Effect of global financial crisis on Pakistan financial sector

AuthorAhmad Sajjad Shabbir

MS (Banking and Finance)

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Table of ContentsIntroduction.................................................................................................................................................1

The Financial crisis and Pakistan.................................................................................................................2

Key indicators of Pakistan economic crisis.............................................................................................2

Financial Sector impact...............................................................................................................................3

Foreign exchange:...................................................................................................................................3

External Financing:.................................................................................................................................3

Banking sector:........................................................................................................................................3

Stock market:...........................................................................................................................................4

Recommendations.......................................................................................................................................4

Bibliography:...............................................................................................................................................5

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1 Introduction

The economic growth of any nation is dependent upon the development of financial sector (financial institutions and markets). The financial institutions play a pivotal role in augmenting financial resources and augmenting them into trade, commerce and industry. The financial institutions thus provide a momentum in the growth of these sectors. A strong base of trade, commerce and industry lays down the foundation of strong economy. With the strength of the financial sector the economy flourish.

But a situation in which the supply of money is outpaced by the demand for money. This means that liquidity is quickly evaporated because available money is withdrawn from banks (called a run), forcing banks either to sell other investments to make up for the shortfall or to collapse is said to be the financial crises and due to a recent financial crises that starts from 2007 to the present collapsed large financial institutions, the bailout of banks by national government and downturns in the stock market. It is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s.

But still in this worst financial crises Pakistan’s financial sector did not take a full impact of financial crises as seen in America and Europe, because the structure of Pakistani economy and its financial system protect the country from the full impact of the financial crisis in America and Europe. Pakistan is poorly integrated with the global economy. It will be spared the consequences of the unraveling in many parts of the western financial structure.

Moreover the best ever thing is this “Those financial institutions (Islamic Financial Institutions) that follow the Best economic system of the World that is Islamic Economic System still growing and earning healthy profits in the worst scenario”

In this assignment we shall try to find out the all effects of global financial crises on the Pakistani financial sector

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2 The Financial crisis and Pakistan

The world is now become the global village due to scarcity of resources all the countries are dependent on each other directly or indirectly and After the globalization it is very easy to fulfill the scarce resources from other countries, So developed economies are linked with each others strongly as compared to developing economies due to less developed linkages of developing economies. Similarly economy of Pakistan comes under developing economy.

The developing nature of the financial sector has been a saving grace for the Pakistani economy. Less developed linkages with international markets have meant that the direct impact of the financial crisis has not been felt by the Pakistani financial sector. However; effects of the crisis have been felt, even though in a limited manner, by the real sectors of the economy. The effects of the global slowdown have been transmitted through the trade balance; with a slowdown in global demand and fall in commodity prices having varying effects, the capital account; with a significant reduction in private inflows to Pakistan.

2.1 Key indicators of Pakistan economic crisis

Pakistan, a fragile economy, has been facing both economic and political crisis which predate the global financial crisis. Key indicators of Pakistan economic crisis are given

1. Inflation, 2. Trade deficit3. Balance of payment4. Foreign exchange reserves5. Circular debt6. Performance of banking sector 7. Karachi stock exchange8. Political instability

Pakistan recent period of economic growth was based on a combination with political instability, led to a rapid in inflation, a spike in the trade and current account deficits, and a devaluation of the Pakistani rupee. Although global fuel and food prices are on the decline, the U.S financial crisis has precipitated a possibly extended global recession. For Pakistan, a global recession will likely reduce demand for its exports, inward FDI flows and overseas remittent. Official Pakistan estimates for inward foreign direct investment in 2009 reportedly show a decline of over 32% when compared ran into problems in 2008. Real GDP growth, which had been averaging above 7% per year since fiscal year 2000/2001, declined to 5.8% in fiscal year 2007/2008 and is expected to decline to 2.5% in fiscal year 2008/2009.

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3 Financial Sector impact

3.1 Foreign exchange:

Pakistan’s exchange reserves decreases throughout 2008. The state bank holding of foreign exchange reserve fell from $14.2 billion at the end of October 2007 to #3.4 billion at the end of October 2008.

Exchange rate after remaining stable for more than four years, lost significant value against US dollar and decrease by 21% during March-December 2008. Most of the decrease of rupee against dollar was recorded in post November 2007.

However, with the successful signing of standby arrangements with the IMF, the rupee got back some of its lost value. With substantial import compression and revival of external inflows from abroad in the current fiscal year, the exchange rate will remain stable at Rs 80-82 per dollar.

3.2 External Financing:

The global crisis has restricted Pakistan’s ability to tap international debt capital markets to raise funds. An increasing cost of borrowing internationally, coupled with deterioration in the country’s credit rating has ruled out issuance of government paper as a financing mechanism. Pakistan’s presence in the international capital markets in 2008-09 was limited to the repayment of Eurobond amounting to US$ 500 million made in February 2009 with no new issuance at the backdrop of financial crisis engulfing the global markets.

3.3 Banking sector:

According to Fitch ratings, “the Pakistani banking system has, over the last decade, gradually evolved from a weak state-owned to a slightly improved and active private sector motivated system. But as of end 2008, data from the banking sector confirms a slow down. As of October 2008, total deposits fell from Rs 3.77 trillion in September to Rs 3.67 trillion. Provisions for losses over the same period went up from Rs 173 billion in September to Rs178.9 billion in October.

Moreover the best ever thing is this “Those financial institutions (Islamic Financial Institutions) that follow the Best economic system of the World that is Islamic Economic System still growing and earning healthy profits in the worst scenario

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3.4 Stock market:

The Karachi stock market exchange (KSE) is Pakistan’s largest and the runniest exchange. It was the “Best performing stock market of the world for the year 2002.”

Due to the global financial crisis stock market also disturbs very much. As of the last day of December 2008 , Karachi stock exchange had a total of 653 companies listed with an accumulated market capitalization of Rs 1.85 trillion ( $23 billion). On 26 December 2007, Karachi stock exchange, as represented by the KSE-100 index closed at 14814 points, its highest close ever, with a market capitalization of Rs 4.57 trillion ($58 billion). As of 23 January 2009, KSE-100 index stood at 4929 points with a market capitalization of Rs 1.58 trillion ($20 billion), a loss of over 65 percent from its highest point ever.

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4 Recommendations

There is a lot of mismanagement and corruption seen in financial sector of Pakistan Government must try to control this. And the main and last recommendation to save Pakistani financial sector and develop the economy is to implement the Islamic economic System and convert conventional banking into Islamic banking, because Islamic banking based on asset based or asset backed and there is no dealing of cash and when there is no enrollment of cash and minimal chances of corruption, non productive use of funds and inflation.

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5 Bibliography:

1) Scribd: Title global financial crisis page no 102) Pakistan and gulf economist (Jan 3, 2010)3) And topic is save Pakistan4) Wikipedia through the topic financial crises5) Article of Mohammed Mansoor Ali , Director of Economic Analysis Department 6) State Bank of Pakistan7) 8) South Asia Region, The World Bank Group

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