Devaluation of Currency

Subject: Global Economic Issues

Presented to: Mr. Kamran Abdullah

Presented By:
Abdul Hameed Baloch BM-25011

Institute of Business & Technology, Karachi

Institute Of Business & Technology (BIZTEK)

Page 1

DEVALUATION OF CURRENCY
TABLE OF CONTENTS S. No.Description ACKNOWLEDGEMENT PREFACE CURRENCY

Institute Of Business & Technology (BIZTEK)

Page 2

1.1 1.2 1.3

What Is Currency Pakistani Currency Role Of SBP DEVALUATION Introduction Devaluation In Modern Economies Types Of Exchange Rate Systems Country Devaluation Effects Of Devaluation EXCHANGE RATE SBP’s Policy About Currency Exchange Rates FACTORS CAUSING DEVALUATION OF PKR Balance Of Payment Pakistan’s Balance Of Payment Measures For Correcting Adverse BoP Suggestions To Improve BoP Depleting Foreign Reserves Decreased Credit Rating 4.7

2.1 2.2 2.3 2.4 2.5 3.1 3.2

4.1 4.2 4.3 4.4 4.5 4.6

Law And Order Situation 4.8 Situation In Northern Pakistan 4.9 Proposed Remedy 4.10 Domestic Issues GLOBAL ISSUES 5.1 OVERVIEW 5.2 SUBPRIME 5.3 US, WAR ON TERROR, FOOD CRISIS AND MORE 5.4 DOLLAR AND CHINA CONCLUSION REFRENCES

PREFACE
The purpose of this study is to analyze the sharp drop in the value of PKR. The international crisis following the events of September 11, 2001 and the ensuing US attack on Afghanistan caught Pakistan in the crossfire, came with serious

Institute Of Business & Technology (BIZTEK)

Page 3

economic and political consequences for the country. With increasing number of refugees crossing the border, adverse Balance of Payments and deteriorating law and order situation, Pakistan is loosing the battle to maintain the strength of its currency which is devaluating at a helpless rate. Fast depleting foreign currency reserves which continue to fall at $800 to $900 million per month, flight out capital estimated $70 million per day, huge gap between import and export bill, mismanagement in privatization process, downgraded credit rating by International Rating Agency Standard & Poors and Moody’s, inflation rate floating more than 25 percent, heavy government borrowing to cover a budget deficit and $500 million euro bond debt obligation due in February are the noticeable factors in the erosion of Pak rupee. This study argues that internal as well as external factors are responsible for this nosedive.

CURRENCY
DEFINITION (1)
Institute Of Business & Technology (BIZTEK)
Page 4

A currency is a unit of exchange, facilitating the transfer of goods and/or services. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value. Currencies are the dominant medium of exchange. Coins and paper money are both forms of currency.

RUPEE (1)
The rupee (sign: ₨; code: PKR) is the currency of Pakistan. The issuance of the currency is controlled by the State Bank of Pakistan. The most commonly used symbol for the rupee is Rs, used on receipts when purchasing goods and services. In Pakistan, the rupee is referred to as the "rupees", "rupaya" or "rupaye". As standard in Indian English, large values of rupees are counted in terms of thousands, lakh (100 thousand, in digits 1,00,000) and crore (10 million, in digits 1,00,00,000). Pakistanirupee ‫( روپی ہ‬Urdu)

1000-rupee note ISO 4217 Code User(s) Inflation Source Subunit Symbol Coins Banknotes Central bank Website

Coins of various denominations
PKR

Pakistan 25% Federal Bureau of Statistics, September 2008 1/100 paisa ₨ Freq. used 1, 2, 5 rupees Freq. used 10, 20, 50, 100, 500, 1000, 5000 rupees State Bank of Pakistan www.sbp.org.pk

HISTORY
The origin of the word "rupee" is found in the Sanskrit word rūp or rūpā, which means "silver" in many Indo-Aryan languages. The Sanskrit word rūpyakam means

Institute Of Business & Technology (BIZTEK)

Page 5

coin of silver. The derivative word Rūpaya was used to denote the coin introduced by Sher Shah Suri during his reign from 1540 to 1545 CE. The Pakistani rupee was put into circulation after the country became independent from the British Raj in 1947. For the first few months of independence, Pakistan used Indian coins and notes with "Pakistan" stamped on them. New coins and banknotes were issued in 1948. Like the Indian rupee, it was originally divided into 16 annas ( ‫ ,)آن‬each of 4 pice (‫ )پيس‬or 12 pie (‫ .)پاى‬The currency was decimalized in 1961, with the rupee subdivided into 100 pice, renamed (in English) paise (singular paisa) later the same year. However, coins denominated in paise have not been issued since 1994

COINS
In 1948, coins were introduced in denominations of 1 pice, ½, 1 and 2 annas, ¼, ½ and 1 rupee. 1 pie coins were added in 1951. In 1961, coins for 1, 5 and 10 pice were issued, followed later the same year by 1 paisa, 5 and 10 paise coins. In 1963, 10 and 25 paise coins were introduced, followed by 2 paise the next year. 1 rupee coins were reintroduced in 1979, followed by 2 rupees in 1998 and 5 rupees in 2002. 2 paise coins were last minted in 1976, with 1 paisa coins ceasing production in 1979. The 5, 10, 25 and 50 paise all ceased production in 1994.There are two variations of 2 ruppee coins, most have clouds above the Badshahi Masjid but many don't have. This is noted by too less people. Currently Circulating Coins Depictio Depictio Value n (Front) n (Back) Re. 1 (Old Version) Re. 1 (New Version) Year in Use Front Illustratio n 1948 - Cupro-nickel Crescent Presen and Star t 1998 - Bronze Quaid-ePresen Azam, t Muhamma d Ali Jinnah 1998 - Brass Presen t 2002 - Cupro-nickel Presen t Crescent and Star Crescent and Star Compositio n Back Illustration Floral Wreath Hazrat Lal Shahbaz Qalandar Mausoleum , Sehwan Shareef Badshahi Masjid, Lahore 5 in a Pentagon

Rs. 2 Rs. 5

Institute Of Business & Technology (BIZTEK)

Page 6

BANKNOTES
In 1947, provisional issues of banknotes were made, consisting of government of India and Reserve Bank of India notes for 1, 2, 5, 10 and 100 rupees overprinted with the text "Government of Pakistan" in English and Urdu. Regular government issues commenced in 1948 in denominations of 1, 5, 10 and 100 rupees. The government continued to issue 1 rupee notes until the 1980s but other note issuing was taken over by the State Bank in 1953, when 2, 5, 10 and 100 rupees notes were issued. Only a few 2 rupees notes were issued. 50 rupees notes were added in 1957, with 2 rupees notes reintroduced in 1985. In 1986, 500 rupees notes were introduced, followed by 1000 rupees the next year. 2 and 5 rupees notes were replaced by coins in 1998 and 2002. 20 rupees notes were added in 2005, followed by 5000 rupees in 2006. All banknotes other than the 1 and 2 rupees feature a portrait of Muhammad Ali Jinnah on the obverse along with writing in Urdu. The reverses of the banknotes vary in design and have English text. The only Urdu text found on the reverses is the Urdu translation of the Prophetic Hadith, "Seeking honest livelihood is worship of God." The banknotes vary in size and colour, with larger denominations being longer than smaller ones. All contain multiple colours. However, each denomination does have one colour which predominates. All banknotes feature a watermark for security purposes. On the larger denomination notes, the watermark is a picture of Jinnah, while on smaller notes, it is a crescent and star. Different types of security threads are also present in each banknote.

Banknotes before the 2005 Series Image Obverse Reverse

Value

Dimension Main s Colour

Descriptio Status n - Reverse

Institute Of Business & Technology (BIZTEK)

Page 7

95 × 66 Re. 1 mm Rs. 2 Rs. 5 Rs. 10 Rs. 50 Rs. 100 Rs. 500 109 × 66 mm 127 × 73 mm 141 × 73 mm 154 × 73 mm 165 × 73 mm 175 × 73 mm

Brown

Purple Burgund y Green

Purple and Red Red and Orange Green, tan, red, and orange Blue

Rs. 175 × 73 1000 mm

Tomb of Muhammad Iqbal in Lahore No longer Badshahi in Masjid in Circulation Lahore Khojak Tunnel in Balochistan Mohenjo- No longer daro in printed Larkana Still in District Circulation Alamgiri No longer Gate of the printed Lahore Fort Still in in Lahore Circulation Islamia College in Peshawar No longer printed The State Still in Bank of Circulation Pakistan in Islamabad No longer Tomb of printed Jahangir in Still in Lahore Circulation

The State Bank has started a new series of banknotes, phasing out the older designs for new, more secure ones.
2005 Series Image Obverse

Reverse

Value

Rs. 5

Dimension Main Descriptio Date of s Colour n - Reverse issue Gwadar port, which 115 x 65 Greenis is a mega July 08, mm h Grey project in 2008 Balochistan (Pakistan)

Institute Of Business & Technology (BIZTEK)

Page 8

Bab ul Khyber which is the entrance to 115 × 65 May 27, Rs. 10 Green the Khyber mm 2006 Pass, Khyber Agency, FATA Mohenjo123 × 65 daro in August Rs. 20 Brown mm Larkana 13, 2005 District MohenjoRs. 20 123 × 65 Orange daro in March 22, (Revised* mm Green Larkana 2008 ) District K2, second highest mountain of 131 x 65 July 08, Rs. 50 Purple world in m.m. 2008 northern areas of Pakistan Quaid-e139 × 65 Azam Rs. 100 Red mm Residency November in Ziarat 11, 2006 Rich Badshahi 147 × 65 Rs. 500 Deep Masjid in mm Green Lahore Islamia 155 × 65 Dark February Rs. 1000 College in mm blue 26, 2007 Peshawar Faisal 163 × 65 May 27, Rs. 5000 Mustard Mosque in mm 2006 Islamabad

(*Recently the State Bank revised the Rs.20/- banknote, after complains of its similarity to the Rs.5000/-, which caused a lot of confusion and financial losses, when people gave out Rs.5000/- notes, thinking them to be Rs.20/- notes)

Institute Of Business & Technology (BIZTEK)

Page 9

DEVALUATION
DEFINITION (1,2)
Devaluation is a reduction in the value of a currency with respect to other monetary units. In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, (currency) depreciation is most often used for the unofficial decrease in the exchange rate in a floating exchange rate system. The opposite of devaluation is called revaluation. Depreciation and devaluation are sometimes used interchangeably, but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services (related to its purchasing power).

Institute Of Business & Technology (BIZTEK)

Page 10

DEVALUATION IN MODERN ECONOMIES
Present day currencies are usually fiat currencies with insignificant inherent value. The value of currency is determined by the interplay of money supply and money demand. As some countries hold floating exchange rates, others maintain fixed exchange rate policy against the United States dollar or other major currencies. These fixed rates are usually maintained by a combination of legally enforced capital controls or through government trading of foreign currency reserves to manipulate the money supply. Under fixed exchange rates, persistent capital outflows or trade deficits may lead countries to lower or abandon their fixed rate policy, resulting in devaluation (as persistent surpluses and capital inflows may lead them towards revaluation).

TYPES OF EXCHANGE RATE SYSTEMS (1,2)
Fixed Exchange Rate System A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. This facilitates trade and investments between the two countries, and is especially useful for small economies where external trade forms a large part of their GDP. Under a fixed exchange rate system, devaluation and revaluation are official changes in the value of a country's currency relative to other currencies. Both devaluation and revaluation can be conducted by policymakers, usually motivated by market pressures. The charter of the International Monetary Fund (IMF) directs policymakers to avoid "manipulating exchange rates...to gain an unfair competitive advantage over other members." Floating Exchange Rate System Under a floating exchange rate system, market forces generate changes in the value of the currency, known as currency depreciation or appreciation. A floating exchange rate or a flexible exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency. The opposite of a floating exchange rate is a fixed exchange rate. Many economists think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates. They allow the dampening of shocks and foreign business cycles. However, in certain situations, fixed exchange rates may be preferable for their greater stability and certainty. This may not necessarily be true, considering the results of countries that attempt to keep the prices of their currency "strong" or "high" relative to others, such as the UK or the Southeast Asia countries before the Asian currency crisis.

Institute Of Business & Technology (BIZTEK)

Page 11

In cases of extreme appreciation or depreciation, a central bank will normally intervene to stabilize the currency. Thus, the exchange rate regimes of floating currencies may more technically be known as a managed float. A central bank might, for instance, allow a currency price to float freely between an upper and lower bound, a price "ceiling" and "floor". Management by the central bank may take the form of buying or selling large lots in order to provide price support or resistance, or, in the case of some national currencies, there may be legal penalties for trading outside these bounds.

UNDER WHAT CIRCUMSTANCES MIGHT A COUNTRY DEVALUE?
When a government devalues its currency, it is often because the interaction of market forces and policy decisions has made the currency's fixed exchange rate untenable. In order to sustain a fixed exchange rate, a country must have sufficient foreign exchange reserves, often dollars, and be willing to spend them, to purchase all offers of its currency at the established exchange rate. When a country is unable or unwilling to do so, then it must devalue its currency to a level that it is able and willing to support with its foreign exchange reserves. A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of devaluation. First, devaluation makes the country's exports relatively less expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country's exports and decrease imports, and may therefore help to reduce the current account deficit. There are other policy issues that might lead a country to change its fixed exchange rate. For example, rather than implementing unpopular fiscal spending policies, a government might try to use devaluation to boost aggregate demand in the economy in an effort to fight unemployment. Revaluation, which makes a currency more expensive, might be undertaken in an effort to reduce a current account surplus, where exports exceed imports, or to attempt to contain inflationary pressures.

EFFECTS OF DEVALUATION (3)
A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth. Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic weakness, the creditworthiness of the nation may be jeopardized. Thus, devaluation may dampen investor confidence in the country's economy and hurt the country's ability to secure foreign investment.

Institute Of Business & Technology (BIZTEK)

Page 12

Another possible consequence is a round of successive devaluations. For instance, trading partners may become concerned that devaluation might negatively affect their own export industries. Neighboring countries might devalue their own currencies to offset the effects of their trading partner's devaluation. Such "beggar thy neighbor" policies tend to exacerbate economic difficulties by creating instability in broader financial markets. Since the 1930s, various international organizations such as the International Monetary Fund (IMF) have been established to help nations coordinate their trade and foreign exchange policies and thereby avoid successive rounds of devaluation and retaliation. The 1976 revision of Article IV of the IMF charter encourages policymakers to avoid "manipulating exchange rates...to gain an unfair competitive advantage over other members." With this revision, the IMF also set forth each member nation's right to freely choose an exchange rate system. To summarize 1. A devaluation of the exchange rate will make exports more competitive and appear cheaper to foreigners. This will increase demand for exports 2. Imports will become more expensive. This will reduce demand for imports 3. AD= X-M Therefore higher exports and lower imports will increase AD Higher AD is likely to cause higher Real GDP and inflation.

Evaluation The size of this increase depends upon factors such as: a) Spare capacity in the economy b) Other determinants of AD 4. Inflation is likely to occur because: i) Imports are more expensive ii) AD is increasing iii) With exports becoming cheaper manufacturers may have less incentive to cut costs and become more efficient

Institute Of Business & Technology (BIZTEK)

Page 13

Evaluation: The effect on inflation will depend on other factors such as iv) Spare capacity in the economy v) Do firms pass increased import costs onto consumers vi) Import prices are not the only determinant of inflation. Other factors affecting inflation such as wage increases may be important 5. There is likely to be an improvement in the current account balance of payments. This is because exports are increasing and imports are falling. NOTE: AD = Aggregate Demand X= Exports M = Imports

EXCHANGE RATE
The Pakistani rupee depreciated against the US dollar until the turn of the century, when Pakistan's large current-account surplus pushed the value of the rupee up versus the dollar. Pakistan's central bank then stabilized by lowering interest rates and buying dollars, in order to preserve the country's export competitiveness. The year 2008 has been termed as disastrous year for the rupee as so far (up to August 2008) it has lost 23% of its value since December, 2007 to a record low of 81.4 against US Dollar. The major reasons for this depreciation are ongoing political crisis, increased

Institute Of Business & Technology (BIZTEK)

Page 14

current and trade accounts deficits and rising militancy in the NWFP and FATA areas. In recent few days, there was a record increase in the price of US Dollar against Pakistani Rupee. Few months back, US Dollar was trading at about 60 Rupees in the Inter-Bank Market.(4) In the month of April, 2008, Pakistani Rupee was at a 64 rupee level against US Dollar. If we go further back few months, then we will find US Dollar at 60 rupee in the Inter-Bank Market. In the past 10 or so months, the rate of US Dollar has increased almost 30% against the Pakistani Rupee. The rate of Pakistani Rupee reached 81.4 rupees in the open market on 16th of October, 2008. This was the highest ever value gained by US Dollar against Pakistani Rupee in the history of Pakistan. An increased US Dollar rate means weakened Pakistani currency. When the currency is weakened, the overall economy suffers. Pakistan’s economy is already in a bad situation. The world wide bad economic situation has made things even worse for Pakistan and other third world countries. State Bank of Pakistan is trying its best to try to improve the economic situation by stabilizing the US Dollar rate. State Bank recently pumped in 50 Million Dollars in the open market in order to stop the fast increasing price of US Dollar against Pak Rupee. For the past two days, value of Pak currency has recovered a little bit in both the Inter-Bank Market as well as in the open market. However, a question raises here: That is, is this an artificial recovery of Pak Currency or the economy really is improving? State Bank of Pakistan took different steps in order to prevent further drop in Pak currency. Let’s hope Pakistan economy and world’s economic situation gets better.

Institute Of Business & Technology (BIZTEK)

Page 15

NOTE: The figures are till August 2008.

Institute Of Business & Technology (BIZTEK)

Page 16

RUPEE and OTHER CURRENCIES (5), (6) Just around January of 2008, Rupee was quite steady at around 61 rupees to a dollar but in the past 4 months, the depreciation has been alomst 23%. That too at a time, when US dollar is also weakening as compared to other major curencies of the world. Following graph shows Rupee’s one year comparison versus the US dollar.

On May 23, 2008, ONE Unit of other currencies was equal to following number of rupees: 1 Australian Dollar = 65.64 Pakistani Rupees 1 Bangladesh Takka = 0.99 Pakistani Rupees 1 Canadian Dollar = 69.09 Pakistani Rupees 1 Chinese Yuan = 9.84 Pakistani Rupees 1 Euro = 107.73 Pakistani Rupees 1 Indian Rupee = 1.6 Pakistani Rupees 1 Iraqi Dinar = 0.06 Pakistani Rupee 1 Kuwaiti Dinar = 257.58 Pakistani Rupees 1 Saudi Rial = 18.23 Pakistani Rupees 1 Thai Baht = 2.12 Pakistani Rupees 1 UAE Dirhan = 18.61 Pakistani Rupees 1 Zimbabwe Dollar = 0.002 Pakistani Rupees

Institute Of Business & Technology (BIZTEK)

Page 17

Following graph is the 5-year view of Pakistani rupee versus the US dollar. One can easily note the alarmingly sharp decline in the value of Rupee in the last few months.

Following graph shows Rupee’s sharp decline as of August 7, 2008

Institute Of Business & Technology (BIZTEK)

Page 18

Exchange rates: Pakistani rupee (PKR) per US$1 (12)
RATE
• • • • • • • • • • • • • • •

YEAR/DATE (16/10/08) (26/07/08) (01/04/08) (01/11/07) (05/08/2007) (2004) (2003) (2002) (2001) (2000) (1999) (1998) (1997) (1996) (1995)

84.00 71.50 63.50 60.50 60.75 58 57.752 59.7238 61.9272 53.6482 51.90 44.550 40.185 35.266 30.930

Institute Of Business & Technology (BIZTEK)

Page 19

FACTORS CAUSING THE DEVALUATION OF PKR (8-14)
The Pakistani Rupee is sensitive to a lot of factors which have played their share in bringing down its value. Analysts are of the view that the depleting foreign currency reserves which continue to fall at $800 to $900 million per month, bad to worst law and order situation in the country, flight out capital estimated $70 million per day, huge gap between import and export bill, mismanagement in privatization process, downgraded credit rating by International Rating Agency Standard & Poors and Moody’s, inflation rate floating more than 25 percent, widening current account deficit, heavy government borrowing to cover a budget deficit and $500 million euro bond debt obligation due in February are the major factors in the erosion of Pak rupee. Though the depreciating rupee is the biggest challenge for Pakistan economy but our leaders are busy in just politics and are least bothered like financial managers to chalk out affective policies to pull the country out of economic mess. Let’s take a look the major factors which are responsible for this turmoil.

BALANCE OF PAYMENT
In economics, the balance of payments, (or BOP) measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits). Balance of payments is one of the major indicators of a country's status in international trade, with net capital outflow. The balance of payments comprises the current account, the capital account, and the financial account. "Together, these accounts balance in the sense that the sum of the entries is conceptually zero."
• •

The current account consists of the goods and services account, the primary income account and the secondary income account. The financial account records transactions that involve financial assets and liabilities and that take place between residents and nonresidents. The capital account in the international accounts shows (1) capital transfers receivable and payable; and (2) the acquisition and disposal of non-produced non-financial assets.

Institute Of Business & Technology (BIZTEK)

Page 20

Current account
The current account is the net change in current assets from trade in goods and services (balance of trade), net factor income (such as dividends and interest payments from abroad), and net unilateral transfers from abroad (such as foreign aid, grants, gifts, etc).

Income Account The income account accounts mostly for investment income from dividends and interest on credit and payments on foreign taxes. Unilateral Transfers Unilateral transfers are usually conducted between private parties. For example, Mexico has a large surplus of remittances from the United States sent by emigrant workers to loved ones back home.

Financial account (IMF)
According to the IMF's definition, the financial account is the net change in foreign ownership of investment assets. In economics, the term capital account has historically been used to refer to the IMF's definition of the capital and financial accounts.

The accounting entries in the financial account record the purchase and sale of domestic and foreign investment assets. These assets are divided into categories such as foreign direct investment (FDI), portfolio investment (which includes trade in stocks and bonds), and other investment (which includes transactions in currency and bank deposits). If foreign ownership of domestic financial assets has increased more quickly than domestic ownership of foreign assets in a given year, then the domestic country has a financial account surplus. On the other hand, if domestic ownership of foreign financial assets has increased more quickly than foreign ownership of domestic assets, then the domestic country has a financial account deficit.

Institute Of Business & Technology (BIZTEK)

Page 21

Capital account (IMF/economics)
According to the IMF's definition, the capital account "records the international flows of transfer payments relating to capital items". It therefore records a country's inflows and outflows of payments and transfer of ownership of fixed assets (capital goods). Examples of such goods could be factories or heavy machinery transferred to or from abroad and so on. Summing up: the capital account accounts for the transfer of capital goods. (source: see book reference list) In economics, the term capital account usually refers to what the IMF calls the financial account and capital account, combined.

Institute Of Business & Technology (BIZTEK)

Page 22

BALANCE OF PAYMENT & PKR (8-11)
Pakistan has a huge trade deficit, and our exports are very low. The dollars that we get as a result of exports is small compared to the dollars we have to pay for our imports. Bottom line, we need dollars, and cannot afford to let go of whatever little we get in the form of our export bills. If the rupee appreciates in value against USD, that will increase our export bill for the buyer, and if that happens, we risk losing that client to a cheaper alternate, like China or India. So in order to 'retain' our exports, the state bank manipulates the exchange rate for rupee, to ensure that it doesn’t appreciate by too much against the dollar. Pakistan's payments problems have been chronic since the 1970s, with the cost of oil imports primarily responsible for the trade imbalance. The growth of exports and of remittances from Pakistanis working abroad (mostly in the Middle East) helped Pakistan to keep the payments deficit in check. Since the oil sector boom began subsiding in the early 1980s, however, remittances declined. Remittances from overseas workers peaked at $2.9 billion in 1982/83, then dropped to $1.4 billion by 1997/98 and $1 billion from 1999 to 2001. This trend especially accelerated during the Gulf War, when nearly 80,000 Pakistanis in Kuwait and Iraq lost their jobs. Only about 25% of these jobs had been regained a year after the end of the conflict. Increased imports and softer demand for Pakistan's textiles and apparel in major markets also caused the current account deficit to further increase. Pakistan is also a developing economy. Some of the items of its exports are oil seed, cotton, rice, wool, fish fresh, chilled frozen, tobacco etc. Main export items are rice and Cotton. Pakistan also faces severe competition in the world market like other developing countries. The volume of exportable goods like cotton and rice also depend upon climate in the country, which determine good or bad harvest. It is agonizing to accept that even after good harvest due to favorable climate Pakistani goods can fetch better prices only if the harvest in competing nations has been bad due to unfavorable climate. Pakistan has made consistent efforts to increase and diversify its exports but no cogent results have so far been achieved. Very recently Pakistan has been paying acute attention in the sector of Information Technology. Every endeavor is being made to enrich the younger generation of the country towards this sector so as to boost software exports and promote email commerce. India our main rival is far ahead of Pakistan in this field. Since the government now give due recognition to the matter it is hoped that we will pick up momentum very soon.

Institute Of Business & Technology (BIZTEK)

Page 23

Main items of imports in Pakistan are petroleum and petroleum products, vegetable oil and fats, tea, wheat, milk and cream etc. The import bill of the country despite best efforts could not be brought down. Import of petroleum and petroleum products is very vital for the survival of the economy. A substantial portion of our foreign exchange is also utilized for the import of tea. Moreover the prices of petroleum and its products prevailing in the international market have direct impact on Pakistan's trade balance and its balance of payment. Increase in prices of petroleum and petroleum products also results in corresponding increase in numerous items attached with it changing overall price structure in the country. Pakistan has time and again devalued its currency anticipating that it will boost its exports and will make the exportable goods of the country more competitive in the world market. But these wishes have failed to materialize so far. Our goods failed to compete with our neighboring countries despite the fact that their currencies were stronger than ours. It is strange to see that despite using the same factors of production and also devaluing our currency, our goods fail to compete with other goods. This is so because our domestic input cost of production is quite higher than our neighboring countries. The fact is that constant increase in country’s imports after 20 percent decline in the rupee is a dilemma that has surprised most economists who say Pakistan is perhaps the second country after the US, which has seen its trade deficit widen irrespective of the value of the currency. It is pertinent to note that foreign exchange reserves of Pakistan are fast depleting and except remittances from abroad other inflows are too low to cover its huge trade deficit. It is a pity that trade is being operated in such a way in Pakistan that encourages imports and discourages local industry. It is claimed that Pakistan is the only major cotton-producing and textile-based country where imported clothing and fabrics dominate local markets because of smuggling menace. It would not be out of place to mention here that the trade deficit, which widened to over $20.74 billion during the financial year 2007-08, reflected a rise of 53 percent when compared to the corresponding period of last year. The trade deficit in July only was 1.644 billion dollar and import surged to 3.549 billion dollar compared to 1.905 billion dollar export. EXPORTS Pakistan's exports stood at $17.011 billion in the financial year 2006-2007, up by 3.4 percent from last year's exports of $16.451 billion. Pakistan exports rice, furniture, cotton fiber, cement, tiles, marble, textiles, clothing, leather goods, sports goods (renowned for footballs/soccer balls), surgical instruments, electrical appliances, software, carpets, and rugs, ice cream, livestock meat, chicken, powdered milk, wheat, seafood (especially shrimp/prawns), vegetables, processed food items, Pakistani assembled Suzukis (to Afghanistan and other countries), defense equipment (submarines, tanks, radars), salt, marble, onyx,

Institute Of Business & Technology (BIZTEK)

Page 24

engineering goods, and many other items. Pakistan now is being very well recognized for producing and exporting cements in Asia and Mid-East. Starting August 2007, Pakistan will be exporting Cement to India to fill in the shortage there caused by the building boom.

IMPORTS Pakistan's imports stood at $30.54 billion in the financial year 2006-2007, up by 8.22 percent from last year's imports of $28.58 billion. Pakistan's single largest import category is petroleum and petroleum products. Other imports include: industrial machinery, construction machinery, trucks, automobiles, computers, computer parts, medicines, pharmaceutical products, food items, civilian aircraft, defense equipment, iron, steel, toys, electronics, and other consumer items. Sales tax is levied at 15 percent both on imports and domestically produced products. The income withholding tax is levied at 6 percent on imports and at 3.5 percent on the sales of domestic taxpayers. DEFICIT Pakistan suffered a merchandise trade deficit of $13.528 billion for the financial year 2006-7. The gap has considerably widened since 2002-3 when the deficit was only $1.06 billion. Services sector deficit for 2006-2007 stood at $4.125 billion which equals the services export of $4.125 billion for the same year. The combined deficit in services and goods stand at $17.653 billion which is approx 83.5 percent of country's total export of $21.136 (Goods and services). The rise in the trade gap has been attributed to high oil import bill, and rise in the prices of food items, machinery and automobiles. Current account deficit - Current account deficit for 2006-7 reached $7.016 billion up by 41 percent over previous year's $4.490 billion.

SUMMARY (11) Devaluation decreases the prices of our exportable goods and simultaneously increases prices of goods we are importing from abroad as well as increases domestic price level of goods and commodities, thus reducing the purchasing power of the people of the country. It may create inflation in the country. Our long experience has shown us that devaluation is not the proper remedy for economic growth of the country. It has resulted in increasing our debt burden to the extent that nowadays it is not possible to obtain easily any aid from world lending agencies. It may be realized that for whatever reason we devalue our currency it results in manifestation of

Institute Of Business & Technology (BIZTEK)

Page 25

weakness of our economy to the other countries. Further, excessive devaluation of the past has adversely affected our credit rating. Moreover foreign investors are now more conscious or reluctant for making any investment in the country. Only logical path available to us is to try to reduce the cost of production of our exportable goods and increase the productivity of the goods, which will enable us to compete in the world market. Participation of everyone concerned towards the above goal will make a difference, but we should do it now not later.

DEPLETING FOREIGN RESERVES
As of October 11, Pakistan's foreign currency reserves totaled $7.75 billion (Dh28.44 billion), having fallen $570 million in a week. Critically, the central bank's share of this has fallen to $4.34 billion, while commercial banks held $3.41 billion. As a result of deteriorating external balances and dwindling reserves the rupee fell almost 2.8 per cent in a day to a record low of 84.40, having lost 27 per cent since the start of 2008. QUESTION: How can Pakistan help itself stop the slide into economic chaos? ANSWER: Raise interest rates, while easing banks' liquidity, impose capital controls, ban imports of non-essentials, and limit how much foreign currency foreigners can buy using rupees.

DECREASED CREDIT RATING (9)
Standard & Poor's said it has lowered its long-term foreign currency sovereign credit rating for Pakistan to CCC+ from B and its long-term local currency rating to B- from BB-. At the same time, S&P lowered its short-term rating on the sovereign to C from B. The outlook on the long-term rating is negative. The rating on Pakistan's senior unsecured local currency debt has also been lowered to B- from BB-, while the foreign currency debt rating has been lowered to CCC+ from B. The downgrade comes in the wake of continued steep erosion of Pakistan's external liquidity position, the extent and pace of which casts rising doubts about the sovereign's ability to meet approximately $3 billion of external debt servicing commitments in the coming year. "Pakistan's balance of payments is under significant and rising pressure, whereby existing structural trade imbalances are magnified by exogenous price shocks," said Standard & Poor's credit analyst Agost Benard. "At the same time, capital inflows, which had in the past covered much of the current

Institute Of Business & Technology (BIZTEK)

Page 26

account gap, are increasingly deterred by the prolonged political uncertainty and adverse security climate." Net foreign reserves of the central bank have fallen 67 per cent to just $4.7 billion since October 2007, as the country recorded an overall balance of payments deficit of $5.7 billion for fiscal year 2008 ended June. For the first two months of fiscal 2009, the overall balance of payment deficit expanded more than six fold year on year to nearly $2.5 billion, with the current account shortfall reaching 1.6 per cent of GDP against a full-year target of 6 per cent. Standard & Poor's believes that stabilizing Pakistan's external position, and thus avoiding near-term debt service stresses, will require substantial and timely multilateral and bilateral assistance, concurrent with fiscal and monetary policy measures aimed at paring aggregate demand to cut import growth. The negative outlook reflects S&P’s expectation that multilateral and bilateral aid, including deferred oil payment schemes, may not be timely enough, or sufficient in magnitude to stem the loss of external liquidity. It also incorporates the view that the necessary policy measures, some of which are likely to be prerequisites for multilateral assistance, will face obstacles and delays in implementation, given the fractious and unstable domestic political scene, and rising social tension. The rating on Pakistan could be lowered further if the foreign exchange reserve cushion continues to shrink and meaningful economic stabilization measures remain wanting. Conversely, the rating could stabilize and eventually be raised if external assistance and domestic policy programs successfully stabilize Pakistan's balance of payments position and foreign reserves.

Institute Of Business & Technology (BIZTEK)

Page 27

Measures for correcting the Adverse Balance of Payments:
(10)

Pakistan cannot afford to run a persistent deficit in the balance of payments on current account as it does not have unlimited reserves of gold and foreign currencies. It can neither persistently borrow from the rest of the world. There is, after all, a limit of accumulation of debt which may be for the development purpose. The adverse balance of payments can be decreased in three ways: (i) The foreign earnings should be increased by export led growth. (ii) The imports should be curtailed to essential items only. (iii) The expenditure on invisible imports should be minimized. Export Led Growth: Export plays an important role in the growth of the economy. It is regarded a key factor in the economic development. As regards Pakistan, it has rich manpower and real resources. If they are properly exploited and utilized, there can be significant improvement in exports and foreign exchange earnings. The following measures need to be adopted for increasing exports and alleviating the balance of payments problems: (1) Promotion of labor-intensive industries. Pakistan has to give priority to the development of those industries which are labor intensive. The cheap labor compared to many other developing and developed countries of the world can give a comparative advantage in the production and export of commodities. The export earnings, therefore, can increase and help in restoring equilibrium in the persistent adverse balance of payments of the country. (2) Diversification of exports. Pakistan's exports since Independence have been showing heavy concentration on a few primary commodities. If there is a recession in the international' market for cotton and rice or Nature is not kind, the production declines and exports are greatly reduced and have a damaging effect on the balance of payments. We shall, therefore, have to diversify our exports and produce value added goods for gaining competitive strength in the international market. (3) Development of industries having low capital output ratio. Pakistan with low foreign exchange earnings cannot afford to import heavy machinery. If Pakistan like China, Korea, Taiwan; Hong Kong, Singapore, takes up lines of production having a low capital output ratio, it can lead to fast growing export. The exports of carpet and rug industry, cigarettes industry, sports industry, leather industry, etc., have considerably increased the export earnings of Pakistan in the past few years and have decreased strain on the balance of payments.

Institute Of Business & Technology (BIZTEK)

Page 28

(4) Decrease in consumption. In spite of rapid rise in prices, there is a greater increase in national consumption 6f various commodities product at home and imported from abroad. The higher consumption of locally manufactured goods is reducing the exportable surplus and consequently the foreign earnings to the country. People shall have to be motivated to adopt simple living and austerity for bridging the resource gap. (5) Restoration of sick industries. The sick industries in the nationalized public sector should be transferred to their owners. The private sector has the capacity to reactivate the dying industrial units and increase production for use at home. It can thus increase exports to earn the much needed foreign exchange. (6) Reduction in export duties. Reduction in export duties, publicity of locally manufactured goods in the foreign markets and adequate provision of credit to the private sector for development of industries can greatly help in increasing export earnings and relieving the pressure on balance of payments. (7) High quality goods. In order to capture foreign markets, it is necessary that high quality goods at minimum cost should be produced in the country. (8) Pricing of goods. For increasing exports, it is necessary that goods should be produced under optimal conditions and offered at competitive prices in the international market. (9) Packing. For promoting exports, high quality packing is essential. If packing is not attractive and durable, it will not capture foreign markets. (10) Creation of export agencies. For break through in exports; export agencies should also be created in the private sector, following suit of China and other recently industrialized countries. (11) Joint ventures. The exports can also be pushed up by establishing industries with joint ventures of foreign investors. The products of these industries can be sold in the foreign markets and the country can earn sizeable foreign exchange.

Institute Of Business & Technology (BIZTEK)

Page 29

Current Account Balance 4000

3000

2000

1000

0 1974-75 -1000

1979-80

1984-85

1989-90

1994-95

1999-2000

2004-05

-2000

-3000

-4000

-5000
Y ears

The only reason the current account balance has come into the positive is because of the role of remittances after 9/11. The level of remittances rose sharply due to the insecurity of non-resident Pakistanis in keeping their hard-earned money abroad. So, this increased the amount of remittances entering into the country. This is why there is a steep curve in the years after 2001. However, the increase in the level of imports and the huge rise in the trade deficit offset this increase in remittances in the recent years. The increase in imports has largely been due to the imports of machinery and oil for the country.

Institute Of Business & Technology (BIZTEK)

Page 30

Trade Balance
0 1974-75 -500 1979-80 1984-85 1989-90 1994-95 1999-2000 2004-05

Trade Balance(US $ Million)

-1000

-1500

-2000

-2500

-3000

-3500

-4000

Years

The trade balance has remained negative in the past 32 years. By-and-large, it is due the factors already highlighted above such as the narrow export base, export in primary products, concentration in exports, and reliance on foreign products in the technology-oriented products.

Institute Of Business & Technology (BIZTEK)

Page 31

Suggestions to improve the BOP Position: Reaffirming the efficient export-led growth can make a significant contribution to reducing Pakistan’s trade deficit and external financing needs, the measures which government should adopt are: 1. Highest priority to improvements in export unit values and export quality through enhanced fiscal concessions, the development of technology institutions, and trade houses; 2. a more effective and comprehensive system of export compensation; 3. a fundamental change in export quota policy for textiles so as to maximize value addition; 4. a significant casing of access to imported raw materials and modern machinery to facilitate quick modernization and technical upgrading of export industry, as well as improving quality standards; 5. improve access to credit for exporters through the establishment of an Export Credit Wing in the State Bank of Pakistan, greater emphasis of product design and marketing strategies by enhancing financial resources of the Export Market Development Fund; 6. Special steps to accelerate the development and modernization of power-loom sector; simulating export competition through the induction of the private sector in the export of rice and cotton; 7. Removal of all restrictions on the textile sector including permission for the free import of high quality yarn; 8. Forging a closer link between export and import flows through trade diplomacy and special incentives for the export of engineering goods; 9. Establishment of efficient mechanisms for implementing and monitoring exportspecific measures.

Institute Of Business & Technology (BIZTEK)

Page 32

LAW & ORDER SITUATION (13)
Various untoward incidents of bomb explosions at the public places, perpetration of suicide bombings by extremist elements bathed in religion and dogmatism and firing of bullets on the innocent civilians by the miscreants bear out that Volatile law and order situation is gravely affecting social, political, economic and religious fabric of Pakistan. This unwanted state of affairs has given birth to uncertainty and frustration which are acting as blight in our society. No public place is secure, no religious institution is sacrosanct and no spiritual or political congregation is safe. Talented people are leaving the Land of the Pure for good because their fate is in the doldrums due to uncertainty of jobs and insecurity to their life and property. Thus menace of “Brain Drain” is continuously depriving the country of the intellectuals that are the true assets of the country to resolve its intricate problems. Our tourism industry is in the doldrums due to security concerns. Despite scenic beauty of hilly areas, glistening peaks, towering mountains, gushing rivers, archeological sites, and historical monuments ,the PTDC and the Tourism Ministry have badly failed to catch the attention of the foreign tourists because no one will take risk to visit a country where indigenous population is not secure and its rulers address public gatherings behind bullet proof screens. Pakistan has a lot of investment potential which could not be fully tapped because of violent incidents. Therefore, the economy of Pakistan is in the shambles. In January and February, a large number of people living abroad, including foreigners and Pakistanis, visited Pakistan; however, the number has decreased in March. A large number of people from Pakistan went abroad during March. This ever deteriorating law and order situation is not only knocking down the number of people touring Pakistan, but is also affecting other areas like • Local business • Foreign investments • Sports • Entrepreneurship opportunities • Development projects • Civil life The investors fear of sinking their investment due to unending terrorist incidents.

Institute Of Business & Technology (BIZTEK)

Page 33

SITUATION IN NORTH PAKISTAN (13, 14)
Falling law and order situation has drastically hit an influx of foreign tourists into the Frontier province in the peak season causing colossal financial losses not only to the provincial government but also to all those associated with tourism industry. Only a handful of foreign tourists visited the ancient city in May and June. Peshawar, once being the hub of foreigners touring various summer resorts located in Northern Areas, is yearning for old good days which may not return due to the existing law and order situation in the region. City hotels and centuries old bazaars with a history including Qissa Khwani, Chowk Yadgaar, Khyber Bazaar, Bazaar-e-Misgaran, Shah Wali Qatal, Tehsil Gorghathri, Dabgri and various others in the walled city’s old areas, flocked by foreign visitors in the past, are today deprived of their presence. Handicraft, carpet, copper and brassware shops have no foreign customers and tour operators have no business for ages. “Only 14 foreign tourists visited the museum in May and June, two busiest tourist months,” Directorate of Archeology and Museums Deputy Director Qazi Ijaz Ahmed told Daily Times. Out of 14 tourists, eight were Americans, two Belgians, two Chinese, one Japanese and one was Greek. Tourism has dropped 95%. There are over 300 hotels in only Kalam area of Swat and there is no business causing huge financial losses to them. The Frontier province has lost $40 million in the past five years, almost $8million a year. Prolonged political uncertainty and fragile economic situation coupled with deteriorating law and order in the northern part of the country and the US threats of direct attacks in tribal areas have not only shattered the confidence of foreign investors but also forced domestic investors to pull out of the equity markets. Local Investors have lost billions of rupees with a single investor having reported 13 million alone.

Institute Of Business & Technology (BIZTEK)

Page 34

PROPOSED REMEDY
Following remedial measures are called for to check this peril of mayhem. It is bitter open secret that in recruitment of the police (especially in the lower ranks), there are several incidents of using under the table means for getting a contractual job. Institutions which are erected by bricks of corruption and insecurity of job cannot provide any guarantee to dispense justice and security to life and property to the citizens. Therefore, meritocracy and job security is essential. Most of the policemen carry obsolete guns and only five bullets per person while robbers and terrorists carry latest weapons and surplus ammunition. Therefore, the police avoid chasing such dangerous criminals by risking their own life. Thus miscreants can easily take to their heels. Therefore, police should be equipped with latest weapons and scores of bullets. There must be coordination and sharing of information among intelligence agencies, LEAs and the Interior Ministry. Pakistan is harboring Afghan refugees and other foreigners on the basis of religious fraternity. But, no country can afford to provide sanctuary to foreign elements which are known to involve in illegal and mutineer activities and poisoning the country with heroin culture. The government should take bold steps to send these refugees to their native countries. It should provide nationality to peace loving people according to the law of the land. The police with the help of media should launch a Herculean campaign for deweaponization of illegal armaments indiscriminately. There is crying need of reformation of social, political and religious institutions for proper socialization of the nation with the help of media by indoctrinating altruism, fraternity, humanity, religious tolerance and patriotism. Massive poverty stricken and illiterate population deprived of basic amenities of life are frustrated due to rampant corruption, social injustice, economic disparity, and political exploitation that force them to snatch their food which create law and order situation. The government should take a firm stand against the uncalled-for attacks by the US army in Pakistani territory. Without resolving these knotty problems the establishment of peace and harmony will remain distant dreams.

Institute Of Business & Technology (BIZTEK)

Page 35

DOMESTIC ISSUES
The World Economic Forum (WEF) recently came out with a report titled Global Competitiveness 2006-07. It put Pakistan at number 91 out of 125 countries in the global race for competitiveness, which is an eye-opener for the government and its team. Though the national economy’s competitiveness has increased by three points over the previous year, it was still 48 ranks behind India (at no 43), 12 places behind Sri Lanka (at no 79), but ahead of Bangladesh (at 99) and Nepal (at 110) in the region. Nine factors that are critical to driving productivity and competitiveness were used as the yardstick. These are as follows: * Institutional infrastructure: The life cycle of institutions is low in Pakistan as compared to other countries and a lot of effort is needed to overhaul the existing outdated infrastructure in the country, especially in the government sector. Corruption, accountability and good governance are still missing. Structural weaknesses need to be addressed. India has been ranked the most corrupt country in the world but it is still far better than Pakistan in the development of infrastructure. * Macro-economy (86th): Due to the continued upward economic development, macro-economic ranking has enhanced upward. But it is still far less compared to India and even Sri-Lanka. This shows that the country is still far away from the goal of sustainable growth and any setback at the domestic or international level can derail the whole process of economic growth in a short period of time (war against Iran, or high prices of oil can be fatal to national economy. Pakistan’s low levels of per capita income and high incidence of poverty, unemployment, illiteracy, widening gap of trade and current account deficits, decreasing ratios of exports, unsuitable debts retirement strategy, regional and sectoral parity are supposed to be one of the main reasons for this low ranking. It should be a lesson for all the economic managers and advisors who are always engaged to glorify the golden achievements of the government in the economic arena. * Health and primary education (108th): The present government had sanctioned Rs450 million for PSDP in the current budget. The government of Punjab is also trying its best to spread the network of schools throughout the province and yet performance is less then desired.

Institute Of Business & Technology (BIZTEK)

Page 36

* Higher education and training (104th): Almost 3 to 4 per cent of the federal budget is spent on the education sector, which is very low as compared to other countries in the region. Recently, the federal government has slashed the allocations of funds to higher education development in the country, which has badly affected our so-called high ambitions towards qualitative and quantitative high education targets. * Market efficiency (54th): No doubt the market efficiency has improved but a lot of things need to be improved further. Free-market mechanism, positive role of regulatory bodies, conducive macro-economic policies in the short period of time of the governments, meaningful incentives, trade liberalization, financial deregulation, corporate governance, and above all political commitment to make country a hub of all the industrial activities has substantially increased. The bulk inflows of FDI, FPI and joint ventures in the country verify it. * Technological readiness (89th): Most government departments and private sectors are reluctant to adopt most advanced technologies in the country. The WB, IMF and ADB have disbursed many loans for rapid technological adoption and automation. Technology makes things easier and swift. But the lack of professionalism along with the shortage of funds is supposed to be the key elements for the denial of technological readiness. *Poor work ethics, cultural and historical background also negatively affect factors like innovation, technological readiness and business sophistication. The firm use of technology and rates of technology transfer are low, although penetration rates of latest technologies are still quite low by international standards. Mobile telephones, Internet, personal computers are increasing day by day in the country. * Business sophistication (60th): Doing business is easy in Pakistan as compared to other countries of the region. Procedures are made simple and easy. Official interference is low. The government is trying its level best to create business-friendly and investment- friendly environment in the country. But deteriorating law and order situation throughout the country along with the continued persistence of power shortage are supposed to be the main concerns for the government in the days to come. 1) The electricity crisis With constant power outages, a lot of local and foreign initiated business have suffered humungous financial losses. Their production hours have been hit, production outputs have decreased and ability to meet orders has weakened. In order to be able to give the same level output, more production hours were required, which in turn raised the cost of capital and made things more expensive. This crisis is also a major red alert stopping potential ‘well needed’ foreign direct investments.

Institute Of Business & Technology (BIZTEK)

Page 37

2) Deteriorating law and order situation Misery, poverty and helplessness has been on the rise in the Pakistani nation. Cases of injustice, corruption, nepotism and constant exploitation of the citizens has raised the frustration of the gentry to a boiling point which comes out in the form of frequent robberies, angry mobs, protests and rallies. This, coupled with the frequent bomb explosions has driven away local and foreign investors, thus taking out a share of Dollar which Pakistan once held. * Innovation (66th): Pakistan’s economy is passing through 2nd generation reforms. The following factors are contributing towards sustainability of the national economy: effective, innovative, financial, debt management and alternative marketing techniques plus purposeful currency exchange policies. To get the accurate feed back and impartial results, over 11,000 business leaders across the world were polled in a record number of economies (125). The survey questionnaire was designed to capture a broad range of factors affecting an economy’s business climate that are critical determinants of sustained economic growth. The most competitive economies in the world are those where concerted efforts are made to frame comprehensive policies, which recognize the importance of a broad array of factors, their interconnection, and the need to address the underlying weaknesses in a proactive way..

SUMMARY
The low ranking in almost all the nine crucial areas shows why the country continues to be uncompetitive and unresponsive to the challenges of a dynamic world economy. The declining trends in the textile exports show increasing uncompetitive nature in the international markets. Basic diversification of exports and the fragility of the economy are largely missing. Our country does not have the tools to acquire comparative advantage in other commodities in a competitive world environment because of lack of innovation, technological readiness or other factors identified by the WEF. However, the first step to change is recognizing grey areas and now that this has been done, let us hope that Pakistan shall be competitive in world markets in the days to come.

Institute Of Business & Technology (BIZTEK)

Page 38

GLOBAL ISSUES
OVERVIEW
The rupee was quoted at a record low in recent days because of the global financial crisis and concern about tension between Pakistan and the United States over US attacks on militants in Pakistan. One of the main reasons is the global financial crisis where some foreign banks have been asked to cut down their exposure in Pakistan. America saw two of its legendary firms bite the dust over the weekend; Lehman Brothers Holding Inc filed for bankruptcy and Merrill Lynch & Co CEO John Thain struck a deal to sell out to Bank of America. The US government then bailed out insurer AIG for $85 billion. US shares prices plummeted to three-year lows and forced increasingly desperate major banks to scramble for merger partners. Dealers said the market was nervous about the situation on the PakistanAfghanistan border after a US missile strike killed five militants hours after the top US military officer said the United States was committed to respect Pakistan’s sovereignty. The market was short of dollars also because of the State Bank’s buy/swap operations. The State Bank of Pakistan (SBP) has been buying dollars in the ready market with a simultaneous commitment to sell dollars back at future dates, they said.

SUBPRIME
Memories are short in the age of financial globalization. While a decade ago contagion effects from spiraling Asian markets imperiled global economies, today a lot of the market volatility stems from the subprime mortgage contagion from the US. This role-reversal is illuminating – paradox plays a shrewd part in economics. The subprime virus has truly gone global. What started as a localized outbreak in the already lethargic US market has spread to supposedly safer markets and asset tiers. A gross mispricing of global risk, perpetuated by insatiable selling of collatateralised debt obligations (CDOs) and financing leveraged buyouts, led to underappreciated risk hazards. A flight from risk followed, seeing global stocks slump and Treasury yields compressing by 51 to 61basis points across the curve. Financial institutions from around the world have recognized subprime-related losses and write-downs exceeding U.S. $501 billion as of August 2008. Profits at the 8,533 U.S. banks insured by the FDIC declined from $35.2 billion to $646 million (89%) during the fourth quarter of 2007 versus the prior year, due to soaring loan defaults and provisions for loan losses. It was the worst bank and thrift quarterly performance since 1990. For all of 2007, these banks earned approximately $100 billion, down 31% from a record profit of $145 billion in 2006. Profits declined from $35.6 billion to $19.3 billion during the first quarter of 2008 versus the prior year, a decline of 46%.

Institute Of Business & Technology (BIZTEK)

Page 39

The financial sector began to feel the consequences of this crisis in February 2007 with the $10.5 billion writedown of HSBC, which was the first major CDO or MBO related loss to be reported. During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold. Top management has not escaped unscathed, as the CEOs of Merrill Lynch and Citigroup were forced to resign within a week of each other. Various institutions followed up with merger deals. Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as of 17 July 2008. The phenomenon of subprime caused major financial giants like Lehman Brothers to file for bankruptcy. Since 1 January, 2008, owners of stocks in U.S. corporations have suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries have averaged about 40%. It shook the strongest of economies forcing countries to intervene to save their economies. The US came up pumped $ 700 billion in its market.

US, WAR ON TERROR, FOOD CRISIS AND MORE
We have seen that our economic crisis is driven primarily by the global economic crisis that in turn is driven by the upward spiraling price of oil and the downward spiraling value of the dollar. The third crisis, which for us is at least as great, is the global food crisis. This last should suit America because it will make food dependent countries even more dependent while it will still retain enough strength to feed the vast majority of its own people. For us the food crisis should be much less acute than the oil and dollar crises because we are principally a food-growing country with the capacity to easily feed our own people, while the other two crises are totally out of our control. We are their helpless hostages. When the world recession of the Nineties started, it used to be said that, “He who has cash is king.” Today, because cash is increasingly losing value (purchasing power) at an alarming rate, the wisdom is: “He who has land is king.” Or should be if he has any sense. This is true both for individuals and states. By that measure, we are a very lucky and wealthy country. How important the capacity to grow one’s own food is was underlined by Bruno Kriesky, the late great Chancellor of Austria “A country that cannot even feed its own people has no right to call itself a superpower,” he said about the Soviet Union, now late, unlamented. A few years later the old man was proved right when the USSR with the world’s mightiest military machine laced with 32,000 nuclear warheads collapsed because it couldn’t feed its own people. Understand the word “feed” in the broader sense and it was worse. Modify Chancellor Kriesky’s statement today to, “A country that cannot even feed its own people has no right to call itself sovereign or independent.” We can. Therein lies not only our basic strength but the wherewithal of our survival, provided?" and it’s a very big provided?" we utilize this asset sensibly and in the national interest and distribute both its product and its gains equitably. We are not. It was said on a television talk show that in the Punjab alone (forget the rest of Pakistan) 7 million male calves and 3 million older cattle die every year due to neglect, while the annual global trade in beef is $80 billion. Our share in it is zilch. Neither are we optimizing our crops yields with new know-how. Nor, apparently, are we doing anything about the wheat fungus that has reached Yemen

Institute Of Business & Technology (BIZTEK)

Page 40

and could reduce our wheat output to zero if it reaches Pakistan. To simply accept the contention that the global food crisis is caused only by too much land being allocated to producing crops that produce the petroleum substitute biofuel ethanol is to be simplistic in the extreme. High food prices are also driven by high petroleum prices. Where do you think the farmer gets electricity from that runs his pump to water his fields? What do you think runs his tractors and harvesters, the trucks on which his produce is transported from farm to market? High oil prices mean higher electricity costs, or even inadequate electricity as we now have. What happens then? We end up with food too expensive to buy or even scarce, probably both, as we also now have. It all goes back to oil and its price, not to mention distribution and greed-driven hoarding. We have to make a doable plan immediately to use our energy resources in the most efficient and optimum manner to overcome energy shortfalls both in terms of quantity and price. Europe alone is sitting on proverbial “lakes of wine and mountains of butter.” Why not put all this food into the markets of the poor? It all has to do with Control without Responsibility, America’s latest doctrine. America knows what it is doing, not just regarding food but also oil. They had the decline of the dollar under control too, until China stepped in. The tragedy is that we do not know what they are doing and we do not know what we are doing.

DOLLAR AND CHINA
The initial fall of the dollar was deliberately targeted to reduce the trade imbalance between America and China. America had the internal strength to withstand the fallout?" or so it assumed, forgetting how indebted it is and to whom and that it has neither the output levels nor the pricing of oil totally under its control. The US had been asking China for years to revalue the Yuan, which it thinks is artificially undervalued. When China did not the US decided to devalue the dollar instead, but it was a managed devaluation, nothing to go hysterical about. Then two things happened to make the US lose some control, enough to make a difference: China decided to sell some of the US debt that it holds and Iran set-up its Eurodenominated Iranian Oil Bourse (IOB) on May 5. This knocked the wind out of the dollar. America is the most indebted country in the world. On June 3, 2008 at 9:04:07 GMT its national debt stood at $9,477,171,636,632.85. That is just under $9.5 trillion! Which means that at the same time and date each US citizen was indebted to the tune of $30,890.69. Considering that the poverty line in America is $18,500 per annum, an American owes nearly twice as much as the income of the 10 percent Americans or over 30 million human beings that live in abject poverty in the richest country in history. These are the joys of market forces capitalism for you. The US national debt has been growing at the rate of $1.55 billion per day since September 28, 2007. That could pay off our entire foreign debt in about 25 days! Their annual military assistance to us is equal to one day of its growing indebtedness. Gandhi was right: “There’s enough for everyone’s need but not enough for everyone’s greed.” The US debt would still have been manageable if it had been indebted to itself. America forgot how indebted it is to China before needling it. China is the

Institute Of Business & Technology (BIZTEK)

Page 41

world’s largest investor in US Treasury bills, bonds and securities ($400 billion in US T-Bills alone) and holds more US debt than any other country (a staggering 40 percent) except Japan. In addition, it holds a huge reserve of US dollars because its currency, like ours, is tied to the dollar. When a country has you by where it hurts most, you do not needle it lightly. Around mid-April China fired a shot across America’s bow when Xiu Jian, Vice Director of the Bank of China, the country’s central bank, said that it is considering shifting a major portion of its national currency reserve of $1.4 trillion into “more stable” currencies. The dollar took a nosedive and fell to record lows " the lowest ever against the Euro, the lowest in a generation against the Sterling and the lowest in 57 years against the Canadian dollar. China fired another shot across America’s bow by divesting 50 percent of its $400 billion US T-Bills to establish a $200 billion fund to help diversify its holdings in equities and stocks around the world. French President Sarkozy said that, “The dollar cannot remain ‘someone else’s problem’. If we are not careful, monetary disarray could morph into economic war. We would all be its victims.” (David Gutierrez in Global Research, April 17, 2008). China wisely stopped because the USA is also its largest trading partner (that is where America has clout over it and most other countries) and killing the goose that lays golden eggs would have meant China killing itself. Europe, however, couldn’t avoid the fallout as high Euro and Sterling values started eroding its exports alarmingly while it becomes too expensive to breathe in. A lot of EU exports are shifting from Europe to China. However, don’t forget that if America was not the cleverest country in the world because of its knowledge bank, the largest there is, it would not be in the position of primacy that it is in. To imagine that China can destroy the dollar simply by selling its debt and holdings is to be naive. America is not going to take this lying down. It could demonetize. It could force the price of oil so high that China’s economy goes into reverse gear. Or it could simply revert to the gold standard that it left in 1971 and which is the source of much of the world currency crisis because it exposed the illusion of paper money backed by itself as the mirage that it really is "not worth the paper it is printed on. If all currencies are worth so many dollars, what is the dollar worth? Hot air? It became oil, but that is de facto, therefore no total control. I wonder whether the price of gold has shot up only because people find it a safer investment bet in today’s uncertainty or because the US is also quietly busy buying up gold just in case it has to go back to the gold standard and leave the rest of the world in the lurch.

Institute Of Business & Technology (BIZTEK)

Page 42

Conclusion
A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth. Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic weakness, the creditworthiness of the nation may be jeopardized. Thus, devaluation may dampen investor confidence in the country's economy and hurt the country's ability to secure foreign investment. Another possible consequence is a round of successive devaluations. For instance, trading partners may become concerned that devaluation might negatively affect their own export industries. Neighboring countries might devalue their own currencies to offset the effects of their trading partner's devaluation. Such "beggar thy neighbor" policies tend to exacerbate economic difficulties by creating instability in broader financial markets. Since the 1930s, various international organizations such as the International Monetary Fund (IMF) have been established to help nations coordinate their trade and foreign exchange policies and thereby avoid successive rounds of devaluation and retaliation. The 1976 revision of Article IV of the IMF charter encourages policymakers to avoid "manipulating exchange rates...to gain an unfair competitive advantage over other members." With this revision, the IMF also set forth each member nation's right to freely choose an exchange rate system

Institute Of Business & Technology (BIZTEK)

Page 43

REFERENCES 1) http://www.wikipedia.com 2) http://www.newyorkfed.org/aboutthefed/fedpoint/fed38.html 3)http://www.economicshelp.org/macroeconomics/exchangerate/effectsdevaluation.html 4)http://www.a1newspapers.com/blog/2008/10/11/is-pakistani-rupee-artificiallystabilized-against-us-dollar/ 5) http://pakistaniat.com/2008/05/25/pakistani-rupees-record-slide-versus-us-dollar/ 6)Money Central, msn 7) http://www.crnindia.com/currency/pak_rupee.html 8)http://economictimes.indiatimes.com/Markets/Global_Markets/Pakistani_rupee_slu mps_to_all-time_record_low_/articleshow/3574624.cms 9) http://www.cpifinancial.net/v2/news.aspx?v=1&aid=1167&sec=The%20Economy 10)http://www.scribd.com/doc/2472096/Measures-for-Correcting-the-AdverseBalance-of-Payments?autodown=doc 11) http://www.pakistaneconomist.com/issue2001/issue10/f&m2.htm 12) http://en.wikipedia.org/wiki/Economy_of_Pakistan 13)http://www.shvoong.com/newspapers/united-states-of-america/1833296-volatilelaw-order-situation-pakistan/ 14) http://www.apakistannews.com/rupee-erosion-85556 15)http://server.kbriislamabad.go.id/index.php?option=com_content&task=view&id=5066&Itemid=43 16) http://intl.econ.cuhk.edu.hk/exchange_rate_regime/index.php?cid=22

Institute Of Business & Technology (BIZTEK)

Page 44

Institute Of Business & Technology (BIZTEK)

Page 45

Sign up to vote on this title
UsefulNot useful