The Impact of the Macroeconomic Environment on Pakistan’s Manufacturing Sector

Inayat U. Mangla () and Muslehud Din ()
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Inayat U. Mangla: Professor of Finance and Commercial Law, Haworth College of Business, Western Michigan University, Kalamazoo, MI
Muslehud Din: Consultant, Pakistan Institute of Development Economics, Islamabad

Lahore Journal of Economics, 2015, vol. 20, issue Special Edition, 241-260

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.

Keywords: Pakistan; economic activity; fiscal and monetary policies; manufacturing activity (search for similar items in EconPapers)
JEL-codes: L69 O23 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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