards accompanying the team, were killed in theattack.

There seems to be no hope for respite from this terror, as Hakeemullah Mehsud, the thenspokesman for the TTP chief Baitullah Mehsud, declared, on May 28, 2009, "I appeal to [people]of Lahore, Rawalpindi, Islamabad and Multan to vacate their cities, as there will be more suchmassive attacks, more dangerous than this and we will target Government buildings and places".On April 8, 2009 the Pakistani Taliban commander Mullah Nazeer Ahmed stated in an interviewwith al Qaedas media arm, Al-Sahab,that the Taliban would soon capture Islamabad and thatPakistani Taliban factions had united and would take their war to the capital. Worryingly, its notonly the Taliban and al Qaeda but also the Sunni outfit Sipah-e-Sahaba Pakistan (SSP) which iscreating a terror hub in the Province.

Sindh and, more alarmingly, the economic capital Karachi, are also being steadily consumed byterrorism. Fatalities in the province rose to 68 in 2009, from 52 in 2008. In one of the deadliestattacks, on December 30, 2009, a suicide bombing killed 45 people in Karachi. In an alarmingdisclosure, a March 1, 2009, report prepared by the Karachi Criminal Investigation DepartmentSpecial Branch indicated that the Taliban network could strike the financial and shipping hub ofKarachi and "could take the city hostage at any point". A December 23, 2009, report, quoting aSenior Police Official said that several militants of the Lashkar-e-Jhangvi (LeJ), who were earlierhiding and fighting in the tribal areas of the NWFP, had reached Karachi to carry out terroristactivities.

Sectarian violence, however, continued to decline, offering Islamabad some relief. Though therewas a slight increase in the number of incidents recorded, the number of those killed and injuredreduced remarkably.

Sectarian Violence in Pakistan

Year Incidents Killed Injured

2009 106 190 398

2008 97 306 505


10/28

2007 341 441 630

2006 38 201 349

2005 62 160 354

2004 19 187 619

2003 22 102 1032002 63 121 257

Source: SATP

2009 was also another bloody year for the media in Pakistan, with at least 10 journalists payingthe ultimate price of practicing a difficult trade in the backdrop of rising terrorism and militancy.At least 163 cases of direct attacks on media were recorded during the year.

Islamabads responses to terrorism, however, remain ambivalent. There have been efforts to fightthe TTP fitfully, and some legal amendments suggest that there is a greater measure ofseriousness in the Government. Thus, on October 2, 2009, President Zardari amended the Anti-

terrorism Act, 1997, and on November 3, 2009, the National Assembly Standing Committee onFinance approved the Anti-Money Laundering Bill, 2009. Nevertheless, the Government remainskeen to allow favoured segments of the terror infrastructure to grow. The open support toterrorists on Kashmir Solidarity Day came as the latest reminder of the States duplicity onterrorism. On February 4, 2010, the Jama'at-ud-Da'awa (JuD), a front organization of theLashkar-e-Toiba (LeT), and the Hizb-ul-Mujahideen (HM), held a Yakjaiti-e-Kashmir (KashmirSolidarity) conference in Pakistan-occupied Kashmir (PoK) capital Muzaffarabad. SyedSalahuddin, the chief of HM and chairman of the 16-party United Jihad Council, declared, "TheKashmir issue cannot be resolved through dialogue. Jihad (holy war) is the only solution to freeKashmir from the Indian yoke... I want to tell my brothers across the border that we will remainwith you until India quits Kashmir." A day later, the JuD held a public meeting in Islamabad,

vowing to seize Kashmir by force and threatening "rivers of blood" in India. "Wheneverour jihad in Kashmir nears success, India becomes ready for talks," Abdur Rehman Makki,deputy to JuD leader Hafiz Saeed proclaimed, referring to Indias proposal for initiation of talkswith Pakistan. [India had proposed resumption of talks on February 5]. Another JuD rally, led byHafiz Saeed, was organised in Lahore. Each of these was a well attended mass rally, widelycovered by the national and international media. State agencies made no effort to curtail theactivities of these groups, several of which are designated international terrorist organisations.

Pakistans role in supporting terrorism in India and Afghanistan is now one of the worlds worstkept secrets, and this was further confirmed, on December 16, by the Federal Bureau ofInvestigation interrogation of David Coleman Headley alias Daood Gilani [one of the prime

suspect in the 26/11 Mumbai terrorist attacks]. The FBI found that "a section of serving PakistanArmy officers" were working in close collaboration with India-specific jihadi groups like theLeT and Jaish-e-Mohammed (JeM).

Islamabad also continued to harbour Taliban militants fighting against the Allied forces, led byUS, in Afghanistan. On February 10, 2009, US President Barack Obama asserted that hisAdministration would not allow 'safe havens' for al Qaeda and the Taliban operating with'impunity' in the Tribal Areas bordering Afghanistan. "You've got the Taliban and al Qaeda


11/28

operating in the FATA and these border regions between Afghanistan and Pakistan What wehaven't seen is the kind of concerted effort to root out those safe havens that would ultimatelymake our mission successful," he asserted. On October 14, the United States Consul General inKarachi, Stephen Fakan, stated that it would be unreasonable to deny the presence of theTaliban in Balochistan. Admiral Mike Mullen, the US Chairman of Joint Chiefs of Staff had said

in April that the Taliban in Pakistan had established strategic links with al Qaeda and wasfacilitating al Qaedas attacks on NATO forces in Afghanistan.

Despite this, the Obama Administration launched a new policy for Afghanistan-Pakistan onMarch 27, 2009 with a much fanfare AfPak policy , without even mentioning the Taliban. Thiswas a continuation of the intentional blindness of the predecessor George Bush Administration.Obamas AfPak policy only talked about the threat from al Qaeda. There was, nevertheless, aneffort on the part of the US to engage the militants directly, and at least 43 drone attacks werecarried out by the US on Pakistani soil in 2009. In the most successful attack on August 5, thethen TTP chief Baitullah Mehsud was killed in SWA.

David Kilcullen articulated a rising desperation in a growing constituency, that "if Pakistan wentout of control, it would dwarf all the crises in the world today". Islamabad, however, continues toplay with fire, even as the international community offers no solution other than rising quantitiesof aid to a progressively rogue Pakistan that remains a safe haven for the al Qaeda, the Talibanand a number of State supported international terrorist organisations. Unless the Pakistaniestablishment overcomes its ambivalence towards all manifestations of terrorism, it is clear, thecountrys slide into chaos will not be halted.

Conclusion:-

Its a world abound with Countless problems- social, economic, legal, political,

spiritual and the list goes on. Certain social and economic conditions become a menace

for the society when they start asserting negative influence on the society. Usually

those social needs which persist in a Society for long period of time without being

fulfilled owing to restrained budgetary Scenarios, they turn into socio-economic

problems. The major problems of a society are linked with the providence of basic

necessities of life to the people making up the society. In the context of Pakistan, owing

to the fact that it is a developing nation, there is no wonder that it is engulfed with a

number of social and economical problems.


12/28

BALANCE OF PAYMENT OF

PAKISTAN

A balance-of-payments crisis looms as the country's foreign exchange reserves drop 75%, thanks to theplunging rupee and soaring oil prices

Starting a few months ago, the $24 million import bill for Pakistan's Conductor & Cables, a

Lahore-based steel business that employs 300 workers, became a drain on the country's most

precious resourcethe U.S. dollar. As the global credit crisis has intensified and Pakistan has

steadily seen its foreign reserves dwindle, privately held Conductor & Cables is facing its toughest

challenge yet. In an attempt to preserve its foreign exchange, the Pakistani government has told

importers they must provide for one-third of their import bill in cash before a bank can issue letters

of credit. As a result, Chief Executive Muhammad Imran Khan's imports are down by 50%. "Mycompany is in a pretty deep crisis right now," he says. "But so is the country."

This is what it feels like when a country faces bankruptcy. The electricity goes out for as much as

12 hours a day, the gasoline lines get longer, and depositors rush to banks to pull out their meager

savings. After weeks of begging in vain for help from the international community, Pakistan's

foreign exchange reserves have dropped to just $4.3 billion, down nearly 75% in the past year

because of soaring prices for commodities, particularly oil, which accounts for about one-third of

imports. The country presently has only enough cash to pay for about 45 days of imports at current

rates. And the rupee has lost about 25% so far this year. Unlike Iceland, whose economy

collapsed (BusinessWeek.com, 10/9/08) as a direct result of the global credit crunch, Pakistan's

problems are largely homegrown. Indeed, its banks are well capitalized and did not get caught up

buying fancy debt securities linked to the U.S. housing market.

RAGING INFLATION

Already the country has cut its oil imports so it holds no more than 10 days' supply at any given

time. Inflation is raging at more than 24%, and for the first time in a decade, Pakistan's economicgrowth this year will drop below 5%, according to economists' estimates, compared with 6.5% last

year. For the $146 billion economy in Pakistan, a mainstay in the Bush Administration's war on

terror, the crisis could not have come at a worse time. Since 2001 the U.S., Pakistan's traditional

ally, has given the country as much as $10 billion in military aid.


13/28

With the global economic system already in shock, were Pakistan to default on its massive foreign

debt obligationswhich it has done beforethe impact would be painful. At the same time, the

West needs Pakistan's newly elected civilian government to remain stable: Pakistan's nuclear

arsenal was never completely secure in the best of times, and now, with an increased offensive by

the Taliban in Peshawar, the biggest Pakistani city near the border with Afghanistan, Pakistan's

role in the global war on terror has never been more important.

With global arteries of credit still constricted, Pakistan's already toxic debtrated the second-

worst in the world by Standard & Poor'smakes it impossible for the country to get bridge loans

to make partial payments on outstanding loans. Just this past week, Pakistani President Asif Ali

Zardari used his first state visit to China to ask for a loan to Pakistan's central bank, reported by

Chinese media to be as large as $2 billion. China said no, but offered to increase bilateral trade and

will consider building two nuclear reactors in the country.

HUGE DEBT BURDEN

Pakistan's debt burden is significant. It has nearly $3 billion in commercial foreign debt and $38

billion in concessionary loans from the International Monetary Fund and the Paris Club, an

informal lending group of about 20 countries, according to an estimate by Credit Suisse (CS)

analyst Farid Khan. Payments on dollar-denominated bonds continue, but in February a $500

million bond comes due, bringing debt servicing costs for 2008 to more than $3 billion, according

to a government estimate."The option of defaulting on those loans has never even been seriously considered," says Sakib

Sherani, chief economist for the Royal Bank of Scotland (RBS) in Pakistan and an adviser to the

government. "But even if they don't have the willingness to default, that doesn't mean it couldn't

happen."

Just to keep afloat, Pakistan's recently appointed financial adviser to the Prime Minister, Shaukat

Tarin, has asked the World Bank, the Asian Development Bank, and other lenders for just under $4

billion in loans.

And then there's the measure of last resortthe International Monetary Fund, which is likely toimpose strict tariff reductions in exchange for the loans. It's not a pleasant option for Pakistan,

which has tried for decades to be free of the IMF's influence. Already, a team from Pakistan has

been meeting with the IMF in Washington. "We don't have the luxury of foreign exchange reserves

to prolong negotiations by a few months," says Sherani. "So the closer[Pakistan] gets to running

out of foreign exchange, the likelihood of turning to the IMF gets stronger."


14/28

IMF: "PLAN C"

Pakistan hopes things don't come to thatnewly appointed Finance Minister Shaukat Tarin has

referred to the IMF as "Plan C"and is waiting for a conference later this month in Abu Dhabi

with an informal group called the Friends of Pakistan to see if soft loans or delayed oil payments to

its Middle Eastern allies could buy it some breathing space.

But the crisis's impact on Pakistan's real economy, which was already reeling from a 60% increase

in oil prices since the beginning of the year and inflation at a 30-year high, has been severe. Last

year it was the star performer among Asia's indexes, but for now the Karachi Stock Exchange is in

complete paralysis. On Aug. 27 the exchange introduced a circuit breaker that prevents prices from

falling. Trade, which had already halved by 50% from January to May, to about 150 million shares

a day, has dwindled to a few thousand per day.

"We were faced with a problem of sharply depreciating currency. We had investors panicking,

very thin volumes, and the market was falling again," say KSE president Adnan Afridi. "So [in

August] we put in the much-talked-about floor."

Afridi plans to remove the floor on Oct. 27. Investors are bracing for a nearly 20% drop, and the

government is planning to provide a backstop by selling a put option to foreign investors that

would limit their downside losses. "In the backdrop of what's happening globally, with local banks

under a lot of liquidity pressure, it [was] probably not a bad thing to freeze things for a while,"

says Credit Suisse's Khan. "But the sooner they remove the planks from beneath the floor and let

the market forces determine the fair level, the better it will be."

Inside Pakistan, though, the situation is seen as just another crisis in a year during which Pakistan

People's Party leader Benazir Bhutto was assassinated, military dictator Pervez Musharraf

resigned, the country's first civilian government in seven years took office, and terrorists have

launched major attacks. Says Shamim Ahmed Shamsi, the head of the Lahore Chamber of

Commerce: "Basically, what we need is a short-term measure so that things can return to some sort

of 'normalcy,' even with a little bit of short-term borrowing."

Restored confidence in the stock marketand the entire economymay come soon via foreign

aid, especially if this economic crisis distracts Pakistan's leaders for too long from the conflict right

on its border with Afghanistan. As Zardari never tires of reminding the world, Pakistan is on the

front lines of the war on terror. Indeed, U.S. Assistant Secretary of State Richard Boucher arrived

in the country over the weekend, and a series of missile and artillery attacks claimed to have killed


15/28

several insurgents near the border with Afghanistan. "Pakistan really is a problem, but they will

definitely get assistance from the U.S. and Europe because of this al Qaeda thing," says Mark

Mobius, executive chairman of Templeton Asset Management, who invests exclusively in

emerging markets. "I'm not too worried about it."

Conclusion:-

Consider IS curve and LM curve in an open economy as explained in a Mundell Flemming

model. By having expansionary fiscal policy, there is an increase in government purchase and

the IS curve shifts towards right. There is no change in LM curve and it remains vertical. Due to

the shift of IS curve, the interest rate and income level remains same but the exchange rate

varies.Keeping in view of open economy in the above scenario, if the government want to use

expansionary fiscal policy to increase the income level then it cannot do that, why?

Solution:

If the govt. want to use expansionary fiscal policy to increase the income level then it cannot do

that, because there is no change in the interest rate it is given and the LM is vertical LM curve, if

use expansionary fiscal policy only the exchange rate become high and the income level remains

fixed.


16/28

The Global Economic Crisis And Its

Impact On The Economy Of Pakistan

Overview:The global financial crisis, brewing for a while, really started to show its effects in the middle of2007 and into 2008. The financial crisis, which has been developing at Wall Street, has gotpeople worried in developing countries around the world. Around the world stock markets havefallen, large financial institutions have collapsed or been bought out, and governments in eventhe wealthiest nations have had to come up with rescue packages to bail out their financialsystems.History:

It was began in July 2007 when a loss of confidence by investors in the value of securitizedmortgages in the United States resulted in a liquidity crisis that prompted a substantial injection

of capital into financial markets by the United States Federal Reserve, Bank of England and theEuropean Central Bank. In September 2008, the crisis deepened, as stock markets worldwidecrashed and entered a period of high volatility, and a considerable number of banks, mortgagelenders and insurance companies failed.Although America's housing collapse is often cited ashaving caused the crisis, the financial system was vulnerable because of intricate and highly-leveraged financial contracts and operations.The situation is not limited to the meltdown of financial markets, the real economy at thenational and international level, its institutions; and its productive structures are also in difficulty.

SCOPEThe crisis in real estate, banking and credit in the United States had a global reach, and isaffecting a wide range of financial and economic activities and institutions world wide.Cause of the financial crisis:

The role of central banks:It has been proposed that the crisis, in which credit created through the central banking givesrise to an artificial boom, which is inevitably followed by a bust. the central banks should not beinvolved in debt markets. The yield curve from 2000 through 2007 illustrates the role that creditcreation by the Federal Reserve may have played in the on-set of the financial crisis in 2007 and2008.Housing bubble: The narrowing of the yield curve ( ) from 2004 and the inversion of the yieldcurve during 2007 indicated a bursting of the housing bubble.Commodity bubble: A commodity bubble was created following the collapse in the housingbubble. The inflationary effect of the prolonged period of a very positively sloped yield curveresulted in inflation of asset prices .The reason this happened was likely due to the cheap goodsthat were imported

Sub-prime lending:This sub prime lending is considersd as one of the reason to the econiomic crisis.But It has beenpointed out that there were not enough of these loans made to cause a crisis of this magnitude.


17/28

Over-leveraging, credit default swaps and collateralized debt obligationsAnother probable cause of the crisis was widespread miscalculation by banks and investors ofthe level of risk inherent in the unregulated collateralized debt obligation and Credit DefaultSwap markets.Under this theory, banks and investors systematized the risk by taking advantage of low interest

rates to borrow tremendous sums of money that they could only pay back if the housing marketcontinued to increase in value.

One of the first victims was Northern Rock, a medium-sized British bank.[27] The highlyleveraged nature of its business led the bank to request security from the Bank of England. Thisin turn led to investor panic and a bank run in mid-September 2007. Calls by Liberal DemocratShadow Chancellor Vince Cable to nationalise the institution were initially ignored; in February2008, however, the British government (having failed to find a private sector buyer) relented,and the bank was taken into public hands. Northern Rock's problems proved to be an earlyindication of the troubles that would soon befall other banks and financial institutions.

Systemic crisis.The constant decrease in GDP growth rates in Western countries since the early 1970s created agrowing surplus of capital which did not have sufficient profitable investment outlets in the realeconomy. The alternative was to place this surplus into the financial market, which became moreprofitable than productive capital investment this phenomenon has lead to financial bubblesand is the deep cause of the financial crisis of 2007-2009. Impact on the economy of pakistan.

The financial turmoil is more then likely to affect Europe, Japan and North American countrieswith full intensity. The crisis affected area, United States and Europe, hold a fundamental valuefor Pakistans economy.Pakistans external sector comprised of trade, foreign investment, remittances, and capital flowsis interwoven with these countries. All these indicators of external sector have more than 50 percent of the stake in this region. The short time ago, the foreign exchange reserves of Pakistansharply declined, currency was depreciating, high inflation, high trade deficit and Pakistan wasalmost near to bankruptcy.

The global financial crisis affects the Pakistan by two ways, directly and indirectly.

GROWTH:

The growth model being followed in Pakistan over the years is highly dependent on foreigncapital inflows, mainly from these countries. The economic growth of Pakistan has taken a hit,with growth slowing down from 7.3 percent during 2004-07 to 5.8percent in 2008 and projectedto slide to around 3 percent in 2009. Pakistans economic growth has directly affected by thiscrisis and slowed down.The financial crisis may or may not hit with same intensity or severity as it is doing to thedeveloped world, but still there are various channels through which the crisis may hit Pakistaneconomy.


18/28

Trade channel:

America is our only major trading partner with which we have a trade surplus.And, America is slowing down like never before. The Global Financial Crisis and theaccompanying global credit crunch had a direct impact on Pakistan.

Pakistan largely depends on exports of cotton and textile related items- rice, sports goods,chemicals and manufacturing items also contribute to exports. More than one-half of Pakistansexternal trade is dependent on these countries. The demands for its export products droppedsignificantly. Exports during October-December2008 actually declined by 1.4 percent, indicatinga worrisome outcome. Pakistan has a very inelastic import structure and if exports are hit by acrisis than the current account deficit is likely to go beyond the sustainable limits.

Banking channel:

The global crisis has really added fuel to the fire. Pakistan facing bankruptcy as world financialcrisis. There are substantial changes taking place in the interrelation with the structure-forming

elements in the global financial market.The drying up of credit internationally has hit Pakistan hard with the banking system suffering asevere liquidity problem. The government is on the verge of seizing bank lockers and foreign-currency accounts to rescue its deteriorating financial position.The presence of foreign banks in Pakistan expands access to credit as well as financial services,which can spur efficiency and innovation in domestic banks, however, ripple effect of shocksfrom the credit squeeze in the US has impact on local financial markets through these banks

Financial market.Stock market.(KSE):The stock exchanges, in developing countries have crashed and things look bleak for thefinancial markets. Pakistans stock markets not integrated to a great deal with internationalmarkets which provide some immunity to these sectors.Exchange rate:

Also, exchange rate depreciation could expose some bank borrowers to exchange rate risk, orraise their costs of operation, with negative effects on loan recovery performance.The other likely impact would be on the value of our currency. The years of our linkage with the

dollar has significance for us. Any drastic depreciation of dollar may give a hard hit to Pakistan.Positive impact:

In 2007-08, Pakistan has added $4.2 billion to its stock of external debt without borrowing asingle penny only because of depreciation of dollar versus major currencies like euro and theJapanese yen.

Conclusion.

The world economy is slowing down liken never before. The slowdown in global growth willreduce trade, remittances, foreign direct investment, and, possibly, aid, and these factors willhave a major impact on Pakistan, including second-round effects on the financial sector.


19/28

The slowdown in the global economy will adversely impact pakistan exports and thus foreignearnings, Coupled with lower foreign capital flows and domestic investment, this willsignificantly reduce growth for pakistan.Even though Pakistan may escape the immediate negative implications of the global recession,there will be long-term direct and indirect consequences. Of the directs, the foreign investments

and bilateral assistance are on the top. This financial crisis will have a significant impact on thesize of remittances which Pakistan receives from the Europe and the US. There is a strong likelyhood that this single largest source of foreign exchange may come under stress. The indirectconsequence would be that Pakistans exports will suffer as imports of the economies inrecession will fall and possibility of slashing of funds from ongoing foreign funded projects cannot also be ruled out.Another outcome is most likely to happen- the efforts and resources required for war againstterror would diminish.Importantly, the adverse effects of the global economic slowdown are still emerging, especiallygiven the growth outlook for industrial economies for 2009

Actions that could be taken to reduce the adverse affects of global economic crisis.

The cascading effects of these crises will present daunting policy challenges to Pakistan. ThePakistan countries can do a number of things to reduce the adverse effects of the financial crisisand prepare the way for a resumption of rapid growth in 2010.

1. Pakistan has to pursue active monetary and fiscal policies to deal with the global financialcrisis which is affecting our economy.2. The policy attention needs to focus on creating as much additional fiscal space as possible toprop up the domestic economy while preserving macro economic stability.

3. The ongoing efforts to increase the efficiency and effectiveness of the banking sector mustcontinue.

4. A careful look at expenditure priorities is in order. Public spending that creates jobs, especiallyfor the poor, will be essential.

5. Efforts to raise domestic productivity and competitiveness become critical factors forprotecting export market shares. And try to reduce restrictions on trade and investment.

A crisis (plural: crises) (from the Greek ) may occur on a personal or societal level. It maybe a traumatic or stressful change in a person's life, or an unstable and dangerous social situation,in political, social, economic, military affairs, or a large-scale environmental event, especiallyone involving an impending abrupt change. More loosely, it is a term meaning 'a testing time' or'emergency event'.


20/28

Conclusion:-

The global economic downturn may have caused economic upheaval and shaken businessesaround the world but confidence among young entrepreneurs remains high, a leadinginternational network to inspire and develop enterprise in young people.

The main highlights of the survey reveal that over one in three entrepreneurs say their businessconfidence remained unchanged during the depths of the recession, while more than six out often expect their businesses to perform significantly better over the next 12 months. The surveyalso suggests that women are more optimistic than men that their profits will rise over the nextyear.

Given the current economic climate, entrepreneurs see the introduction of new products andservices as being the two biggest opportunities for their businesses.

One local entrepreneur in Pakistan whose business is thriving during the economic downturn is

Shakaib Khan of SK Motor Syndicate, which provides automotive solutions directly to thecustomers doorstep. Fortunately, I cater to the necessities he says, cars need maintenance andrepairs, and my clients have no other option than to spend on it.

Yet, building on this basic premise, Shakaib offers competitive rates and a convenient pick upand drop service for his clients automobiles, which has helped to create a niche market for hisbusiness.


21/28

ENERGY CRISIS IN PAKISTAN

Hagler Bailly, a global management consulting firm with an office in Islamabad, warned in a

2006 study that Pakistan is going to witness gas shortage starting in 2007, and the imbalance willgrow every year to cripple the economy by 2025, when shortage will be 11,092 MMCFD(Million standard cubic feet per day) against total 13,259 MMCFD production. The HaglerBailly report added that Pakistan's gas shortage would get much worse in the next two decades ifit did not manage any alternative sources. It appears that we are seeing the beginning of the crisisthat HB predicted back in 2006.

Recent Growth in Gas Demand:

Demand for natural gas in Pakistan increased by almost 10 percent annually from 2000-01 to2007-08, reaching around 3,200m cubic feet per day (MMCFD) last year, against the totalproduction of 3,774 MMCFD, according to Pakistani official sources. But, during 2008-2009,the demand for natural gas exceeded the available supply, with production of 4,528 MMCFD gasagainst demand for 4,731 MMCFD, indicating a shortfall of 203 MMCFD. This winter, SuiNorthern Gas sources have reportedly told the media that the company is dealing with a shortfallof 700 MMCFD of gas due to increasing use of heaters and geysers.

Energy Shortages:

The potentially devastating effect of the gas shortage on the nation can be gauged by the fact thatPakistanis heavily depend on gas for their energy needs, much more so than neighboring Indians.With a gas pipeline network stretching around 56,400 km, pipeline density of 1044 km/mmscmd(million metric standard cubic meter per day) and a 31,000 km distribution network to serve itsdomestic and commercial consumers and nearly 3000 CNG stations, the gas consumption inPakistan is much higher than its bigger South Asian neighbor. India relies more heavily on itsvast coal reserves for energy.

According to BMI, gas is the dominant fuel, accounting for 47.5% of Pakistan's primary energydemand (PED) in 2007, followed by oil at 30.7%, hydro-electric energy at 12.9% and coal with a7.9% share. Regional energy demand is forecast to reach 4,859 million tones of oil equivalent(toe) by 2013, representing 24.9% growth from the estimated 2008 level. Pakistans estimated2008 market share of 1.52% is set to ease to 1.45% by 2013. The countrys estimated 2.5TWh ofnuclear demand in 2008 is forecast to reach 5.0TWh by2013, with its share of the Asia Pacificnuclear market rising from 0.49% to 0.75% over the period.


22/28

In terms of overall energy requirements, here is a more complete picture for per capita energyconsumption in South Asia and China, using Nation master, with 2006-2007 figures andrankings:

Pakistan per capita gas consumption 187 cu meters(ranked 73)India per capita gas consumption 36 cu meters (ranked 99)

China per capita gas consumption 53 cu meter (ranked 95)

India per capita electric consumption 466 KWhr (ranked 160)Pakistan per capita electric consumption 430 KWhr (ranked 164)China per capita electric consumption 2,179 KWhr (ranked 91)

India coal consumption per capita 0.3 ton (ranked 23)Pakistan coal consumption per capita 0.03 ton (ranked 35)China coal consumption per capita 1 ton (ranked 16)

India oil consumption per day per 1000 people 2.4 barrels (ranked 165)

Pakistan oil consumption per day per 1000 people 2.2 barrels (ranked 169)China oil consumption per day per 1000 people 5.7 barrels (ranked 144)

There is strong correlation between energy availability and level of any nation'sdevelopment. The nations topping the list of human development rankings are also thelargest per capita consumers of energy.


23/28

Per capita energy consumption in Pakistan is estimated at 14.2 million Btu, which is much higherthan Bangladesh's 5 million BTUs per capita but slightly less than India's 15.9 million BTU percapita energy consumption. South Asia's per capita energy consumption is only a fraction ofother industrializing economies in Asia region such as China (56.2 million BTU), Thailand (58million BTU) and Malaysia (104 million BTU), according to the US Dept of Energy 2006 report.

To put it in perspective, the world average per capita energy use is about 65 million BTUs andthe average American consumes 352 million BTUs. With 40% of the Pakistani households thathave yet to receive electricity, and only 18% of the households that have access to pipeline gas,the energy sector is expected to play a critical role in economic and social development. Withthis growth comes higher energy consumption and stronger pressures on the countrys energyresources. At present, natural gas and oil supply the bulk (80 percent) of Pakistans energy needs.However, the consumption of those energy sources vastly exceeds the supply. For instance,Pakistan currently produces only 18.3 percent of the oil it consumes, fostering a dependency onimports that places considerable strain on the countrys financial position. On the otherhand, hydro and coal are perhaps underutilized today, as Pakistan has ample potential supplies ofboth.

Energy Projects:

Pakistan and Germany have initiated serious discussions of German funding of eight ongoingand new hydropower projects worth billions of dollars. These talks have takien place inIslamabad between German Minister for Economic Co-operation and Development Ms.Heidemaire Wiegoreak Zeul and Pakistani Prime Minister's Adviser on Finance Mr. ShaukatTarin, accordingBusiness Recorder newspaper.

In addition to megaprojects such as 1000 MW Neelum-Jhelum hydropower project, a numberof community-based micro hydro projects are being executed with the help of the Agha KhanFoundation in Pakistan's Northern Areas and NWFP. Within this region, out of a total of 137micro-hydro plants, the AKRSP has established 28 micro-hydros with an installed capacity of619kW. Initially, in 1986, these plants started as research and demonstration units. Theseprojects were extended to Village Organizations (VOs) and became participatory projects. AVillage Organization (VO) is a body of villagers who have organized themselves around acommon interest.

Pakistan has vast reserves of coal. But there is very little energy produced by burningcoal. China has now agreed to invest about $600 million for setting up an integrated coal mining-cum-power project in Sindh. The project will produce 180 million tons of coal per year, which issufficient to fuel the proposed 405 MW power plant. Pakistan is currently world's seventhlargest coal-producing country, with coal reserves of more than 185 billion tons, ranking as thefourth of fifth largest coal reserves in the world. Almost all (99 percent) of Pakistan's coalreserves are found in the province of Sindh. Pakistan's largest coal field is Thar coal field whichis spread over an area of 9100 square kilometers, and contains 175 billion tons of coal. So far thiscoal field has not been developed but efforts are underway.

In addition to the coal project, China has agreed to build several other power plants in Pakistan tohelp the South Asian nation deal with its worsening electricity crisis. When completed over the


24/28

next several years, these plants, including Nandipur (425 MW, Thermal), Guddu(800 MW,Thermal) and Neelam-Jhelum(1000 MW, Hydro), Chashma (1200 MW, Nuclear) will add morethan 3000 MW of power generating capacity for the energy-hungry country. Pakistan is currentlyfacing a deficit of 4,000 to 5,000 megawatts, resulting in extensive load-shedding (rollingblackouts) of several hours a day.

China has already installed a 325-megawatt nuclear power plant (C1) at Chashma and iscurrently working on another (C2) of the same capacity that is expected to be online by 2010.The agreements for C3 and C4 have also been signed. The United States has objected to Chinasupplying C3 and C4 on the grounds that any Pak-China nuclear cooperation would requireconsensus approval by the NSG, of which China is now a member, for any exception to theguidelines. The US is applying double standards since it supported and got approval for such anexception from NSG for its own nuclear deal with India.

Beyond the power generation capacity expansion projects, Pakistan must also pay attention tomodernizing its national grid. The country's creaky and outdated electricity infrastructure loses

over 30 percent of generated power in transit, partly due to theft, more than seven times thelosses of a well-run system, according to the Asian Development Bank and the World Bank; anda lack of spare high-voltage grid capacity limits the transmission of power from hydroelectricplants in the north to make up for shortfalls in the south.

In terms of the cost of renewable sources such as wind and solar, the cost of not empowering thepoor rural communities is far greater than the cost of providing a Grameen Shakti type solarsystem, or Agha Khan Foundation's microhydro or the gearless wind microturbines that arebeginning to show up on the rural landscape in Pakistan.

Given the unresponsive nature of "democracies" and incompetent and corrupt governance inIndia and Pakistan, many of the poor rural communities far away from the national grid willprobably never be electrified unless there are community-based local green initiatives pursuedwith the help of NGOs.

Compressed Natural Gas (CNG) Industry Growth:

According to International Association of Natural Gas Vehicles, as of December 2008, Pakistanhas the worlds highest number of vehicles running on compressed Natural Gas (CNG). Thenumber is 2 million. Pakistan also has the Worlds largest number of CNG refueling stations,2941 as of July 29, 2009.

Just as the worst electricity crisis of its history is currently gripping the nation, it appears that thegas crisis has begun to rear it ugly head, with recurring reports of low gas pressure, CNG stationclosures and rationing, and gas "load shedding" for businesses and consumers. The blame gamehas already started and there appears to be little relief in sight on either the electricity or the gasfronts. One of the reported effects of the gas shortage is delay in the availability of power fromthe rental power plants which are expected to operate on gas. It appears that the attempt to solvethe electricity crisis has made life even more difficult for the people by spawning a gas crisis at


25/28

the same time.

Citizens and industries in Lahore have been particularly badly hit, resulting in angry protestswidely reported in the media. The All Pakistan Textile Mills Association (APTMA), the textile

industry group, has claimed that it suffered losses of about Rs 1 billion in December due to lackof smooth gas supply to the industry. Pakistan's CNG industry is also feeling the pinch afterrapid growth in the last few years.

Rental Power Plants (RPPs):

A story in Pakistani newspaper the News is alleging that "these expensive rental power plants,which were being installed with tall claims to address the energy crises in the country, were saidto have now become one of the major reasons behind a new sorts of energy crises in Pakistan, astheir gas requirements are bound to hit other sectors of economy running on gas supplies".

Solutions For Gas Shortage:

The best solution to alleviate the gas shortage is to build a pipeline to import over a billion cubicfeet of gas a day from Iran, but such a project will take many years to implement even on anaccelerated schedule. In the meantime, Pakistan's Sui Southern Gas Company (SSGC) isworking on completing a project, dubbed Mashal LNG Project, that was started three years agoto import 500 MMCFD of LNG from Qatar by 2010. But even that won't happen till October2011. The second phase of this project will add an additional 500 MMCFD of LNG by 2013.

In response to the alarming gas situation, there are reports that Pakistan is finally going aheadwith the multi-billion dollar Iran-Pakistan Gas Pipe Line Project and has initiated the process ofarranging financing of US $1.245 needed for laying 800 Km long pipe line from Pakistan-Iranborder to Nawab Shah. Pakistan will also import 1.05 billion cubic feet of gas per day from Iranat 78 percent of crude oil parity price. Pakistan and Iran have already signed Gas SalesAgreement (GSPA) for importing 750 million cubic feet gas per day which will be used togenerate 4500 MW of electricity and would be a cheaper alternative to the presently expensiveimported furnace oil used in the existing thermal power houses. Another 250 million cubic feetof Gas per day is also envisaged to the purchased for development projects at Gawadar inBalochistan. Considering the magnitude and strategic nature of the Gas Line Project, thegovernment has adopted a private-public partnership approach for financing the project with debtequity ratio of 70:30 under which the Pakistan government will provide 51 per cent equity. Thisequity financing would be provided upfront through selected Public Sector Entities like OGDCL,Pakistan Petroleum Limited, Government Holding Private Limited, Employees Old Age BenefitsInstitution and State Life Insurance Corporation. The debt will be sourced from the marketbacked by the government guarantees for transportation tariff. Any gap in raising the requireddebt from the market, the funds will be available by PDSP allocations.

The current completion date for Iran-Pakistan gas pipeline project is June, 2014, if things gosmoothly. There is significant investor interest. Russia's Gazprom is very keen on the project."We are ready to join the project as soon as we receive an offer," Russia's deputy energy minister


26/28

Anatoly Yankovsky has been quoted as saying by the media. Another top Russian governmentofficial has said Moscow sees the pipeline as a means to divert Iranian gas from competing withRussian exports on the European market.

Iranian Consul General in Pakistan, Masoud Mohammad Zamani has told Pakistani news site the

Dawn that Iran has completed major portion of work on Iran-Pakistan gas pipeline project andwithin couple of months the pipeline will be at Iran-Pakistan border. Hopefully, by 2013 Iran gaswill be used in Pakistan, Iranian envoy explained during a meeting with members of KarachiChamber of Commerce and Industry.

India, too, needs to import gas to meet its growing energy needs. But it pulled out of the pipelineproject after the US-India nuclear deal. If and when India does come back to the table, thepipeline built from Iran to Nawabshah in Pakistan can be extended to support additional capacityfor India.

Current Issues:

As the nation's attention turns to the gravity of the worsening gas energy crisis, thegrowing supply-demand gap for electricity is still unaddressed. The government's attempts to fillthe gap with rental power have raised many questions and drawn seriouscorruption charges fromthe opposition parties and the media. Analysts at Center for Research and Security Studies areasking why have some private power producers completely shut down? And why are otherprivate power producers operating well below their full capacity? It is being alleged that thereasons for buying rental power to fill the electricity gap rather than pay the outstanding dues ofthe independent power producers (IPPs) to fully utilize exiting installed capacity have to do withthe kickbacks offered by the rental power operators. According toReuters, Finance MinisterShaukat Tarin almost resigned after failing to persuade the cabinet against renting, an option heconsidered expensive and inefficient.

There have been widespread complaints in Islamabad, including by Mr. Tarin, that thegovernment had solutions to improve the power output but was refusing to implement them inorder to benefit a handful of power plant operators, such as those supplying rental power, whilethe IPPs are not being paid for supplying power from currently underutilized installed capacity.Requests for information by Transparency International Pakistanregarding rental power contractshave been ignored by the Ministry of Water and Power. There are widespread corruptionallegations against President Asif Ali Zardari personally who has allegedly influenced the awardof the 783 MW rental power contracts to a former governor of Oklahoma and his Pakistanipartner.

Rental power is not an issue by itself. While it does provide some relief, it does not address thecore problem of making sure that government departments, politicians, businesses and allconsumers pay for power they use to make it attractive for private investments in the powersector.

Currently, most IPPs in Pakistan are operating well below capacity because they are not beingpaid billions of rupees owed to them. Paying them should be the first step toward filling the


27/28

supply-demand gap by fully utilizing current capacity, and restoring order in the power market.Unless this done, the electricity rates will keep rising because the honest consumers end upfooting the power bill for the many deadbeats and power thieves.

Meeting Energy Demand Growth:

BMI forecasts Pakistan real GDP growth averaging 3.98% a year between 2009 and 2013, withthe 2009 estimate at 2.50%. The population is expected to expand from 161mn to 177mn, withper capita GDP and electricity consumption increasing by 20% and 11% respectively. Powerconsumption is expected to increase from an estimated 81TWh in 2008 to 99TWh by the end ofthe forecast period, which provides are relatively stable theoretical generation surplus (beforetransmission losses, etc.), assuming 4.3% annual growth in electricity generation.

Between 2008 and 2018, BMI is forecasting an increase in Pakistani electricity generation of59.2%,which is mid-range for the Asia Pacific region. This equates to 27.2% in the 2013-2018

period, up from25.1% in 2008-2013. PED growth is set to increase from 19.1% in 2008-2013 to25.8%, representing 49.9% for the entire forecast period. An increase of 49% in hydro-power useduring 2008-2018 is a key element of generation growth. Thermal power generation is forecastto rise by 52% between 2008 and2018, with nuclear usage up 380% from a low base.

Summary:

The failures of successive Pakistani governments in tackling the growing energy crisis areshameful. Inaction at this point would be criminal. The Iran-Pakistan gas pipeline project has tobe accelerated to avoid significant further harm to the country. At the same time, the shortages ofelectricity and gas need to be managed actively and fairly to minimize the impact on theconsumers and the businesses to help the economy recover from the current slump. The issueof unpaid electricity bills and therampant power theft should be confronted head-on torestoreinvestor confidence in long-term energy projects in the country. Since the federalgovernment is the biggest dead beat, followed by the four provincial governments, FATA, theKESC and the KW&SB, it is an opportunity for the current leadership in Islamabad to lead byexample by paying off their outstanding utility bills, and resolving the circular debt issue inenergy sector expeditiously.

Conclusion:-

Pakistan is in the grip of a serious energy crisis that is affecting all sectors of the economy andthe various segments of the society. As the situation stands to-day, there are hardly anyimmediate solutions to resolve the issue. A change of attitude and a change of life style is neededat the national level which should be triggered by the ruling elite and followed by all segments ofthe society that have access to electricity. At best there could be some short and long-termsolutions to the crisis but they need immediate planning and execution with an enormousinvestment.


28/28

The current energy consumption trends in Pakistan are extremely inefficient, whether it be in thedomestic, industrial, trade or commercial sectors. With minimal effort, well over ten per cent ofnational electricity can be saved by applying only the first level of energy conservation that is achange in attitude. It is simple, instant and effective and all it requires is a stop to using energyunnecessarily.

If load shedding is still unavoidable despite all these measures, WAPDA/KESC should organizethe cuts in a sensible way to cause minimum discomfort. Load shedding schedules should beproperly planned and announced.

The reasons behind energy crisis are poor management, lopsided priorities and lack ofaccountability on part of those who stay at the helm of affairs. We must try our best to adoptenergy conservation as individual and at national level.

new eco assignment

Documents