Abstract:
This paper analyzes the impact of the macroeconomic environment on
Pakistan’s manufacturing sector, emphasizing in particular the role of fiscal and
monetary policies in shaping incentives for industrial investment. Arguably,
Pakistan’s macroeconomic fundamentals in the last two decades have remained
fragile, resulting in severe macroeconomic imbalances that have contributed to
macroeconomic instability and hampered private investment in aggregate as well
as in the manufacturing sector. Furthermore, macroeconomic stabilization policies
have often failed to produce the desired results owing to the lack of coordination
between monetary and fiscal policies. Pakistan’s economy has thus lived on
borrowed money and time and on rent-seeking behavior. Although some recent
macroeconomic indicators have improved slightly, fundamental weaknesses
remain. In particular, the recent improvement in the current account deficit was
driven largely by the high inflow of remittances, coupled with financial
engineering such as loan payments from the International Monetary Fund,
“friendly” money, European Union bonds, and Islamic sukuk. It is imperative to
think about the consequences of a leveraged reliance on remittances in the
aftermath of falling oil prices and global deflation. Prudent macroeconomic
management aimed at consolidating public finances and controlling inflationary
pressures is essential to boost industrial investment and yield sustainable growth
