Abstract:
Pakistan embarked on the liberalization of its capital account more than
two decades ago. Today, it is an economy with a capital account that is, by and
large, free of restrictions, and a convertible currency. However, its actual
integration into the global economy in comparison to other emerging market
economies has remained rather limited. The opening of a capital account appeared
to have improved the country’s access to private foreign capital, but because of
domestic security and economic and political concerns, the inflow of private
capital has fallen in recent years. Although capital outflows were not a major
cause for the decline in foreign exchange reserves during Pakistan’s economic
crisis of 2008, the open capital account and rupee convertibility have made it
more vulnerable to outside shocks. This article identifies three areas where
policymakers in Pakistan face serious challenges, i.e., macroeconomic
management; controlling tax evasion, which the Pakistani rupee’s convertibility
has made easier; and minimizing the real cost of portfolio investment to the
country. The article offers ideas on how these challenges could be met.
