burden ( 92. 9 as % of gdp in fy00 to 57. 7 % by fy07 ). current challenges. pakistan is at a critical cross road. on one hand, there are achievements to be recounted. the country ’ s smooth, though protracted, transition to democracy and the preceding few years ’ economic performance that managed to excite foreign interest in pakistan lends us confidence that pakistan has strong economic potential and can attract global capital. on the other hand, there remain key economic risks and challenges that the country faces. unless addressed holistically these could threaten economic prospects ; a luxury pakistan can ill - afford given the geopolitical context and the emerging global challenges. re - emergence of twin deficits has complicated monetary management. borrowings from sbp induce expansion in reserve money and government ’ s high recourse to banking system potentially crowds out private sector credit. these complications introduce volatility in overnight and other interest rates weaken the monetary policy transmission mechanism and hurts investment potential. growing demand for goods and services, both from domestic sources and from abroad has helped domestic industry, but has also enhanced import reliance. over fy03 - 07, import growth ( including oil ) averaged 24. 7 % outpacing export growth ( 13. 4 % ) leading to a widening external current account deficit. during this period, capital inflows funded fully the external current account deficit and the residual helped in building foreign exchange reserves ( growing by $ 5. 6 billion over fy03 - 07 ). even if oil prices fall and foreign inflows are restored, sustainability of external account will remain under stress as export growth may be impacted by the global slowdown. containing both the external and the fiscal account imbalances is one of the challenges for the government. solutions, strategy and structural reforms : future agenda. so what is the solution in this situation? the answer is to conduct counter - cyclical policies to curb demand pressures by dealing with the root cause of deficits ; the sustainable and enduring solution is not only how to finance these deficits but more importantly how to introduce structural changes to reduce these deficit in a sustainable manner, while reflecting on approaches to meet the country ’ s development requirements. to resolve macroeconomic imbalances on a sustainable basis and meet the growing development requirements, there is need to as high priority focus on enhancing national saving rate, which is a basic ingredient to increase the productive capacity ( possible only through well sequenced structural reforms

to the subprime paper, are likely to be impacted by the second round effects of the financial market turmoil which are now visible by way of sluggish world economic growth as us downturn is setting in. to mitigate these risk, us has launched a unprecedented package involving : easing liquidity through special funding windows, cutting policy rate, in five rounds, to 225 bps and providing us $ 200 billion fiscal package. this package, while warranted, is fairly controversial because of the associated moral hazard and inflationary consequences of rate cuts and easing of liquidity. since the appropriate size of the stimulus cannot be calibrated with any precision, the aggressive stimulus by way of a monetary accommodation is likely to compound the global inflationary pressures which were already rising in wake of ( i ) supply constraints magnified due to world wide shortages of strategic products ( such as wheat ) and oil substitution efforts that diverted use of corn as a bio - fuel and ( ii ) growing demand pressures with rising world income. fuelling the international commodity prices has also been the fall in us dollar which has driven investors to chase gold and oil markets. in a globally integrated world the costs of re - anchoring inflation expectations are likely to be punitive. no wonder, other central banks, with the exception of few such as federal reserve and bank of england, have either further tightened their monetary policy or kept on hold to existing levels of tightening. developing understanding of the origins of the financial crisis and adequacy of its policy responses is critical. analysts have largely identified collapsing us sub - prime mortgage market as the key cause for financial market turmoil. however, the sub - prime mortgage debacle appears more of a symptom rather than a cause of this evolving credit crisis. underlying causative factors is the sustained decline in inflation and inflation volatility and the associated notable decline in nominal and real interest rates in most developed and developing economies. this resulted in complacency and central banks ’ adopted accommodative monetary policy for longer period that induced excessive liquidity. combined with regulatory and supervisory gaps in oversight of off - balance sheet and nonbank transactions, this provided opportunities for overleveraging without appropriate risk management frameworks. arguably, these developments increased appetite for and under pricing of risk ( although the pricing of risk was ( and is ) becoming increasing difficult in the face of fast - paced financial innovations ), elevated asset prices, increased capital flows across borders in search of better yields