industrial policy, its spatial aspects and cluster development in ...

Since 2004, the internal gap (Government consumption and tax revenue gap) have
coincided with the external gap (export and net factor income i.e. remittances) (see
Figures 2-28 and 2-29). There was a large capital inflow into Pakistan in the form of
remittances and aid post 9/11 which led to an appreciation of the nominal and the real
exchange rate. This appreciation reduced the competitiveness of our exports (the Dutch
Disease effect) and increased import demand significantly leading to a widening current
account deficit. In order to bridge the trade and fiscal gap, the economy has to rely on
external sources of financing. Delays or non-availability of external finance jeopardize
the macroeconomic stability of Pakistan in the long term exerting pressure on foreign
reserves, exacerbating inflation and interest rates, and deteriorating currency stability.
Figure 2‐28: Tax Effort and Government Expenditure Gap, 1990‐2008 (percent)
Source: Felipe and Lim (2008).
Figure 2‐27: Exports, Net Factor income from Abroad and Imports, 1990-2008 (percents of GNI)
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