SETTING THE PRICE

When develops a new product or introduces regular product into new distribution channel or geographical area. It is a six step procedure.

STEP 1: Selecting the Pricing Objective

Each firm operates with some objectives and sets its products price which aligns with its objectives.

Survival.

When intense competition exists, or consumer wants changes. Price only covers variable cost and some fixed cost and company stays in business. It is a short-run objective.

Maximum Current Profit.

Tries to produce maximum current profit or cash in-flows by estimating the demand and cost. Difficult in the long-run because of marketing-mix variables, competitors, and legal constraints.

Maximum Market Share. Market-penetration pricing. Mass production involves. Higher sales volume leads to lower unit cost and higher long-run profit. Benefits can be achieved:

(1) When the market is highly price sensitive and low price stimulates market growth.

(2) With mass production cost of production and distribution will decrease.

(3) Competitive advantage. Low price discourage actual and potential competition.

Maximum Market Skimming. Market-skimming-pricing. Monopoly. Higher price in the start and then low. In 1990 Sony introduced High Definition Television (HDTV) at $43,000. In 1993, 28" was of $6,000 and in 2004; 42" was in $1,200. Condition must exist:

1. High current demand.
   
2. Low unit cost at small volume.
   
3. High initial price will discourage competition.
   
4. Superior product image.
   

Product-Quality Leadership. Making the brand high quality and affordable by creating value and setting just high enough prices.

Other Objectives. Nonprofit or public organizations have different objectives, like nonprofit hospital aim to full cost recovery, or social agencies set a price according to client income.

STEP 2: Determining Demand

Price and demand has an inverse relationship. If price is high demand level will be fall and if the price is low demand will be ultimately high.

Price Sensitivity.
People have different price sensitivities. Customers are more prices sensitive to products that cost a lot or are bought frequently and less sensitive to low-cost items or items that buy infrequently. Companies prefer less price sensitive customers.

Estimating Demand Curves.

• Statistical analysis by statistical techniques gathering data from past prices, sale volumes.
  
• Price experiments by charging different prices for a product to see how sales affects.
  
• Surveys can explore what price consumer will accept.
  

Price Elasticity of Demand. Need to know the change in price brings how much change in demand.

 

 

 

 

 

 

STEP 3: Estimating Costs

Amount incurred on producing, distributing and selling the product

Types of Cost and Level of Production.

Management should know how costs vary with the different levels of production.

• Fixed cost that does not vary with production.
  
• Variable cost varies with the level of output.
  
• Total Cost = sum of fixed and variable costs for given level of production.
  
• Average cost = Total Cost / No. of Units Produced.
  

Accumulated Production.

With time experiences the production techniques become better, the methods improve and average cost falls with this accumulated production experiences. It is called the experience curve or learning curve. Some chains have different learning curves so profits. Activity-based cost (ABC) accounting should be used to estimate the real profitability.

Target Costing.

Set a target cost to be achieved through production scale, experience, and efforts by designers, engineers, and purchasing agents by reducing the current cost. Cost elements---design, engineering, manufacturing, sales---must be examined to bring down cost in target cost range.

SWOT Analysis

			Project on
			SWOT		Analysis

 

SWOT analysis is an important key step in strategic management process. It is an analysis of organization's strengths, weaknesses, opportunities, and threats. Strengths - Any activities the organization does well or any unique resources that it has. Weaknesses – Activities the organization does not do well or resources it needs but does not posses. Opportunities – Positive trends. Threats – Negative trends.

In the light of SWOT analysis it is easy to evaluate the any organization's current missions and goals and easy to evaluate whether they need any modification or not. Also the overall direction can be observed and if necessary changes can be made.

Introduction

Mobilink is the market leader in providing state-of-the-art communications solutions in Pakistan. Mobilink started operations in year 1994 and now it is a biggest cell phone family in Pakistan. It provides coverage in more than 400 cities and towns nationwide including northern, central and southern regions of Pakistan. It deals in JAZZ prepaid service and indigo post-paid cellular service. Its competitors are UFone, Paktel, Insta phone, Telenor, and Warid Telecom.

Strengths

Financial Strength. This has involved an investment in the company of more than US$ 1 Billion including assets, network, equipment, and so on.

Skilled Management Team. Staff Mobilink with world class Professionals and ensure that the right systems are in place to encourage them to develop to their full potential.

Product Categories. Its product lines are both pre-paid and post-paid. Other servers have yet only prepaid, so it is generating revenues rapidly.

Competitive Advantages. Due to its positive market image it had captured a major portion of market demand and suddenly become the biggest cell phone family.

Lower Cost. The cost it is bearing is lower because it is being operated at a very large scale.

Market Image. For last five years it has developed a very positive image through its activities and operations by doing what we say and saying what we do.

Weaknesses

Facilities Obsolete. Some of the features desired by the consumers are not yet given by committed. Such as GRPS service has been launched.

Lower Profitability. Although is operates on large scale so its cost is lower than others, yet it is taking low profits to get competitive advantages.

Lack of Management Departments. It still needs more management departments to handle wildly growing organization.

Services Diversification. Its products categories are both per-paid and post-paid so there is a little diversification of the features, billing methods, franchising and controlling them.

Opportunities

Global Market. Recently it has extended it IR (international roaming coverage) in Jordon, Nigeria, UK Japan, Cambodia, Hong Kong, Germany and many other countries. It has the aim to roam the world by its promotions.

Internet Advertising Growth. It can be grow up more in international business by marketing itself via internet on world's popular domains, e-mail servers.

Increasing Demand. Fashion, Trends are changing rapidly. Now the cellular phone become more affordable in out country, so the demand of the cellular services will ultimately increase.

Market Growth. Hence, the voice communication technology is spreading widely then. Continuously more and more people are taking interest in it. It can occupy a big share of growing market with its strategies.

Under-Establishing Competitors. Although there are many other companies which are competing with Mobilink, but more of them are yet new in the market and under establishing. These companies can't get competitive advantages. Mobilink has the opportunity to compete them because it is well established.

Threats

Government Restrictions. It is a multinational company being operated in Pakistan. It pays tariff to government. As being a outsider company government imposed some service and production restrictions on it also.

Production and Services Limits. Because it is a multinational company and it has to pay tariff to government to operate in Pakistan it has no privileges to render unlimited services.

Increasing Competition. Because of the population growth and the profitability in voice communication industry there are many competitor are being raised gradually.

Rapidly Changing Trends. The necessities and trends are changing with great speed. These changes might cause the absolution of the old technology. May some other time there will be a better system get connected with outside world.

Substitute Products. There are many other substitutes in voice communication technology such as PTCL land line phones or wireless phones.

D E C I S I O N - M A K I N G

    A decision is a choice from two or more alternatives. Making good decisions is something that every manager should have. Decisions have a major influence in organizational success or failure. Top-level managers make decisions about their organization's goals, middle and lower-level managers make decisions about setting production schedules, handling problems and employee hiring and firing.

D E C I S I O N - M A K I N G P R O C E S S

    Decision making process is a set of eight steps that are following:

    STEP 1: IDENTIFYING A PROBLEM

The decision-making process begins with the existence of a problem. A problem is a discrepancy between an existing and a desired state of affairs.

    STEP 2: IDENTIFYING DECISION CRITERIA

Once a manager has identified a problem that needs attention, the decision criteria important to resolving the problem must be identified. That is, managers must determine what's relevant in making a decision.

    STEP 3: ALLOCATING WEIGHTS TO THE CRITERIA

The decision maker must weight the items in order to give them the correct priority in the decision. A simple approach of allocating weights is to give the most important criterion a weight of 10 and then assign weights to the rest against that standard.

    STEP 4: DEVELOPING ALTERNATIVES

Then the decision maker should list the variable alternatives that could resolve the problem. In this step the manager doesn't has to evaluate the alternatives. He only has to list out them.

    STEP 5: ANALYZING ALTERNATIVES

Once the alternatives have been identified, the decision maker must critically analyze each one. Each alternative is evaluated by appraising it against the criteria established. From his comparison, the strengths and weaknesses of each alternative become evident.

    STEP 6: SELECTING AN ALTERNATIVE

The sixth step is the important act of choosing the best alternative from among those considered. We have determined all the pertinent criteria in the decision, weighted them, and identified and analyzed viable alternatives. Now we merely have to choose the alternatives that generated the highest score in previous step.

    STEP 7: IMPLEMENTING THE ALTERNATIVE

Although the choice process is completed in the previous step, the decision may still fall if it isn't implemented properly.

    Implementation involves conveying the decision to those affected by it and getting their commitment to it.

    STEP 8: EVALUATING DECISION EFFECTIVENESS

The last step in decision-making process involves appraising the outcome of the decision see if the problem has been resolved. Did the alternative chosen and implemented accomplish the desired results?

If the problem still exists then the manager would need to carefully assess what went wrong. Was the problem incorrectly defined? Were errors made in the evaluation of the various alternatives? Was the right alternative selected but poorly implemented. It might even require starting the whole decision process over.

D E C I S I O N - M A K I N G S T Y L E S

    Four decision making styles are evident: directive, analytical, conceptual and behavioral.

• Directive style. People using the directive style have tolerance for ambiguity and are rational in their way of thinking. They're efficient and logical. Directive types make fast decision and focus on the short run. Their efficiency and speed in making decisions often results in their making decisions with minimal information and assessing few alternatives.
  

 

• Analytical style. Decision makers with an analytical style have much greater tolerance for ambiguity than do directive types. They want more information before making a decision and consider more alternatives than a directive-style decision maker does. Analytical decision makers are best characterized careful decision makers with the ability to adopt or cope with unique situations.
  

 

• Conceptual style. Individuals with conceptual style tend to be very broad in their outlook and will look at many alternatives. They focus on the long run and are very good at finding creative solutions to problems.
  

 

• Behavioral style. Decision makers with behavioral style work well with others. They're concerned about the achievements of subordinates and are receptive to suggestions from others. They often use meetings to communicate, although they try to avoid conflicts.
  

Management process

PLANNING

Planning involves defining the organization's goals, establishing an overall strategy for achieving those goals, and developing a comprehensive set of plans to integrate and coordinate organizational work. Planning can be either formal or informal.

 

In informal planning, nothing is written down, and there is little or no sharing of goals with others in the organization. This type of planning often is down in many small businesses and also exists in some large organizations as well.

 

When we use the term planning, we mean formal planning. In formal planning; specific goals covering a period of years are defined. Those goals are written down and shared with organizational members. Finally, specific action programs exist for the achievement of these goals.

PURPOSES OF PLANNING

1. Direction to managers.

   Planning establishes coordinated effort. It gives direction to managers and non-managers alike. When employees know where the organization or work unit is going and what they must contribute to reach goals, they can coordinate their activities, cooperate with each other, and do what it takes to accomplish those goals.

2. Reduce un-certainty.

   Planning also reduces uncertainty by forcing managers to look ahead, anticipate change, consider the impact of change, and develop appropriate responses.

3. Reduce overlapping.

   Planning reduces overlapping and wasteful activities. When work activities are coordinated around established plans, wasted time and resources and redundancy can be minimized.

4. Improve efficiency.

   When means and ends are made clear through planning, inefficiencies become obvious and can be corrected or eliminated.

5. Minimum wastage of sources.
6. Standardizes the controlling process.

   Planning establishes goals or standards that are used in controlling. If we're unsure of what we're trying to accomplish, how can we determine whether we have actually achieved it?

 

Planning depends upon two elements:

I – Goals: Goals are desired outcomes for individuals, groups, or entire organization. There are two types of goals:

Stated Goals: Official statements of what an organization says, and what it wants its various stakeholders to believe, its goals are.

Real Goals: Goals that an organization actually pursues, as defined by the actions of its members.

Ii – Plans: Documents that outline how goals are going to be met including resource allocations, schedules, and other necessary actions to accomplish the goals.

 

APPROACHES TO ESTABLISHING GOALS

TRADITIONAL GOAL SETTING

An approach to setting goals in which goals are set at the top level of the organization and then broken down into sub goals for each level of the organization.

    

Means-Ends Chain

An integrated network of goals in which the accomplishment of goals at one level serves as the means for achieving the goals, or ends, at the next level.

MANAGEMENT BY OBJECTIVIES (MBO)

A management system in which specific performance goals are jointly determined by employees and their managers, progress toward accomplishing those goals is periodically reviewed, and rewards are allocated on the basis of this progress.

TYPES OF ORGANIZATIONAL STRATEGIES

Organizational strategies include strategies at the corporate level, business level, and functional level. Managers at the top level of the organization typically are responsible for corporate-level strategies. Managers at the middle level typically are the responsible for business-level strategies. And managers at the lower levels of the organization typically are responsible for the functional-level strategies.

 

1. CORPORATE-LEVEL STRATEGY

A corporate-level-strategy seeks to determine what business a company should be in or want to be in. It refers to make strategies for multiple (more than one) products under an organization.

 

2. BUSINESS-LEVEL STRATEGY

A business level strategy seeks to determine how an organization should compete in each of its business. When you as a manager makes strategies for your own product-line from multiple products in which your organization deals.

 

1. STRATEGIC BUSINESS UNIT

When an organization is in several different businesses, these single businesses that are independent and that formulate their own strategies are often called strategic business units.

1. COMPETITIVE ADVANTAGES

Competitive advantage is what sets an organization apart, that is, its distinct edge. You can check the resource of your business that competes to other companies and you can facilitate your customers to compete them. In any industry, five competitive forces dictate the rule of competition. Managers access an industry's attractiveness using the following five factors.

1. Threat of new entrants. Factors such as economies of scale, brand loyalty, and capital requirements determine how easy or hard it is for new competitors to enter an industry.

2. Threats of substitutes. Factors such as switching costs and buyer loyalty determine the degree to which customers are likely to buy a substitute product.

3. Bargaining power of buyer. Factors such as number of customers in the market, customer information, and the availability of substitutes determine the amount of influence that buyer have in an industry.

4. Bargaining power of suppliers. Factors such as the degree of supplier concentration and availability of substitute inputs determine the amount of power that suppliers have over firms in the industry.

5. Existing rivalry. Factors such as industry growth rate, increasing or failing demand, and product differences determine how intense the competitive rivalry will be among existing forms in the industry.

 

3) COST LEADERSHIP STRATEGY

A business level strategy in which the organization is the lowest-cost produces in its industry.

4) DIFFERENTATION STRATEGY

The company that seeks to offer unique products that are widely valued by customers is following a differentiation strategy.

3. FUNCTIONAL-LEVEL STRATEGY

A functional-level strategy seeks to determine how to support the business-level strategy. It means all sub departments of your organization should have such kind of strategies that are supporting your business-level strategies. These strategies facilitate you to achieve both corporate level strategies and business level strategies.

CONTROL

Control is the process of monitoring activities to ensure that they are being accomplished as planned and of correcting any significant deviations. Three different approaches to designing control system have been identified.

1. MARKET CONTROL

Market control is an approach to control that emphasizes the use of external market mechanisms, such as price competition and relative market share, to establish the standards used in the control system.

1. BUEARUCRATIC CONTROL

Bureaucratic control is an approach to control that emphasizes organizational authority and relies on administrative rules, regulations, procedures, and policies.

1. CLEAN CONTROL

Under clean control, employee behaviors are regulated by the shared values, norms, traditions, rituals, beliefs, and other aspects of the organization's culture.

 

WHY IS CONTROL IMPORTANT?

• To maintain quality.
• To achieve goals.
• To reduce cost.
• To keep standard output.

 

CONTOL PROCESS

The control process is a three-step process including measuring actual performance, comparing actual performance against a standard, and talking managerial action to correct deviations or inadequate standards.

 

STEP1: MEASURING

To determine what actual performance is, a manager must acquire information about it.

How We Measure Four common sources of information frequently used by managers to measure actual performance are personal observation, statistical reports, oral reports and written reports. Management by walking around (MBWA) is a phase used to describe when a manager is out in the work area, interacting directly with employees, and exchanging information about what's going on.

What We Measure What we measure is probably more critical to the control process than how we measure. Why? The selection of the wrong criteria can result in serious dysfunctional consequences.

STEP2: COMPARING

The comparing step determines the degree of variation between actual performance and the standard. Some variation in performance can be expected in all activities. It's critical, therefore, to determine the acceptable range of variation. The range of variation is the acceptable parameters of variance between actual performance and the standards.

STEP3: TAKING MANAGERIAL ACTION

The third and final step in the control process is taking managerial action. Managers can choose among three possible courses of action.

1. Do Nothing

Managers can leave the deviations. "Do nothing" is fairly self-explanatory.

1. Correct Actual Performance

If the source of the performance variation is unsatisfactory work, the manager will want to take corrective action such as changing strategy, structure, compensation practice, or training programs; redesigning jobs; or firing employees.

Immediate Corrective Action. Corrective action that corrects problems at once to get performance back on track.

Basic Corrective Action. Corrective action that looks at how and why performance deviated and then proceeds to correct the source of deviation.

1. Revise the Standard

It's possible that the variance was a result of an unrealistic standard; that is, the goal may have been too high or too low. In such cases, it's the standard that needs corrective attention, not the performance.

DECISION-MAKING

A decision is a choice from two or more alternatives. Making good decisions is something that every manager should have. Decisions have a major influence in organizational success or failure. Top-level managers make decisions about their organization's goals, middle and lower-level managers make decisions about setting production schedules, handling problems and employee hiring and firing.

DECISION-MAKING PROCESS

Decision making process is a set of eight steps that are following:

STEP 1: IDENTIFYING A PROBLEM

The decision-making process begins with the existence of a problem. A problem is a discrepancy between an existing and a desired state of affairs.

 

STEP 2: IDENTIFYING DECISION CRITERIA

Once a manager has identified a problem that needs attention, the decision criteria important to resolving the problem must be identified. That is, managers must determine what's relevant in making a decision.

 

STEP 3: ALLOCATING WEIGHTS TO THE CRITERIA

The decision maker must weight the items in order to give them the correct priority in the decision. A simple approach of allocating weights is to give the most important criterion a weight of 10 and then assign weights to the rest against that standard.

 

STEP 4: DEVELOPING ALTERNATIVES

Then the decision maker should list the variable alternatives that could resolve the problem. In this step the manager doesn't has to evaluate the alternatives. He only has to list out them.

 

STEP 5: ANALYZING ALTERNATIVES

Once the alternatives have been identified, the decision maker must critically analyze each one. Each alternative is evaluated by appraising it against the criteria established. From his comparison, the strengths and weaknesses of each alternative become evident.

 

STEP 6: SELECTING AN ALTERNATIVE

The sixth step is the important act of choosing the best alternative from among those considered. We have determined all the pertinent criteria in the decision, weighted them, and identified and analyzed viable alternatives. Now we merely have to choose the alternatives that generated the highest score in previous step.

 

STEP 7: IMPLEMENTING THE ALTERNATIVE

Although the choice process is completed in the previous step, the decision may still fall if it isn't implemented properly. Implementation involves conveying the decision to those affected by it and getting their commitment to it.

 

STEP 8: EVALUATING DECISION EFFECTIVENESS

The last step in decision-making process involves appraising the outcome of the decision see if the problem has been resolved. Did the alternative chosen and implemented accomplish the desired results?

If the problem still exists then the manager would need to carefully assess what went wrong. Was the problem incorrectly defined? Were errors made in the evaluation of the various alternatives? Was the right alternative selected but poorly implemented. It might even require starting the whole decision process over.

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DECISION-MAKING STYLES

Four decision making styles are evident: directive, analytical, conceptual and behavioral.

• Directive style. People using the directive style have tolerance for ambiguity and are rational in their way of thinking. They're efficient and logical. Directive types make fast decision and focus on the short run. Their efficiency and speed in making decisions often results in their making decisions with minimal information and assessing few alternatives.
• Analytical style. Decision makers with an analytical style have much greater tolerance for ambiguity than do directive types. They want more information before making a decision and consider more alternatives than a directive-style decision maker does. Analytical decision makers are best characterized careful decision makers with the ability to adopt or cope with unique situations.
• Conceptual style. Individuals with conceptual style tend to be very broad in their outlook and will look at many alternatives. They focus on the long run and are very good at finding creative solutions to problems.
• Behavioral style. Decision makers with behavioral style work well with others. They're concerned about the achievements of subordinates and are receptive to suggestions from others. They often use meetings to communicate, although they try to avoid conflicts

THEORY OF DEMAND AND SUPPLY

DEMAND

    By demand we mean, then quantity of any commodity which a consumer wants to buy and has purchasing power.

Law of Demand

It is stated that "other things remaining same, the price of a commodity increases, demand of that commodity decreases, and when the price of a commodity decreases the demand of that commodity increases".

The functional relationship between quantity demanded and the price of the commodity is inverse and it can be expressed as:

        Q_d = f(P)

Where Q_d = quantity demanded

P = Price of the commodity

Assumption

1. There is no change in the taste, habits and preferences of the consumer.
   
2. The income of the consumer remains constant.
   
3. There is no change in the prices of the substitutes.
   
4. No change in the circumstances.
   

 

Explanation

The slope of the demand function is negative. With the increase of demand the demand curve will move to the right\up; with the decrease of demand it will move to the left\down. Price is independent and demand is dependent variable.

    The demand function is explained with the help of following example:

Price (P)	Quantity demanded (Qd)
0	10
1	8
2	6
3	4
4	2
5	0

 

By assuming different values of P, we can calculate the different values of Q_d.

 

As we assume different values of 'P' i.e. 0 to 5, then the calculated values of Q_d decrease from 10 to zero.

SUPPLY

    By demand we mean, then quantity of any commodity which a seller offers to purchase at a specific price and time.

Law of Supply

It is stated that "other things remaining same, when price of a commodity increases, supply also increases and when price of a commodity decreases, supply of that commodity also decrease".    

The functional relationship between supply and price of a commodity is direct and can be expressed as:

Q_s = f(P)

where Q_s = Supply of a commodity

P = Price of the commodity

Assumption

1. There is no change in the taste, habits and preferences of the consumer.
   
2. No change in Government taxation and other policies about business.
   
3. There is no change in the prices of the substitutes.
   
4. No change in the circumstances.
   

 

Explanation

The slope of the supply function is positive. With the increase in supply of a commodity the supply curve for that commodity will move to the right\up; with the decrease of supply it will move to the left\down.

    The supply function is explained with the help of following example:

 

Price (P)	Supply(Qs)
0	0
5	10
10	20
15	30
20	40
25	50

 

By assuming different values of P, we can calculate the different values of Q_s.

 

As we assume different values of 'P' i.e. 0 to 25, then the calculated values of Q_s also increase from zero to 50.

 

INFLATION

Inflation means sharp upward movement in the price level. Inflation is generally associated with the abnormal increase in the quantity of money resulting in the abnormal rise in the prices.

Causes of Inflation

Two types of inflation

• Demand Pull Inflation
  
  • High monetary expansion
    
  • Increase in population
    
  • Deficit financing
    
  • Hoarding
    
  • Natural Clamities
    
• Cost Push Inflation
  
  • Increase in price of raw material
    
  • Increase in wages
    
  • Increase in indirect taxes
    

 

Preface

At the request of the Government of Pakistan, a mission led by the Asian Development Bank (ADB) and the World Bank conducted a preliminary damage and needs assessment. This assessment estimates the damage and reconstruction costs of the October 8, 2005 earthquake that struck areas of the North West Frontier Province (NWFP) and Azad Jammu and Kashmir (AJK) in Pakistan.

Effects on Inflation

Hence, there will be a need for a monetary policy geared towards containing inflation, in the absence of which average inflation in FY06 could reach double digits, hurting the poor excessively.

 

Earthquake Effects on different sectors

• Social Infrastructure
  
  • Housing
    
  • Health
    
• Physical Infrastructure
  
  • Transport
    
  • Energy, power and fuel
    
• Economic Sectors
  
  • Agriculture and livestock
    
  • Industry and Services
    

Pakistan earthquake:

Housing. Damage – Rs. 61.2 billion (US$1.03 billion). Across AJK and NWFP, the earthquake destroyed 203,579 housing units, while 196,573 were damaged to various degrees. These include 116,572 destroyed and 88,368 damaged in AJK, and 87,007 destroyed and 108,205 damaged in NWFP. Losses to the housing sector represent 84 percent of the total housing stock in the affected Districts of AJK, and 36 percent of housing stock in the five affected Districts of NWFP. The affected houses are predominantly rural, with urban units accounting for only 10 percent of the total.

Reconstruction needs and strategy – Rs. 92.2 billion (US$1.55 billion). The reconstruction strategy for the housing sector is underpinned by the following nine principles: (i) promote hazard-resistant construction standards and designs; (ii) rebuild in-situ; (iii) ensure rebuilding is owner-driven; (iv) rebuild with familiar methods and easily accessible materials; (v) relocate settlements only when necessary; (vi) ensure urban replanning is limited and strategic; (vii) offer uniform assistance that is not compensation-based; (viii) coordinate multiple reconstruction initiatives and standards for equity; and (ix) link housing to livelihoods and infrastructure rehabilitation.

Inflation Effect.
Inflation effected very badly to housing industry due to high price level of house construction items and material such as cement, steel, sand and machinery. If we take a look as a producer point of view the producers are taking much benefits after earthquake because of widely increasing demand of construction related material and instruments. Due to increase in the price level of all construction items, consumers are also affected.

 

Health. Damage – Rs. 7.1 billion (US$120 million). The immediate need is to treat the more than 70,000 people with injuries. The earthquake's impact on the health sector also includes severe damage to health infrastructure and health systems. About 574 health facilities have been partially damaged or destroyed. Moreover, health management was paralyzed at the central level in AJK, district, and at the facility level. These losses have resulted in a complete breakdown of the health system and a total disruption of both secondary and primary care service provision.

Recovery needs – Rs. 18 billion (US$303 million). The immediate focus needs to be on the revitalization of the primary health care system, the provision of services in tented villages and for the newly disabled and psychological care for survivors and health care workers. The estimated short term cost is Rs. 7.2 billion. In the medium term, all levels of health facilities, including secondary care hospitals, will need to be reconstructed and re-equipped. The health system management should be strengthened and the disabled should experience community-based rehabilitation. The estimated cost of the medium to longer term recovery plan is Rs. 10.8 billion.

Inflation Effect. Medical staff and medical instruments has been consumed heavily to injurious peoples, thus the shortage has occur. The production of medicines and surgical instruments and all related material is increasing but this ratio is not so sufficient. Thus the average price of these items is being increased gradually.

 

Transport. Damage – Rs. 20.2 billion (US$340 million). Damage to the mountainous roads in AJK and NWFP is largely due to landslides precipitated by the earthquake, but the intensity of the damage varies. In AJK, it is estimated that 2,366 km roads were damaged. Of this 203 km are major roads, 761 km are other paved roads, and 182 km are unpaved shingled roads for a total of 1,146 km representing 45 percent of all Public Works Department (PWD)-managed roads. These include the Neelam Valley road, and to a lesser extent the Jehlum Valley road, which are the primary transport arteries in AJK. Another 1,220 km of local unpaved roads are damaged, representing 44 percent of the total Local Government and Rural Development (LGRD) roads in the affected districts. Damage in AJK is estimated at Rs. 9.2 billion (US$155 million). In NWFP, 2,063 km of roads were damaged, representing 31 percent of the total road network in the affected Districts. Of this amount, 652 km comprise provincial highways managed by FHA, 1,016 km are paved provincial roads that were devolved to the Districts, 367 km are unpaved district roads, and 27 km are urban roads managed by municipal agencies. The estimated damage in NWFP is about Rs. 7.49 billion (US$124 million). The damaged length of the three national highways that provide main access to the northern areas of NWFP is about 194 km, representing 72 percent of the total length. The estimate of assessed damage to the national highways is Rs. 3.5 billion (US$59 million).

Recovery needs – Rs. 24.7 billion (US$416 million). Immediate needs include: (i) the removal of landslide debris and the reopening of roads to traffic; (ii) restoration of roads and bridges; (iii) stabilization of road embankments to withstand the oncoming snow; (iv) comprehensive condition surveys of all damaged roads to plan and prioritize the reconstruction and recovery works; and (v) reconstruction of unpaved local roads using labor-based appropriate technology methods employing communities and individuals to create livelihood opportunities. Short term activities include: (i) planning and engineering design; (ii) bidding of the priority damaged paved roads; and (iii) mobilizing for construction. A total of Rs. 5.1 billion, or US$86 million, will be needed for this phase. Medium to longer term recovery efforts include: (i) continuation of the bidding for the remaining damaged paved roads; (ii) supervision and monitoring of the ongoing reconstruction works; (iii) stabilization of the roadside slopes damaged by landslides and potential landslide areas; and (iv) review and improvement of design standards. A total of Rs.19.6 billion, or US$330 million, will be required for this phase.

 

Energy. Damage – Rs. 744 million (US$13 million). Damage to the four energy sub-sectors—power, petroleum and gas sectors, and subsistence fuels (wood and dried dung)—consists primarily of destroyed operational buildings, staff quarters, equipments in the power sector, and damage to retail stations and related inventory in the fuels sector (petroleum, liquefied petroleum gas (LPG), and natural gas). In addition, ten hydropower generation stations have been partially damaged and will require repairs to return to full operational status. The bulk of power and fuel supply was restored within days of the earthquake, and power is being supplied to all accessible urban and rural areas. For the most part, the initial repairs are temporary and will need to be revisited to establish permanent technical and building structures for continuous energy supply.

Recovery needs – Rs. 2.4 billion (US$40 million). For the recovery of the energy sector, two immediate priorities include the electrification of the tent villages and restoration of electricity supply to the customers whose services have not yet been restored. In the short-term, the repair and rehabilitation of existing damaged distribution lines, transformers, and service connections is needed. The sufficient provision of electricity must be an integral part of the planning and implementation process to ensure that new service connections are in place to supply power to newly constructed houses. The cost estimates have incorporated technological upgrading of the equipment to ensure improved efficiencies and quality of services, which will benefit the area through increased economic activity. A major additional cost related to the reconstruction of the energy sector is caused by the moratorium on electricity payments. In order to ensure financial sustainability, payment for power and fuels will have to be made to protect the distribution companies and fuel retailers.

 

Industry and Services. Damage – Rs. 8.6 billion (US$144 million). Due to the lack of any major industry or manufacturing in the affected areas, the damage to the private sector is largely restricted to trade activities. All eight affected districts have a substantial number of trade-related activities comprising retail, restaurants, and wholesale warehousing. Mansehra district in NWFP, which contains the tourist towns of Kaghan, Naran, and Balakot, also sustained significant damage to its tourism infrastructure. Similarly in Muzaffarabad district in AJK, the handicraft sector was substantially damaged. Direct damage to assets in the private sector comprises building façades of commercial enterprises, which are mainly restricted to retail shops. The capital damage indicates losses to the goods,.Pakistan: Preliminary Damage and Needs Assessment 18 inventories, and other working capital. These establishments also suffered indirect losses, which refer to output lost due to business interruption caused by the earthquake.

Recovery needs - Rs. 9.2 billion (US$155 million). The reconstruction needs for the trade sector are attributed to the reconstruction of the damaged and destroyed buildings and the replacement of lost capital assets. In the short term, the aim should be to restore the abilities of medium, small-scale and even unregistered businesses to restock basic supplies and to re-engage in commerce, which is central to the livelihoods of people living in affected areas. Restoring basic infrastructure and facilitating access to financial resources—from domestic and foreign remittances, microfinance institutions, and banks—is an essential first step. The Government will have a key role to play in helping entrepreneurs rebuild their businesses quickly and returning commerce to normalcy in the affected regions.

 

Agriculture, Livestock and Irrigation. Damage – Rs. 13.3 billion (US$223 million). Based on data from the UN FAO team and information from concerned government officials, the earthquake severely damaged crops, livestock and irrigation subsectors in both AJK and NWFP. Direct damage to crops includes loss of harvested and standing crops, disruption of terraces and soil conservation structures, spoilage of stored grains and animal feed, and structural damage and destruction to extension and research buildings amounting to Rs. 4.0 billion (Rs. 3.2 billion in AJK, Rs. 0.75 billion in NWFP). The indirect damage of Rs. 712 million (Rs. 529 million in AJK and Rs. 183 million in NWFP) represents value of wheat productivity losses in the coming rabi season and amortized value of fruit production. The direct damage to the livestock sub-sector equals about Rs. 9 billion, which is accounted for by the loss of large and small ruminants and poultry, animal sheds, and damage to extension and research buildings. The indirect losses to the livestock sector, mainly loss of milk productivity, are estimated at Rs. 6 billion (US$102 million). The main damage to the irrigation sub-sector has been to the water channels, diversion structures, water lifts, spillways, and water tanks, amounting to Rs. 324 million (Rs. 240 million in AJK and Rs. 84 million in NWFP).

Recovery needs – Rs. 18.5 billion (US$311 million). The immediate requirements in the next month are for winter crops, mainly wheat cultivation, construction of temporary animal sheds for protection from severe cold, and repair of water channels. If support for wheat cultivation is not extended in time, the affected persons will be unable to grow wheat, which is their main staple. Similarly, if shelter for animals is not provided immediately, there will be substantial loss of the remaining livestock inventory. These needs would require an immediate support of Rs. 3.3 billion (US$56.5 million). In the short term, Rs. 1.9 billion would be required for the restoration of the relevant line agencies' buildings and rehabilitation of irrigation facilities. In the medium term support would be needed for replanting fruit trees, rebuilding terraces, replenishment of livestock inventory, rehabilitation of productive infrastructure, and reconstruction of laboratories, offices of extension and research for agriculture, livestock, and irrigation departments. Over the longer term the focus should be on restoring livestock inventories and. Pakistan: Preliminary Damage and Needs Assessment 15 rehabilitation of terraces and soil conservation infrastructure that have been severely damaged. It is necessary to reestablish the agricultural sector in a sustainable manner through strengthening institutional capacities and providing support services.

Monetary Policy

• The actions of a central bank, currency board, or other regulatory committee, that determine the size and rate of growth of the money supply, which in turn affects interest rates.
  

 

• is the process of managing a nation's money supply to achieve specific goals—such as constraining inflation, achieving full employment or more well-being. Monetary policy can involve setting interest rates, margin requirements, capitalization standards for banks or even acting as the lender of last resort or through negotiated agreements with other governments.
  

Types of Monetary Policy

In practice all types of monetary policy involve modifying the amount of base currency (M0) in circulation. This process of changing the liquidity of base currency is called operations. Constant market transactions by the monetary authority modify the liquidity of base money and this impacts other market variables such as short term interest rates, the exchange rate and the domestic price of spot market commodities such as gold. Open market operations are undertaken with the objective of stabilizing one of these market variables. The distinction between the various types of monetary policy lies primarily with the market variable that open market operations are used to target. Targeting being the process of achieving relative stability in the target variable.

 

Monetary Policy:	Target Market Variable:	Long Term Objective:
Inflation Targeting	Interest rate on overnight debt	A given rate of change in the CPI
Price Level Targeting	Interest rate on overnight debt	A specific CPI number
Monetary Aggregates	The growth in money supply	A given rate of change in the CPI
Fixed Exchange Rate	The spot price of the currency	The spot price of the currency
Gold Standard	The spot price of gold	Low inflation as measured by the gold price
Mixed Policy		Usually interest rates	Usually unemployment + CPI change

The different types of policy are also called monetary regimes, in parallel to exchange rate regimes. A fixed exchange rate is also an exchange rate regime; The Gold standard results in a relatively fixed regime towards the currency of other countries on the gold standard and a floating regime towards those that are not. Targeting Inflation, the price level or other monetary aggregates implies floating exchange rate unless the management of the relevant foreign currencies is tracking the exact same variables (such as a harmonized consumer price index).

Inflation Targeting

Under this policy approach Inflation is defined as the rate of change in the CPI. It requires

that a basket of consumer prices is monitored and from these prices a CPI (Consumer Price Index) defined.

For example the target might be to keep increases in the CPI index between 2 and 3% per year. The specific Inflation rate objective is achieved through periodic adjustments to an interest rate target. The interest rate target generally refers to the interest rate at which banks lend to each other over night for cash flow purposes. Depending on the country this particular interest rate might be called the cash rate or something similar.

The interest rate target is maintained for a specific duration using open market operations. Typically the duration that the interest rate target is kept constant will vary between months and years. This interest rate target is usually reviewed on a monthly or quarterly basis by a policy committee.

Changes to the interest rate target are done in response to various market indicators in an attempt to forecast economic trends and in so doing keep the market on track towards achieving the defined inflation target.

Price Level Targeting

Price level targeting is similar to inflation targeting except that CPI growth in one year is offset in subsequent years such that over time the price level on aggregate does not move.

Something like price level targeting was tried in the 1930s by Sweden, and seems to have contributed to the relatively good performance of the Swedish economy during the Great Depression. As of 2004, no country operates monetary policy based on a price level target.

Monetary Aggregates

In the 1980s several countries used an approached based on a constant growth in the money supply. This approach was refined to include different classes of money and credit (M0, M1 etc). In the USA this approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman.

This approach is also sometimes called monetarism.

Whilst most monetary policy focuses on a price signal of one form or another this approach is focused on monetary quantities.

Fixed Exchange Rate

This policy is based on maintaining a fixed exchange rate with a foreign currency. Base money is bought and sold by the central bank on a daily basis to achieve the target exchange rate. This policy somewhat abdicates responsibility for monetary policy to a foreign government.

This type of policy is used by China. The Chinese yuan is managed such that its exchange rate with the United States dollar is fixed.

Gold Standard

gold is kept constant by the daily buying and selling of base currency. This process is called open market operations

.The gold standard might be regarded as a special case of the "Fixed Exchange Rate" policy. And the gold price might be regarded as a special type of "Commodity Price Index".

Today this type of monetary policy is not used anywhere in the world, although a form of gold standard was used widely across the world prior to 1971. For details see the Bretton Woods system. Its major advantages were simplicity and transparency.

Mixed Policy

A mixed policy approach is usually in practice most like "inflation targeting". However consideration is also given to other goals such as unemployment and market bubbles.

This type of policy is used by the United States.

Monetary Policy Tools

Monetary Base

Monetary policy can be implemented by changing the size of the monetary base. This directly changes the total amount of money circulating in the economy. In the United States, the Federal Reserve can use open market operations to change the monetary base. The Federal Reserve would buy/sell bonds in exchange for hard currency. When the Federal Reserve disburses/collects this hard currency payment, it alters the amount of currency in the economy, thus altering the monetary base. Note that open market operations are a relatively small part of the total volume in the bond market, thus the Federal Reserve is not able to influence interest rates through this method.

Reserve Requirements

The monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve changes the availability of loan able funds. This acts as a change in the money supply.

Discount Window Lending

Many central banks or finance ministries have the authority to lend funds to financial institutions within their country. The lended funds represent an expansion in the monetary base. By calling in exisiting loans or extending new loans, the monetary authority can directly change the size of the money supply.

Interest Rates

Monetary authorities in different nations have differing levels of control of economy-wide interest rates. In the United States, the Federal Reserve can only directly set the Federal Funds Rate. This rate has some effect on other market interest rates, but there is no direct, definite relationship. In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By altering the interest rate(s) under its control, a monetary authority can affect the money supply.

Overview of Pakistan economy and monetary policy stance(2005):

Pakistan's economy performed exceptionally well during FY05 with a record growth estimated at 8.4 percent in two decades. The growth is broad based as all segments of the economy contributed significantly to GDP growth. Manufacturing sector showed a growth of 12.5 percent against the target of 10.2percent while Agriculture sector expanded by 7.5 percent against the target of 4percent. Services sector also exceeded its performance target by 1.7 percent to show a growth of 7.9 percent. Credit absorption by the private sector has been in the region of Rs.400 billion for the first time in the credit history of the private sector despite rising interest rates. The SME sector also significantly benefited from record credit expansion as its credit absorption has risen toRs.71.4 billion during July-May FY05. may not be taken as a source of concern because it has primarily emanated from production-oriented imports like oil, machinery and raw materials. It has been the sustainability of worker's remittances at around $4 billion a year that has contained the overall balance of payments deficit to mere $933 million during FY05 and thereby has prevented foreign reserves from depletion

Plans

 

To sum up, Pakistan's economy is projected to perform well during FY06. The growth momentum built up last year is expected to continue with economic growth projected at 7 percent and inflation targeted at 8 percent. Manufacturing sector is projected to grow by 11 percent, while agriculture sector is expected to expand by 4.8 percent. To achieve these targets, monetary expansion is targeted at 13 percent with the credit to the private sector growing

at 20 percent (Rs.330 billion). Monetary expansion has been kept marginally below the nominal GDP growth target to reduce monetary overhang and bring inflation down to a reasonable level. The acceleration in interest rates since April 2005 is expected to depress inflationary pressures and help achieve the. inflation target of 8 percent by the end of the current fiscal year. Other factors expected to help contain inflation include:

 

• The increased supply of domestically produced goods and services as a result of continued and rapid GDP growth;
  
• Capacity expansion and BMR in key industries;
  
• Improved food supplies from substantial growth of 17.3 percent in the production of major crops last year supplemented by duty-free imports of 11 essential food/commodities from neighboring countries;
  
• Further improvement in fiscal discipline through the enactment of Fiscal Responsibility and Debt Limitation Law along with sustained
  improvement in financial position of PSEs and decline in revenue deficit;
  
• Expectation of stable exchange rates on the back of sizable foreign reserves and sustained annual inflows of workers' remittances and FDI;
  
• Increased productivity and efficiency of textile industry and ongoing expansion in automobile, electronics and cement industries;
  

Monetary and Credit Trends(initiatives)

The monetary expansion continued unabated despite periodic rises in interest rates during FY05. SBP continued to facilitate growth initiatives as it ensured interest rate hikes at a gradual pace through to March 2005. The policy of gradual interest rate hike substantially added to the

stock of reserve money as it expanded by 16.6 percent (Rs.128.5 billion) during July-25 June FY05, in part due to shifting of some of the government debt away from banks to the SBP.

Therefore, the stock of broad money also expanded by 16.5 percent (Rs.411.3 billion) as the net domestic assets (NDA) of the banking system grew by 19.5 percent (Rs.371.2 billion) largely due to record credit distribution to the private sector (Figure 1). The share of NDA in monetary expansion stood at 90.3 percent while net foreign assets (NFA) of the banking system increased

moderately by Rs.40.1 billion (Tables 1-2). The balance sheets of banks continued to expand substantially during July-25 June FY05. This primarily occurred on the back of substantial growth of deposits by 15.9 percent (Rs.303.9 billion). Other factors that made the liquidity position of banks even more comfortable included a shift of some of the TB holdings by banks to SBP (Rs.67.0 billion), and retirement of bank credit by PSEs (Rs.17.9 billion). Therefore, the total liquidity of banks rose roughly by Rs.411 billion and this improved the credit performance of banks substantially as the private sector credit off-take rose to an historically high

level of almost Rs.400 billion.

Private sector continued to benefit from relatively low real interest rates, which remained in the negative zone as inflationary pressures outpaced ongoing interest rate hikes recorded in the

first three quarters of FY05. This spurred the demand for cheap bank credit by the private sector and in consequence commercial banks created history by providing ample liquidity to the private sector. Bank credit to the private sector during July-25 June FY05 grew by 30.6 percent

(Rs.390.3 billion) compared with the growth of 30.7 percent (Rs.291.6 billion) in the corresponding period of last year (Figure 2). The distribution of credit to the private sector continued to be broad-based during July-May FY05. The manufacturing sector as usual led the credit utilization and its credit absorption rose by 41 percent to Rs.153.2 billion. The largest recipient of manufacturing loans was textile industry (Rs.91.8 billion) followed by cement industry (Rs.11.3 billion) and petroleum refining industry (Rs.4.7 billion). The scale of consumer loans expanded by 93.1 percent to Rs.80.3 billion and their distribution showed concentration towards auto loans (Rs.37.4 billion) and house building loans (Rs.17.5 billion). Credit absorption

by Construction industry rose to Rs.10.6 billion from mere Rs.331 million last year. Wholesale and retail trade also picked up strongly and loans involved in these rose by 78.2 percent to Rs.30.7 billion. The credit absorption of transport,
storage and communication rose by 164.7 percent to Rs.21.1 billion.

(Plans)

The ongoing credit boom is likely to ease with expected monetary expansion decelerating to around 13 percent during FY06 because of the prospect of rise of interest rates triggered primarily by rising core inflation. However, it is expected that credit to the private sector will still expand by around 20 percent (Rs.330 billion) during FY06 due to substantial rise in the bank deposit base due to record economic growth of 8.4 percent during FY05 and likely continuation of significant inflows of workers' remittances in FY06.

Inflation Trends( initiatives)

The consumer price inflation fluctuated around 9 percent last year despiteinterest rate tightening throughout the year. It was encouraging to see the food price inflation decelerating to 12.5 percent in June 2005 from 14.9 percent at the start of year but it remained on the higher side

primarily due to excessive rises in the prices of eggs, pulses, sugar, milk and potato. Major sources of inflation from the non-food basket were the groups of house rent and, fuel and lighting: they recorded increases of 11.3 percent and 3.7 percent from 9 percent and 2.7

percent, respectively. The major source of concern remained the rising core inflation, which ended at 7.6 percent in June 2005 up from 6.1 percent at the start of the year (Figure 3).

(Plans)

Inflationary pressures are likely to ease during FY06. Food supplies are expected to improve on account of better food crops in FY05 and permission of duty-free import of some essential food items from neighboring countries. Therefore, food inflation is likely to decelerate further. Core inflation is also likely to come down on account of slowdown in aggregate demand due to

higher interest rates. Exchange rates are expected to remain stable on the back of substantial workers' remittances, FDI inflows and foreign reserves and thereby contribute to contain the price inflation of imported goods. Therefore, consumer price inflation is projected to come down at least to 8 percent in FY06.

Interest Rate Trends (initiative)

International financial markets remained subject to interest rate hikes during FY05.

The Fed raised the Federal Funds Rate eight times during the year by 25 basis points each to 3.25 percent since July 2004. The 6-month LIBOR also continued to edge up and showed a rise of 263 basis points to 3.84 percent. The European Central Bank however kept interest rate unchanged in view of weak economic condition in that region. On the domestic front, the inflationary pressures continued to mount with some deceleration in the middle of the year.

In consequence, SBP had to take corrective measures to stay aligned not only with the international financial markets but also to ensure domestic price stability. In the first three quarters of the year, SBP took recourse to the policy of gradual interest rate hikes to avoid its adverse impact on economic growth. However, in April 2005 SBP changed its discount rate policy after a period of two years, and increased its discount rate by 150 basis points to 9 percent and thereby setting the stage for high yields on various government papers and their impending expansionary impact on the bank lending and deposit rates. The increase in the discount rate added momentum to the process of interest rate hikes and in the space of roughly three months, yields on 3-month, 6-month, and 1-year TBs increased quickly by 268 basis points to 7.69 percent, by 230 basis points to 7.99 percent and by 275 points to 8.7 percent, respectively. Prior

To the change in the discount rate policy, it took almost nine months for yields on 3-month, 6-month, and 1-year TBs to rise by 326 basis points to 5.01. Percent, by 346 basis points to

5.69 percent and by 370 points to 5.95 percent, respectively. The rapid upward change in the

Interest rates since April 2005 is also reflected by a large shift in the yield curve

The inter-temporal impact on core inflation of recent rises in key policy rates is expected to unfold in the near term. The average bank lending rate which had risen by 152 basis points to 6.57 percent between July-March FY05 is likely to pick up speed as it has already shown a rise of 109 basis points between April-May FY05.