Capital Markets Project - an Outlook of the Future

Economic Growth

The gross domestic product (GDP) is a basic measure of a country's overall economic performance. It is the market value of all final goods and services made within the borders of a country in a year. It is often positively correlated with the standard of living. The GDP growth rate is the most important indicator of economic health. "Gross" means that GDP measures production regardless of the various uses to which that production can be put. Production can be used for immediate consumption, for investment in new fixed assets or inventories, or for replacing depreciated fixed assets. The GDP Equation consists of:

GDP = Consumption + Investments + Govt. Spending + Net Exports

Consumption is normally the largest GDP component, consisting of private household expenditures in the economy. When we analyze this equation we come to know that almost 75% of the GDP is contributed by consumption and investments, around the world. Consumptions are the injections in the economy. Consumption and investment are directly proportional to each other. A growing population results in higher consumption patterns, which in turn requires extensive investments from corporations in order to fulfill consumer needs. These investments may include investments in plant, equipment, inventory and it does not include 'exchanges' of existing assets.

The total world GDP according to the figures provided by the World Bank is about 60 trillion dollars. While the United States contributes about 25% of the world's GDP which amounts to approximately 15 trillion dollars. The reason for such a large contribution by the US is because the US Economy is highly oriented towards consumption this is primarily because of a large population and the savings to consumption ratio is extremely low in the US. This is reflected by the fact that over 70% of what the U.S. produces is for personal consumption.

Pakistan's GDP figures amount to approximately 150 billion dollars. When we analyze the GDP figures of Pakistan for the recent years such as in the year 2000, Pakistan's GDP was approximately 74 billion dollars but during President Musharraf's regime the Pakistan Economy was characterized by heavy foreign direct investments. These investments resulted in greater money supply and unemployment levels diminished, resulting in high consumption patterns. The cumulative effect of these changes resulted in doubling the GDP in a short span of almost nine years.

An important point to consider here is that a rising GDP may not always be a very good sign. An increase in money supply when not backed by the supply of commodities results in depreciation in the value of money, because now more money is required to purchase a commodity. This gives birth to the curse of inflation. In the case of Pakistan the situation is similar, although our GDP figures enhanced dramatically but this did not raise the standard of living of the masses, because inflation kicked in. Therefore in order to reduce GDP at appropriate levels; that represent true picture of the economy; the consumption and investment components need to be diminished.

These rising inflation trends can be controlled by changes in interest rates. The ongoing interest rate in Pakistan is almost 16 to 17% which increases the cost of business, resulting in lower investments, lower consumption and hence bring down the GDP up to the required level. In order to maintain GDP figures at appropriate levels and reduce inflation the State Bank needs to maintain a tighter monetary policy.

The future prospects of Economic Growth in Pakistan are uncertain. This is primarily due to political instability, the ongoing financial crises, and the War on Terror. Moreover the policies announced by the State Bank are not always implemented, due to the negative influences by top notch government officials. Therefore adequate measures must be taken to restore confidence of the masses. The government must focus upon a stable short term economic order and it should provide incentives for investors. It is about time that the power crises be handled and businesses should be provided with a favorable climate to function.

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Inflation's Past history & Forward expectations

Inflation is the rise in the prices of goods and services in an economy over a period of time. When the general price level rises, each unit of the functional currency buys fewer goods and services; consequently, inflation is a decline in the real value of money. Economists use a series of indices to measure relative price levels. One important index is the CPI or Consumer Price Index. The CPI measures inflation as experienced by consumers in their day to day living expenses. High rates of