The Financial crisis and Pakistan

8/7/2019 The Financial crisis and Pakistan

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situation the foreign direct investment inflows also fell more than 20 percent in calendar

year 2009. Pakistans total external debt is also increasing with the appreciation of

dollar and continuous relying on the foreign debt. The national savings are also on

decline.

The core inflation which represents the rate of increase in cost of goods andservices excluding food and energy prices also went up to 18.0 percent and for a brief

period it even crossed 20 percent.

Pakistans local banking sector has shown recoil to the weak macroeconomic

environment even though it experienced a decline in decline in deposits. Circular debt is

another critical issue which is still a potential indicator of the economic problem.

Government of Pakistan is unable to billions of rupees to oil marketing

companies (OMCs) and independent power producers (IPPs). The long hour power

failures have not only affected the common people, but also shut down manybusinesses.

There are no doubts that 2008 global financial crisis has not affected Pakistan

with a huge blow though the government claimed entirely different. The country has

seen some of the worst situations but survived.

Pakistan is going through a critical phase at this stage. The country was already

facing economic burdens because of its participation in the war on terror. According to

the government of Pakistan, it has suffered economic losses worth US$34 billion so far

because of the war. While the aid that it received is far below. The continued global

economic crisis has hit Pakistan hard. Remittances sent to the country by the overseas,Taliban can take advantages of the bad economic conditions of the country.

The price of oil fell to $77 a barrel, almost one-half of the level it had reached a

couple of months ago. This put a strain on the spending plans of a number of countries

in the Middle East. Some of these countries had large investments planned in Pakistan.

In the light of these developments the question arises as to what is the likely impact on

Pakistans financial grounds? How should Pakistans policy makers respond to the

developments in America, Europe and the Middle East as they begin to address the

problems the country is already confronted with? The writer will attempt to answer these

questions.

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,


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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.

Sectoral impact of the crisis in Pakistan:

Though the impact of this crisis varies from country to country, but no country will

be left alone to benefit or detriment from the prevailing crisis. Analysts believe that

countries with large macro-economic balances, poor governance and regulation are

more prone to the negative effects of the crisis. According to a report presented by

overseas development institute, UK, the economic, financial as well as social impacts

could include:

Weaker export revenues

Further pressure on current accounts and balance of

payment(BOP)

Lower investment and growth rates

Lost employment

Lower growth translating into poverty

More crime, weaker health systems and even more difficulties

meeting the millennium development goals

In Pakistan, the sectors that are most severely hit could financial, business and

social. A sum up of all the sectors that are hit by the current crisis and the subsequent

increase in price of commodities and energy, and their present performance could help

explain where the country is heading.

External sector impact:

The country macroeconomics environment is affected by increase of war on

terror and deepening of the global financial crisis which penetrated into the domestic

economy through a route of large decline in Pakistans exports and a visible drop in

foreign direct inflows. Although contraction in export receipts is more than compensated

by massive imports compression send out from global crash of crude oil and commodity

prices, the external sector vulnerabilities remain a threat. Pakistans economy continues


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to remain exposed to the vagaries of international developments as well as internal

security environment.

When people stop borrowing and start savings to pay off debt, it acts like a shrink

in money supply. Thus goods and services get cheaper, and money get more valuable

compared to others things. Economies that depend on exports are also affectedbecause others such as US and Europe start importing less.

Exports:

The financial crisis made countries realize that they dont have much to spend on

external goods and that recovery is possible only if demand as well as production for

internal goods is increased. As a result, countries that hugely relied on exports likePakistan suffered huge losses,. Even their most loyal customers, the US didnt have the

capacity to pay for exports. As a result, the export sector of Pakistan was badly hit. Its

major exports include textiles, surgical instruments, sport goods etc.

Imports:

The flow in global energy and goods prices coupled with poor agricultural

production in Pakistan over the past two years had played destruction to the countries

import expenditure. However, the recent lowering of these prices did provide some relief

to the countries trade deficit.

Imports registered a negative growth of 9.8 percent in July to April 2009. The

imports stood at $26.77 billion as against $28.715 billion in the comparable period of

last year. The growth in imports reflects impact of substantial fall in oil and food imports

in monetary terms and these two items were responsible for 80 percent of additional

imports bill last year.

Financial Sector impact

Foreign exchange:

Pakistans 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.


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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.

External Financing:

The global crisis has restricted Pakistans ability to tap international debt capital

markets to raise funds. An increasing cost of borrowing internationally, coupled with

deterioration in the countrys credit rating has ruled out issuance of government paper

as a financing mechanism. Pakistans 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.

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.

Market analyst Muhammad Suhail told the Los Angeles times. The global crisis

has really fuel to the fire. There was a time window earlier this year to address all this,

and we missed it. The drying up of credit internationally has hit Pakistan hard with thebanking system suffering a severe liquidity problem. Overnight call rates rises so much

and its ranging from 32 to 40 percent.

Circular debt:

On 26 January 2009, Raja Pervaiz Ashraf, Minister for water and power, told the

senate that the federal government will settle half of the Rs 400 billion circular debt by

the end of January.

Circular debt arises when the Government of Pakistan owes and is unable to pay

billions of rupees to oil marketing companies (OMC) an to independent power producers

(IPPs).

Stock market:

The Karachi stock market exchange (KSE) is Pakistans largest and the runniest

exchange. It was the Best performing stock market of the world for the year 2002.


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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.

Inflation:

Rising food and fuel prices have been a major source of inflationarypressure in South Asian countries especially Pakistan. In Pakistan, food prices

mad a bigger impact on inflation than fuel, and wheat prices more than

doubled, due to poor domestic production and export restrictions. The

combined effects of lower food and fuel prices along with demand

management are reducing inflationary pressure in most South Asian

countries but conditions have not been that favorable in case of Pakistan.


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In the year 2009 core inflation rose to 18% from the 14.7% 2008. In

year 2009 inflation accelerated at rapid speed mainly because of food prices

which increased as a result of high prices of widely consumable items such

wheat, wheat flour , sugar and meat etc, owing to their to their supple

shortage.

Economic business sector impact:

Economic activity is the life blood of a nation. For a country to survive

it is important that its economy is sound and successful and that business

activity flourishes, but the global credit crisis and liquidity problems of manyglobal corporations have already led to net capital outflows from rising

markets, uncertain new investment projects.

With fast depleting international reserves there is growing fear that the

country may be forced into failure to pay on its foreign obligations. It was

because of the fear that on October 6, standard and poors and moodys, two


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of the largest rating agencies, downgraded Pakistani bonds. This has a

created a terror and investors have begun to fear weathers Pakistan will be

able to pay them back.

Impact on textile industry:

Pakistan textile industry is facing an uncertain environment. Following few factors

like increase in input cost of minimum wage by 50 percent, increasing interest rates,

non-guaranteed energy supplies, lack of R and D and reduction in cotton production,

put a negative impact on the industrys competitiveness internationally, because of the

entire situations the companies are downsizing. Production units are being shut down

and around 5000000 of the workers lost their jobs. After surviving load shedding now

industries have face gas load shedding this also increase their cost so thats why our

industry didnt progress and gets into loss. When light is gone in industry it take almost

30 minutes to start work again and thats the big problem your time also waste and your

cost also increasing.

Social Sector Impacts:

Every problem that enters the society has its social costs that the country has to

bear. Pakistan where poverty and unemployment is much already, financial crisis

increases the situation.

Poverty and unemployment:

Food prices have a large bearing on poverty rate. A review of price trends of

essential items during 2007-08 indicates that the prices of daily life such as wheat, flour,rice, edible, oil, vegetables and pulses. Since April 2007, the economy has witnessed

over 200% increase in the price of palm oil; and an increase of 150% in wheat prices,

while over 100% increase in the price of oil in the international market.

The government estimates that about 25% of population live below the poverty

line and this average increases just because of food inflation.

Economic growth has slowed down considerably during the last three years. The

industry and construction sectors have contracted due to the domestic slowdown and

energy shortage and also due to global recession. People are being laid-off especially

from foreign or multinational companies in order to reduce costs through downsizing. It

has become even tougher for a freshman to find a suitable job than it was five years

from now. According to one estimate, Pakistans unemployment rate in urban areas is

nearly 40% and in rural areas over 60%. Increase in poverty means, decrease in

average standard of living, poor health and education, and low-paying job, more

population which is again makes it difficult to maintain their needs.


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IMF: Solution or more pain?

On 24 November 2008, the executive board of the IMF agreed to bail Pakistan

out by agreeing to a stand-by arrangement (SBA) valued at $7.6 billion. The two

conditions are a cut in the budgetary shortage from around 7 percent to GDP of 4.2

percent of GDP and an increase in the taxation from 10 percent of GDP to 10.5 percentof GDP.

The fact of the matter is that 2 out of 3 Pakistanis are already at or below $2 a

day. An increase in taxation would mean a further slowdown in the economy. A further

slowdown would mean increased unemployment. Same thing with the rate of interest

this high cost of capital is bound to shut down a lot of our industrial units and that means

even more unemployments.

All this slowdown and all this additional unemployment could very well bring Pakistanis

out on the streets and that means a full blown political crisis.

Did financial crisis benefit Pakistan:

So far the only sector that has shown growth prospects, regardless of the

economic crisis has been the agriculture sector. While the rest of the south Asian

economics suffered a huge loss of income. Pakistan and India actually gained, being

large rice exporters.

Technique to tackle the situation:

When the first global recession came in the world, it destroyed the whole

economy of the world. The reason of that recession was world War II. The studies made

at that time does not apply on our problem. The crisis which we are facing currently is

due to free market system. There was no government intervention in the economy. Now

after the recession the mix system strategies are now being applied. Now there is

government involvement in the economy to support the economy.

The crisis in the whole world has been cured by the bail out plans given by the

government. They have used Federal Reserves to cover-up. Although these strategies

has not given the instant recovery yet, it is expected that in few years the position of themarkets will be stable and on track. Pakistan has different criteria to survive in this

critical situation as the effect was not usual. By following methods we can survive from

this crisis.


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1) Tax breaks will be given to the industry to produce the product. We have a

problem of energy crisis but if we develop plans by keeping in mind our

resources than the industry crisis can be cured.

2) Agriculture sector needs a greater support; we are not using the resources of our

agriculture. We have an ideal land for agriculture but we are not utilizing it.Government has to empower the farmers so that they could produce more. Once

we have our own produce we will be good enough to overcome the problem of

hunger. People will not prefer to have migration towards cities if we will develop

the agriculture the shortage of labor faced in the fields will be covered if the

agriculture will be given boost. People will prefer to have cultivation on their

lands.

3) Cash subsidies and food fixed amount programs regarding the economic

financial shortage will be good to obtain stability.

4) Reduction of the financial policy and decreasing the rates of productive sector

will be helpful to deal with the problem faced by our country.

5) Increasing supporting programs for the labor demanding activities. It will help to

fulfill the need of employment. The wages paid to the poor keeps the poor always

poor so if we will start to overcome the poverty due to unemployment the half of

the situation can easily be handled.

Challenges going forward

Pakistan faces a number of challenges that comes from both the domesticenvironment as well as the negative outlook of the global economy. Having successfullystabilized the economy, reinforced its reserve position, curtailed fiscal and currentaccount deficits and managed a reduction in inflationary pressure, the government cannow focus on boosting economic activity and providing growth impetus. In order toachieve an increase in production and the desired level of growth, efforts must beconcentrated on increasing capacity of industry, and removing inefficiencies whichwould allow productive sectors to function at optimal levels. While the targets set by

fiscal and monetary policies are a considerable step towards this, implementation andcoordination going forward will be key factors.The future of workers remittances is uncertain given the fact that employment in host

countries is limited. The external sector still faces multiple threats in the form of a further

reduction in international demand and secondly, a recent rally in international

commodity prices as investors seek refuge could potentially reverse the gains

registered in the current account balance. If current conditions in international markets


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persist, the government will have to increase reliance on funding from multilateral and

bilateral agencies. It is vital that fiscal, monetary, and external debt policies work in

tandem to protect the sectors exposed to the international crisis, while striving to re-

establish domestic economic growth.

The Financial crisis and Pakistan

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