Capitalism, an economic system whereby land, labor, production, pricing and distribution are all determined by the market, has a history of moving from extended periods of rapid growth to relatively shorter periods of contraction. The ongoing Global Financial Crisis 2008-09 actually has its roots in the closing years of the 20th century when U.S. housing prices, after an uninterrupted, multi-year escalation, began declining. By mid-2008, there was an almost striking increase in mortgage delinquencies. This increase in delinquencies was followed by an alarming loss in value of securities backed with housing mortgages. And, this alarming loss in value meant an equally alarming decline in the capital of America s largest banks and trillion-dollar government-backed mortgage lenders (like Freddie Mac and Fannie Mae; the government-backed mortgage lenders hold some $5 trillion in mortgage-backed securities). Outside of the U.S., the Bank of China and France s BNP Paribas were the first international institutions to declare substantial losses from subprime-related securities. Just underneath the U.S. subprime debacle was the European subprime catastrophe. Ireland, Portugal, Spain and Italy were the worst hit. The U.S. Federal Reserve, the European Central Bank, the Bank of Japan, the Reserve Bank of Australia and the Bank of Canada all began injecting huge chunks of liquidity into the banking system. France, Germany and the United Kingdom announced more than ($222 billion) of new bank liquidity and 163 billion

700 billion (nearly $1 trillion) in interbank loan

guarantees. Towards the end of 2007, it had become quite clear that the subprime mortgage problems were truly global in nature. (Scribd, 2009) The global financial crisis is hitting South Asia at a time when it is already reeling from the adverse effects of a severe terms-of-trade shock. Countries have responded by partially adjusting domestic fuel prices, cutting development spending and tightening monetary policy. The adverse effects of these terms of trade losses have been substantial, reflected in a slowdown of growth, worsening of macroeconomic balances and huge inflationary pressures. The global financial crisis will likely worsen these trends, particularly on the growth and balance of payments front. Slowdown in global economy will adversely affect South Asian exports

2 and could hurt income from remittances. Lower foreign capital flows and harder terms will reduce domestic investment. Both will lower growth prospects. (Scribd, 2009) Pakistan is another country in South Asia that has been severely affected by the financial crisis. In fact, Pakistan seems to be one of the hardest hit. Its economy, already on the brink of collapse, is destined for bankruptcy because fleeing foreign investors have caused a significant depreciation in its currency, the rupee. Pakistan is also facing a serious liquidity crunch, with the only solution being international support. Pakistan's request for Chinese support, however, has been denied because of Pakistan's alleged involvement in terrorist activities in China's Muslimdominated areas. Saudi Arabia has refused to give Pakistan a financial concession on the oil trade, as well. The only option for Pakistan is to approach the International Monetary Fund, which will set highly stringent conditions for the nation. (Sidgel, 2009)

The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. Many financial crises are associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Many economists have offered theories about how financial crises develop and how they could be prevented. There is little consensus, however, and financial crises are still a regular occurrence around the world. (Wikipedia, 2009)

The financial crisis of 2007 2009 has been called the most serious financial crisis since the Great Depression by leading economists, with its global effects characterized by the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity. Many causes have been proposed, with varying weight assigned by experts. Both market-based and regulatory solutions have been implemented or are under consideration, while significant risks remain for the world economy. (Wikipedia, 2009)


It is not yet clear whether we stand at the start of a long fiscal crisis or one that will pass relatively quickly, like most other post-World War II recessions. The full extent will only become obvious in the years to come. But if we want to avoid future deep financial meltdowns of this or even greater magnitude, we must address the root causes which are summarized below: (Scribd, 2009) y Credit boom and housing bubble: spread on credit instruments and the ratio of housing pricing in relation to its rental income. o Fundamental mispricing in the capital markets risk premiums were too low and long-

term volatility reflected a false belief that future short-term volatility would stay at its current low. This is turn implied low credit spreads and inflated prices of risky assets. One reason was the tremendous growth of capitalistic societies in China, India and eastern bloc of Europe. There were fast-growing, investment and savings driven nations. Hence, capital from the second set of countries poured into assets of the first set, leading to excess liquidity, low volatility and low spreads. As a result, massive shock to one of the asset market housing led to a wave of defaults in the mortgage sector. y Mistakes made by the Fed and other central banks keeping the federal funds rate too low for

too long created both the credit bubble and housing bubble. In other words, with an artificially low fed funds target, banks gorged themselves on cheap funding and made cheap loans available. o There has been great disparity in the quality and quantity of loans in the recent years. In terms of quantity, there was an increase in low-rated issuance of shares rated B- or lower

from 2004 to 2007. Moreover loans that were issued were mainly given to finance leveraged buyouts. Over the same period average debt leverage ratios grew rapidly to levels never seen previously. o In terms of quality, there was also a general increase in non documentation and high loan-to-value subprime mortgages. y Plus the failure to control poor underwriting standards in the mortgage markets payment, no verification of income, assets, and jobs (called NINJA no down

no income, jobs, or assets),

interest only mortgages, negative amortization, and teaser rates were widespread among

4 subprime, near-prime and even prime mortgages. The Fed and other regulators generally supported these financial innovations. o With defaults in interest payments and simultaneously in the ABSs, prices drop drastically, leading to a huge loss of wealth causing severity of the crisis. (Scribd, 2009)

The US is going through the greatest financial crisis since the 1930s, as reported by Fianncial Times. (Sameer Khatiwada) Towards the end of 2007, it had become quite clear that the subprime mortgage problems were truly global in nature. Of the $10 trillion around 50 percent belonged to Freddie Mac and Fannie Mae. By September 2008, the U.S. Department of Treasury was forced to place both Freddie and Fannie into federal conservatorship. On 15 September 2008, Lehman Brothers, one of America s largest financial services entity, filed for bankruptcy. On September 16, American International Group (AIG), one of America s largest insurer, saw its market value dwindle by 95 percent (AIG s share fell to $1.25 from a 52-week high of $70). (Pakistan and the Global Financial Crisis, 2009) Notwithstanding, strenuous efforts by the US administration, including buying up of toxic assets and recapitalization of financial institutions and stimulus packages the world s largest, US, is projected to contract by 2.9% till 2009 further down from the positive growth of 1.1 % in the previous year. (State Bank of Pakistan, 2009) This has resulted in severe loss to not only financial institutions but also the business and economic sector. Companies, including multinational that invested in these Asset Backed Securities incurred huge losses as these investments were made millions of Dollars. This resulted in a downward trend in growth. Companies, in order to reduce costs started downsizing, cutting production and because no one was there to buy (or didn t have the capability to), these losses tripled.

Countries around the world had invested in these defaulted securities, unaware of the fact that returns from them would eventually end up in them paying instead. By the end of 2007 everyone around the world was aware of the fact that a crisis is budding. The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank

subprime debacle was the European subprime catastrophe.2% in 2007. declines in various stock indexes. As for Africa. such as shipping rates. Leading indicators of global economic activity. further accelerated the liquidity crisis and caused a decrease in international trade. as compared to 7. IMF World Economic Outlook . the Bank of Japan. as assets were sold to pay back obligations that could not be refinanced in frozen credit markets.8% in 2009. 2009) The world economy is likely to contract by 1. Federal Reserve. rescue packages are drawn up involving more than a trillion US dollars. Ireland. Despite stimulus packages and government action of unprecedented scale and nature. but many suggest the worst is not yet over. the European Central Bank. advanced economies are expected to contract by 3. the de-leveraging of financial institutions.S. and interest rates have been cut around the world in what looks like a coordinated response. Moreover.S. (Pakistan and the Global Financial Crisis. Investment banks have collapsed. are declining at alarming rates. Spain and Italy were the worst hit. EUROPE The global financial crisis is already causing a considerable slowdown in most developed countries. and large reductions in the market value of equities and commodities. France. Stock markets are down more than 40% from their recent highs. Governments around the world are trying to contain the crisis. the Bank of China and France s BNP Paribas were the first international institutions to declare substantial losses from subprime-related securities.3% in 2008. Germany and the United Kingdom announced more than 163 billion ($222 billion) of new bank liquidity and 700 billion (nearly $1 trillion) in interbank loan guarantees. Portugal.5 failures. Growth in world trade volume fell to 3.S. Outside of the U. and is expected to contract substantially by 11% till the end of 2009. Just underneath the U. The U. (State Bank of Pakistan. the Reserve Bank of Australia and the Bank of Canada all began injecting huge chunks of liquidity into the banking system. 2009) AFRICA Growth performances vary considerable among developed and developing countries.3 % in 2009 with almost all developed countries are to post negative growth. 2009) Countries relying on trade as a primary mean of boosting economic growth saw trade volumes disappear as contractions starts in trading partners. (State Bank of Pakistan. (Sameer Khatiwada) The $10 trillion mortgage market went into a state of severe turmoil..

5 percentage points to 9. it was in deficit by 4% in 2007. The correlation between African GDP and World GDP since 1980 is 0. in a bad position to face yet another crisis. with the recent interest rate cut a sure sign the authorities are concerned more about the financial crisis than recent inflationary pressures. Many developing and especially small and African countries are. FDI. on how accommodative monetary policy can be. Trillion dollar rescue packages are launched around the world. However. and solid export performances has helped their strong current account position.5. it was only 0.9% real GDP growth). (Sameer Khatiwada) However. There is less scope for expansionary fiscal policy in fact these rescue measures have increased public debt.1 percentage points down to 6.3% respectively). there are worrying signs. but also India (-1. a decline in world growth of one percentage point would lead to a 0. The combination of high food prices and high oil prices has meant that.3% and 6. aid) would be quite high. Malawi. but while the markets may eventually respond. Its magnitude will depend. while the current account of oil and food importers was in balance by 2003. but between 2000 and 2007. the Asian Development Bank has revised its forecast for Asian countries downwards by 1-2 percentage points. and China and Africa (both down by -0. The IMF growth forecasts have been revised significantly. 2009) GCC In the case of Gulf Cooperation Countries and impact of global financial crisis on the economies of these countries was severe.8 percentage points down from the last forecast for 2009). the engine of recent world growth. African growth has temporarily decoupled from OECD GDP. African countries such as Kenya. (Sameer Khatiwada) The magnitude of the crisis will depend on the response of the USA and EU. In the space of a couple of months. The slump in the global demand and its impact on oil . Tanzania are projected to have faced terms of trade shocks of greater than 5% of GDP (World Bank paper for the October 2008 Commonwealth Finance Ministers meeting). (Pakistan and the Global Financial Crisis. there are also signs of a slowdown in Asia. ASIA East Asia is diverging as much as it did during the last significant global economic downturn in the early 1990s. Inflation has also doubled. the UK is already in a recession. The terms of trade shock tend to be highest in small importing countries such as Fiji.6 report in April 2008. As there have been significant structural changes (and a move into services that were able to withstand competition much better) as well as the rise of China. Several Asian countries have build up healthy government reserves. Swaziland. However. in part.2. therefore. so the effects of global turmoil on Africa (via trade. Dominica.5 percentage point drop in Africa s GDP. especially for the UK (1.

and slowdown in private and public investment owing to higher interest rates as well as lower export demand. The reduction in global petroleum and food prices observed over the past few months provides a silver lining for South Asia in an otherwise difficult external environment. Developed countries have been worst hit but so have developing countries like Pakistan. These risks can transmit from both the financial sector in terms of volume and price of foreign capital flows as well as from the real sector based on adverse effects of a global slowdown on South Asian exports. which is now having impact on the development projects. (Dawn News. UK. 2009) The new growth power houses in china and India are experiencing worst kind of slowdown in economic growth mainly because of the sub-prime meltdown in the US and the ensuing financial and credit crunch around the world. possible downward pressure on remittances. Countries have responded by partially adjusting domestic fuel prices. However. (State Bank of Pakistan. 2008) . The South Asian economies are already limping from the adverse effects of the huge terms of trade shock of the past 6 years. (Zubair. 2009) The global financial crisis is hitting emerging economies at a time when it is already reeling from the adverse effects of a severe terms-of-trade shock. very soon it became clear that developing countries including Pakistan would be affected by the global financial crisis. Most developing countries were not closely linked to the global financial system based in the US. Asia all going down with decline in economic growth. cutting development spending and tightening monetary policy. reflected in a slowdown of growth. 2009) THE CRISIS ENTERING EMERGING ECONOMIES Initially the view was that the financial crisis that began in the US and then spread to Europe would not seriously affect the economies of the developing countries. worsening of macroeconomic balances and huge inflationary pressures. The adverse effects of these terms of trade losses have been substantial. 2009) Financial system as the backbone of economy and that was why the financial crunch brought the economy down affecting US. (World Bank. (The News.7 prices has reduced the surplus petrodollar. Yet this silver lining is now heavily clouded by the emerging global financial crisis that poses tremendous downside risks to South Asia. Japan. India.

Slowdown in global economy will adversely affect South Asian exports and could hurt income from remittances. is fortunate to have a broadly resilient financial sector due to a combination of past financial sector reforms and capital controls that insulate these economies to a great extent from the risk of a financial crisis transmitted from abroad. 2008) South Asia constituting a belt of emerging economies. Both will lower growth prospects. The policy option of full pass-through of fuel and fertilizer prices to consumers is not politically viable. (Dawn News.8 Exports from developing countries are projected to contract by 6. 2009) The trickle-down effect of this crisis has gone from the developed to the less developed parts of the world. (World Bank. individual country risks vary substantially as the macroeconomic performances. 2008) The financial crisis that has spanned the globe has had an especially strong impact in countries beset by political uncertainty. The growing fiscal deficits due to food and fuel subsidies and rising inflation suggest that South Asian countries have basically run out of fiscal space and do not have the option of riding out further shocks with expansionary fiscal and monetary policies. Pakistan is one of the most prominent examples of a nation where economic pressures are feeding unrest and threatening a wobbly government. (Thomas. 2008) According to analysts. (World Bank. 2009) The global financial crisis will likely worsen these trends. Growth in these countries is projected to slowdown further to 1. Analysts say weak governments saddled with poorly performing economies are more vulnerable to social unrest and armed insurgency.3% in 2007. Lower foreign capital flows and harder terms will reduce domestic investment. (State Bank of Pakistan. although further reduction in gap between domestic and international prices and better targeting of open-ended subsidies are possible options. the combined effects of a global food.4% during the same period and developing economies started experiencing substantial slowdown in growth in 2008. especially in Pakistan which faces the largest macroeconomic imbalances. Pakistan is no exception. financial sector health and exposure to foreign capital markets differ considerably by countries. in the near term growth will need to fall to absorb the shock from the financial crisis. However. fuel and financial .6% in 2009.1% as compared to robust growth of 8. particularly on the growth and balance of payments front. So. with real GDP growing at 6.

with expected revenues of around $20 billion. The impact of the meltdown might be compensated to some extent through boosting local demand. there is substantial scope for domestic resource mobilization through the tax system that will play a key role in regaining the growth momentum. The three components have different geographical origins and their effect on different segments of the globe and their inhabitants is highly uneven. deregulation and privatization was imposed through the Washington Consensus in the early 1990s in the name of achieving higher growth and reducing global poverty. and a retreat in equity prices as a result of the global crunch. capital flows. and in an ad hoc. But vigilance by the policy-makers around the developing countries is needed to lessen the severity of downside risks posed to current crisis. Thailand. 2009) In emerging economies. Pakistan has been running an unsustainable budgetary as well as trade deficits.9 crisis took quite a toll on the economy as the current account balance and fiscal deficits increased. But the transmission of these crises in the global economy has become much easier and faster since the regime of liberalization of trade. Emerging economies have already seen the spreads on sovereign and corporate debt widening. however. are taking a bigger hit. (State Bank of Pakistan. the slowdown manifested itself through various channels like volatility in the financial markets led to a flight of capital. rather than a systematic manner. with three essential components: food. inflation surged and growth slowed. Korea. 2008) Pakistan s financial crisis predates the Global Financial Crisis. routinely spends some $26 billion a year thus incurring a budget deficit of over 7 percent of GDP. rather than as a whole. All South Asian countries can benefit from it. fuel and finance. a trade . 2008) THE FINANCIAL CRISIS AND PAKISTAN The world is thus engulfed in a new hydra-headed crisis. (Naseem. East Asian tigers Malaysia. The Government of Pakistan. But its economic managers have always tried to deal with such crises individually. Philippines. On the trade front. The effects of adverse developments at global level have been felt unevenly and countries with weaker macroeconomic fundamental. (Garewal. accumulated exports hardly ever cross the $20 billion a year mark but imports end up exceeding $35 billion. 2009) Over the medium term. and Singapore all are prospective candidates for posting negative growth. For the past several years. (Dawn News. Pakistan is affected by all the three components of the mega-crisis in varying degrees.

2008) Pakistan is going through a critical phase at this juncture. it has suffered economic losses worth US$34 billion so far because of the war. Pakistan s balance of payment (BOP) crisis. This happened because of the unrelenting increase in the prices of oil and several agricultural commodities imported by the country. meant a frightful depletion of foreign exchange reserves down to a less than 3-months import-cover. (Garewal. that it is much easier to convince the people that the Taliban have the solution rather than the government. The country was already facing economic burdens because of its participation in the war on terror. Both food and energy price indices continued to increase through 2007-08. Pakistan s external account situation is the result in part of the large increase in the import bill. 2009) High fiscal and current account deficits. (Dawn News. electricity shortages are rampant. Remittances sent to the country by the overseas Pakistanis have declined over the years in terms of value. According to some observers. with the oil price increase outpacing the increase in the price rises of internationally traded agricultural products. (Scribd. as a consequence of $147 a barrel oil and a spike in commodity price. only Seychelles has a lower rating and it has already defaulted on its debt . shot up to over 24 percent and Pakistan stood caught in a vicious cycle of stagflation--economic stagnation plus high inflation. a weak currency and a declining economy have put Pakistan in a very difficult situation. 2009) Pakistan now has the lowest credit rating in the developing world. rapid inflation. but the Taliban know only that when the government is unable to deliver services. managing director with Standard & Poor. Pakistan is one of the most prominent examples of a nation where economic pressures are feeding unrest. Taliban can take advantage of the bad economic conditions of the country. According to the government of Pakistan.10 deficit in excess of $15 billion a year and a current account deficit of over $1 billion a month. Shuja Nawaz. The continued global economic crisis has hit Pakistan hard. low reserves. According to John Chambers. in the meanwhile. The price of oil has declined by 50 percent in a couple of . and when there is unhappiness among the general population because food prices have gone up tremendously. director of the South Asia Center at the Atlantic Council argues that Well. None of these developments are related to the financial problems faced by the industrial countries. While the aid that it received is far below. In fact. I don t know if they re paying much attention to the economic news.. Inflation. there will be positive short-term impact on Pakistan of the current economic turmoil in the developed world. gasoline is not available. In 2007-08. The financial crisis has suddenly reversed these trends.

2009) Pakistan s recent period of economic growth was based on a combination of export expansion and inward foreign direct investment (FDI). a rise in fuel and food prices.8% in fiscal year 2007/2008 and is expected to decline to 2.17 Pakistan s consumer price index (CPI).5% in fiscal year 2008/2009.11 months while the prices of traded food crops have registered significant drops. Real GDP growth. In the autumn of 2008. led to a rapid rise in inflation. however. In 2007 and 2008. After seven years of generally strong economic growth. and a devaluation of the Pakistani rupee. combined with political instability. 2009) The country s ability to borrow externally is already heavily constrained and bond spreads are very high. declined to 5. driven by a rapidly deteriorating current account balance. the U. (Dawn News. jumped to over 25% during the summer of 2008. was the dramatic decline in Pakistan s foreign exchange reserves. Although global fuel and food prices are on the decline. This should provide Pakistan with some relief and stop the rapid hemorrhaging in its foreign exchange reserves.S. financial crisis has precipitated a possibly extended global recession. Pakistan was in danger of defaulting on its sovereign debt. 2008) Just two years ago. For Pakistan. (Peiris. (Peiris. (Michael F. inward FDI flows and overseas remittances. a spike in the trade and current account deficits. primarily due to a sharp increase in global food and energy prices. Martin.4 billion in October 2008. which had been averaging above 7% per year since fiscal year 2000/2001. economic commentators were describing Pakistan as a success story under former military strongman President Pervez Musharraf and speculated that it would be the next Asian Tiger . More alarming. Pakistan s economy ran into problems in 2008. 2009) With Pakistan s current security situation in the Northern Region and even in the more developed parts of the country. The global financial crisis means that non-official foreign capital flows will be even more expensive than now. Official Pakistan estimates for inward foreign direct investment in 2009 reportedly show a decline of over 32% when compared to last year. which had fluctuated around 7%-9% for several years. which plummeted from over $14 billion in June 2007 to $3. Pakistan was able to finance its modest trade and capital account deficits in part due to the inward FDI and in part due to remittances from overseas Pakistanis. mounting economic hardships and frustration over poor . a global recession will likely reduce demand for its exports.

The impact of any financial implosion would certainly compound the country s political crisis which is already being intensified by US demands for the Pakistani army to step up its war on Islamist militias along the border with Afghanistan. A top secret National Intelligence Estimate (NIE) drafted by US intelligence agencies and leaked to the media last week. director of the South Asia Center at the Atlantic Council. a sinking currency and a massive flight of foreign capital accelerated by an escalating insurgency. UK. Analysts believe that countries with large macro-economic balances. poor governance and regulation are more prone to the negative effects of the crisis. Its support for the bogus war on terror has been transformed into an argument for financial aid. Martin. the economic.12 governance have given rise to greater radicalization. escalating fuel costs. if the economy really collapses this is going to mean civil strife and strikes. while down slightly from last year. no government . the NIE warned that the government was facing an accelerating economic crisis that includes food and energy shortages. As a Pakistani official explained to the New York Times: A selling point to us even has been. 2009) SECTORAL IMPACT OF THE CRISIS IN P AKISTAN Though the impact of this crisis varies from country to country. financial as well as social impacts could include: o o o o o o Weaker export revenues Further pressure on current accounts and Balance of Payments (BOP) Lower investment and growth rates Lost employment Lower growth translating into poverty More crime. and put the war on terror in jeopardy. no energy. According to McClatchy newspapers. still hovers at around 20 percent. while prices of food and fuel are up. Shuja Nawaz. Growth has stalled in Pakistan. (Michael F. summed up the situation in Pakistan as no money. but no country will be left alone to benefit or detriment from the prevailing crisis. According to a report presented by the Overseas Development Institute. weaker health systems and even more difficulties meeting the Millennium Development Goals . says such ingredients are a classic recipe for radicalization. Inflation.

Its major exports included textiles.  EXPORTS The financial crisis made countries realize that they don t have much to spend on external goods and that recovery is possible only if demand as well as production for internal goods is increased. sport goods etc. 2008) External Sector Impact The country s macroeconomic environment is affected by intensification of war on terror and deepening of the global financial crisis which penetrated into the domestic economy through a route of substantial decline in Pakistan s exports and a visible drop in foreign direct inflows.S.6 percent declining from $ 16. 2009)  IMPORTS .0 billion in July-April 2008-09. 2009) When people stop borrowing. and money (in this case USD because worldwide debt is mostly in denominated in USD) get more valuable compared to other things. surgical instruments. The recent Economic Survey of Pakistan 2008-2009 reports. As a result. and start saving to pay off debt. countries that hugely relied on exports like Pakistan suffered huge losses. exports started to face heat of global financial crisis since November 2008 and the contraction of world over demand has exacerbated export contraction. Thus goods and services get cheaper. the U.13 In Pakistan. didn t have the capacity to pay for exports. A précis of all the sectors that are hit by the current crisis and the subsequent increase in price of commodities and energy. (State Bank of Pakistan. Economies that depend on exports are also effected because others such as US and Europe start importing less. Although contraction in export receipts is more than compensated by massive import compression emanating from global crash of crude oil and commodity prices. Pakistan s economy continues to remain exposed to the vagaries of international developments as well as internal security environment. As a result. (State Bank of Pakistan. The exports witnessed negative growth of 2. it acts like a shrink in money supply. Even their most loyal customer. (Velde. and their present performance could help explain where the country is heading. the sectors that are most severely hit could include financial. the external sector vulnerabilities remain a threat. business and social.4 billion last year to $ 16. the export sector of Pakistan was badly hit.

the continued decrease in exports. the rupee got back some of its lost value. (State Bank of Pakistan. (State Bank of Pakistan. The State Bank of Pakistan s holdings of foreign exchange reserves fell from $14. (Michael F.77 billion as against $28. 2009)  BANKING SECTOR . Martin. 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.715 billion in the comparable period of last year.2 billion at the end of October 2007 to $3. Imports registered a negative growth of 9. The imports stood at $26. This was another implication of the financial crisis that also contributed to a massive increase in the inflation rate of the country.8 percent in July-April 2009. hence.14 The surge in global energy and commodity prices coupled with poor agricultural production in Pakistan over the past two years had played havoc to the country s import expenditure. the exchange rate will remain stable at around Rs. with successful signing of Standby arrangements with the IMF. Most of the depreciation of rupee against dollar was recorded in post November 2007 owing to combination of factors like political uncertainty.80-82 per dollar. lowering the living standards even more. However.3% in the year 2009 Financial Sector Impact  FOREIGN EXCHANGE Pakistan s exchange reserves declined markedly throughout 2008. 2009) As a result. However. the recent lowering of these prices did provide some relief to the country s trade deficit.4 billion at the end of October 2008. trade related outflows and speculative activities. is. after three years. Import compression measures coupled with massive fall in international oil prices have started paying dividends. With substantial import compression and revival of external inflows from abroad in the current fiscal year. was outstripped by the decrease in import bill which improved the trade deficit by 12. lost significant value against the US dollar and depreciated by 21% during March December 2008. 2009) Exchange rate after remaining stable for more than 4 years.

the Pakistani banking system has. Pakistan s banking sector hasn t been as prone to external shocks as have been banks in Europe. 2009) But as of end-2008. the SBP has jacked up economy-wide rates of interest (the 3-month treasury bill auction has seen a jump from 9. As of October 2008. To be certain. Martin. total deposits fell from Rs3. despite facing pressures emanating from weakening macroeconomic environment since late 2007. data from the banking sector confirms a slowdown (after a multi-year growth pattern). IPPs are unable . The drying up of credit internationally has hit Pakistan hard with the banking system suffering a severe liquidity problem. Circular debt arises when the Government of Pakistan owes and is unable to pay .billions of rupees to Oil Marketing Companies (OMC) and to Independent Power Producers (IPPs). despite the injection of 54 billion rupees into the financial system by the central bank. over the last decade. There was a time window earlier this year to address all this.67 trillion. 2009) Market analyst Muhammad Suhail told the Los Angeles Times last week: The global crisis has really added fuel to the fire. In return. (Scribd. (Michael F. Overall. Raja Pervaiz Ashraf. 2009) According to Fitch Ratings. Pakistan s banking sector has remained remarkably strong and resilient.77 trillion in September to Rs3. Minister for Water and Power. (Pakistan and the Global Financial Crisis. OMCs are unable to either import oil or supply oil to IPPs. Overnight call rates rose to high levels ranging from 32 to 40 percent.15 State Bank of Pakistan s (SBP) Financial Stability Review 2007-08 reports that.09 percent in January 2008 to 14 percent as of January 2009 and bank lending rates are as high as 20 percent). gradually evolved from a weak state-owned system to a slightly healthier and active private sector driven system. In the meanwhile. 2009)  CIRCULAR DEBT On 26 January 2009. As a consequence. the international credit rating agency dual headquartered in New York and London. Provisions for losses over the same period went up from Rs173 billion in September to Rs178. and we missed it. (Pakistan and the Global Financial Crisis. liquidity is tight but that has little to do with the Global Financial Crisis and more to do with heavy government borrowing from the banking sector and thus tight liquidity and the crowding out of the private sector. told the Senate that the federal government will settle half of the Rs400 billion circular debt by the end of January.9 billion in October.

According to estimates of the State Bank of Pakistan (SBP).929 points with a market capitalization of Rs1.57 trillion ($58 billion). During calendar 2006 as well as 2007 foreign investors were quite actively investing into KSElisted securities. On 26 December 2007. Due to low cash balances and liquidity as a result of the debt problem. 2009) Thought much of this precipitous decline is related to equity market which has fallen by over 62% (as on December 2008) since touching its peak in April 2008. as represented by the KSE-100 Index. threatening clouds over the KSE. The same can be said about the OMC sector including the fact that financing costs in the entire energy sector have skyrocketed. (Pakistan and the Global Financial Crisis.58 trillion ($20 billion). In September 2007. It was the Best Performing Stock Market of the World for the year 2002. KSE-100 Index stood at 4. a ballooning trade deficit. According to BMA. a loss of over 65 percent from its highest point ever. Other estimates put foreign investment at around 20 percent of the total free float. the uncertainties of the upcoming general election. its highest close ever. Refineries are having problems opening LC s to import crude oil due to mounting payables and receivables.16 to generate electricity and refineries are unable to open LC s to import crude oil. 2009)  STOCK MARKET The Karachi Stock Exchange (KSE) is Pakistan s largest and the most liquid exchange. Moody s Investors Service announced that Pakistan s credit rating had been placed under review. Towards the end of 2007. As of the last trading day of December 2008. the companies have to resort to short term financing at high interest rates. The circular debt problem is seriously impacting the operations of the entire energy value chain. double-digit inflation. Standard & Poor s cut its outlook for Pakistan s credit rating to stable from positive on concern that security was deteriorating. While issues related to the macroeconomic scenario and shaky political environment fuelled anxiety among investors community and contributed to a fall in value. KSE.814 points. As of 23 January 2009. closed at 14. a leading financial services entity. On 5 November 2007. KSE had a total of 653 companies listed with an accumulated market capitalization of Rs1. a troubling macroeconomic scenario.85 trillion ($23 billion). a dearth of adequate corporate governance measures . foreign investment into the KSE stands at around $500 million. an active insurgency in the Federally Administered Tribal Areas (FATA). IPP s like HUBCO and KAPCO are also having difficulty purchasing oil and continuing operations. with a market capitalization of Rs4. an unsustainable budgetary deficit and a worrying depletion in foreign currency reserves had all brought dark. (State Bank of Pakistan.

2009) Current account deficit shrank to $ 8. (Garewal. which like the stock market is irrationally overpriced .2 billion last year.5%. Pakistan suffered the most rapid deterioration in the current account balance. the current account witnessed a surplus which is a rare development in Pakistan economy. it shrank by 23. 2009) The Daily Times warned on October 14: The recent decline in the Pakistan stock market suggests that the bubble has burst and experts fear that this is likely to spread to the real estate market. (State Bank of Pakistan. However. 2009)  EXTERNAL AND FISCAL BALANCE Pakistan has been facing balance of payments (BOP) pressures from expansionary fiscal and monetary policies. It turned to deficit in March and April 2009. the terms of trade shocks accelerated the deterioration. The large loss of income from the terms of trade shock was partially compensated by rising remittances. This was first monthly surplus since June 2007.5 billion as against $ 11. this rate witnessed a rare development in the beginning of the year 2009. Supplementing the extensive weakness was the diminishing foreign interest in the equity markets of Pakistan. (State Bank of Pakistan. (State Bank of Pakistan. 2009) . which turned from a surplus of around 4 percent of GDP in 2003 to a deficit of over 8 percent in 2008.17 aggravated the situation. In the month of February 2009. Nevertheless there has been a negative impact on the external balances of most South Asian countries.

2009) The fiscal deficit widened most for Pakistan. (World Bank.18 These differential effects reflect a number of factors including: the relative magnitude of terms of trade shocks.4 percent of GDP in 2004 to 7. The unanticipated persistence of inflationary pressures on the economy kept fiscal policy options limited. Going forward Pakistan needs a substantial increase in resource base to augment its development efforts and fiscal consolidation efforts has to come from enhanced revenue base because we have already exhausted options for expenditure cuts. 2008)  FISCAL BALANCE The severity of the macroeconomic imbalances in the last fiscal year once again reinforces the importance of fiscal prudence for sustainable economic growth. rising from 2. and policy responses. The shrinking revenues constrict government s ability to pursue counter cyclical policy. The fiscal consolidation efforts faced headwinds like deteriorating security environment. with the overall fiscal deficit estimated to have dropped to 4. 2008) There has been significant improvement in fiscal performance during 2008-09 due to the policy shift. The overhang from 2007-08 continued to haunt adjustment efforts. the differences in compensating growth of remittances. (World Bank. The fiscal improvement in 2008-09 has largely based on reduction of oil subsidies and a slash on development spending. (State Bank of Pakistan. Pakistan s future . domestic political uncertainties along with the deepening of the global financial crisis and overall depressed macroeconomic environment.3 percent of annual GDP.4 percent in 2008.

the decline has been subject to stiff downward rigidity. food prices made a bigger impact on inflation than fuel. sugar and meat etc.7% last year. (State Bank of Pakistan. upward revision of support prices of wheat by above 50 percent thus pushing up the retail prices of wheat and wheat flour across the country. The month on month increase in food and nonfood inflation in the last three months (February. Rising food and fuel prices have been a major source of inflationary pressure in South Asian countries especially Pakistan. (World Bank. Other major factors that effected domestic prices include phasing out of subsidies on petroleum products. due to poor domestic production and export restrictions. In Pakistan. wheat flour. owing to their supply shortage. and wheat prices more than doubled. Going forward the government has to rationalize electricity tariff which will be inflationary in nature. This year inflation accelerated at rapid pace mainly because of food prices which increased as result of high prices of widely consumable items such wheat. 2009)  INFLATION As inflationary pressures across the globe continue to dissipate. Pakistan still faces high double-digit inflation.April) has been especially disappointing. 2009) .19 economic development crucially hinges upon additional resource mobilization and for this end extending the tax base to unexplored sectors is very crucial. Although all the price indices like the CPI including core inflation have shown a downward trend in recent months. 2008) This year core inflation rose to 18% from the 14. (State Bank of Pakistan. sparking deflationary concerns in even some countries like Thailand and India which shared pain of galloping inflation with Pakistan a few months ago. 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.

lack of R&D and reduction in cotton production. Put otherwise. Following few factors. This has created a panic and investors have begin to fear whether Pakistan will be able to pay them back. It was because of the fear that on October 6. banks in many emerging market economies are vulnerable to a global liquidity crunch due to short-term international financing exposure and risky lending practices. Because of the entire situation the companies are downsizing. increase in input cost of minimum wage by 50 percent. . Pakistan. But the global credit crunch and liquidity problems of many transnational corporations have already led to net capital outflows from emerging markets. two of the world s largest rating agencies. put a negative impact on the industry s competitiveness internationally. 2009)  TEXTILE SECTOR Pakistan Textile Industry is facing an uncertain environment. is an example of which. For a country to survive it is important that its economy is sound and prosperous and that business activity flourishes. much more so in countries that have not built up sufficient international reserves or have not run fiscal surpluses. downgraded Pakistani bonds. Finally. (Garewal. new waves of crises in emerging market economies appear rather unavoidable. With fast depleting international reserves there is growing fear that the country may be forced into defaulting on its foreign obligations. halting new investment projects.20 Economic/Business Sector Impact Economic activity is the life blood of a nation. Standard and Poor s and Moody s. non-guaranteed energy supplies. increasing interest rates.

6 percent and provided much needed sanity to economic growth.5 percent.0 percent achieved during 2008-09 seems reasonable albeit it implies definite slippage against 4. The massive downward correction in services sector s growth is mainly because of poor show of the financial sector beside saturation level attained in the communication sub-sector. 2009) .000 of the workers have already lost their jobs. (Scribd. Prior. Barring social services and public administration & defense almost all sub-sectors of services sector felt the pinch of recessionary trend. The economic growth of 2. around 500. 2009) The services sector has compensated some of the lost growth of the industrial sector by growing at 3.1 percent growth of the last year and this year s target of 4. The poor show of the LSM is understandable in the context of acute energy shortages and constrained international demand for Pakistan s manufactured exports. depressing the external demand for Pakistan s exports. After surviving from the load-shedding scenario the industry has yet to survive the gas load shedding scenario as authorities have informed the industry that they would not be to supply power for the additional load and only the sanctioned load will be supplied during the times to come.21 production units are shutting down. (State Bank of Pakistan.  MANUFACTURING AND SERVICES SECTOR In the wake of above mentioned international and domestic environment the economy lost significant growth momentum owing to massive contraction in the industrial sector. 2009) Moreover. it is hit even harder due to further decline in its exports. Now with the financial crunch. The industrial sector in general and large-scale manufacturing in particular has contributed to this slowdown in economic growth by posting dismal performance. (State Bank of Pakistan. The domestic environment was also not supportive to the growth momentum. However. it should be looked in the backdrop of global recession where positive growth is an exception and international developments where real GDP in Pakistan s main trading partners is estimated to contract by almost 3 percent on average in 2009. the textile industry of Pakistan has always been dependant on assistance for its growth. the abolition of quotas by the developed countries caused huge costs to the industry as it could not come at par with other emerging markets like India and China in terms of technology and man power.

. while over 100% increase in the price of oil in the international market.  POVERTY AND UNEMPLOYMENT Food prices have a significant bearing on poverty incidence. flour. rice. 2009) The Report of a UN Inter Agency Assessment Mission fielded during June-July 2008 found that food security in Pakistan in 2007-08 had significantly worsened as a result of food price hike. (State Bank of Pakistan. vegetables and pulses. The total number of households falling into this category was estimated to be seven million households or about 45 million people in 2008. and an increase of 150% in wheat prices. The Report shows an increase in the share of severely food insecure population. edible oil. Since April 2007. Forty five percent of the population working as employees witnessed decrease in their real wages. as food expenditures comprise a large share of the poor s total expenditures and food price hike has severely eroded poor household purchasing power. It found that the poorest 20 percent spent 50 to 58 percent of their income just to buy cereals. 2009) The government estimates that about 25 percent of the population of 169 million is living below the poverty line of $1 a day. the economy has witnessed over 200% increase in the price of palm oil.2 percent in 2004-05 poverty estimated that poverty head count increased to 33. a country already with a high rate of unemployment or semi-employment and poverty the financial crunch only worsened the situation. With Pakistan. The main findings indicate that the high food prices are undermining poverty reduction gains.1 percent in 2008 09 or about 62 million people in 2008-09 were below the poverty line. An Oxfam report released this month estimated that the number of poor in the country has risen from 60 to 77 million because of food inflation . The survey further indicates that more than 40 percent of households reported no change in income in 2008 since last year. but other sources put the figure far higher. The Task Force on Food Security based on the World Bank estimates of head count ratio of 29. A review of price trends of essential items during 2007-08 indicates that the major portion of food inflation during this period stemmed from hike in the prices consumed by the poor household such as wheat. from 23 percent in 2005-06 to 28 percent in 2008. (Garewal.8 percent in 2007-08 and 36.22 Social Sector Impacts Every dilemma that enters the society has its social costs that the country has to bear.

23 Moreover. While the rest of the South Asian economies suffered a huge loss of income from a severe terms-of-trade shock owing to the surge in global commodity prices. 2009) People are being laid-off especially from foreign or multi-national companies in order to reduce costs through downsizing. DID FINANCIAL CRISIS BENEFIT PAKISTAN So far the only sector that has shown growth prospects. Martin. Pakistan s unemployment rate in urban areas is nearly 40% and in rural areas over 60%. (However. Thus job absorbing capacity of the economy shrank. gram and rice). It has become even tougher for a freshman to find a suitable job than it was five years from now. being significant rice exporters. poor health and education. 2009) Increase in poverty means. According to one estimate. Pakistan and India actually gained. (State Bank of Pakistan. 2008) This year too. (State Bank of Pakistan. low-paying job.) (World Bank. loss came from higher petroleum prices. 2009) . more population which again makes it difficult to sustain their needs. where all countries lost. despite the economic crunch has been the agricultural sector. economic growth has slowed down considerably during the last three years. (Michael F. decrease in the average standard of living. the sector performed exceptionally well on the back of extraordinary performance of major crops (mainly wheat. The industry and construction sectors have contracted due to the domestic slowdown and energy shortage and also due to global recession.

2009) Moreover. including a fairly diversified economy. notwithstanding the benefits of a strong agriculture recovery. (World Bank.5 billion in annual remittances. The slowdown will be particularly notable for Pakistan. he said. many foreign banks are optimistic about investing in Pakistan. The government has begun to move away from subsidies that are a drag on the economy. said Vinit Chandra. the adjustment to the terms of trade shock brought about a slowdown in growth in 2008 for all South countries. (State Bank of Pakistan. reaching a peak of 9 percent in 2006. Pakistan has some significant advantages. A recent example is UK s second largest bank Barclays which started its operations on Pakistan last year. Chief Executive Global Retail and Commercial Banking Emerging Markets. Pakistani banking industry has huge potential to grow and we will grow with this potential. Growth has been on a declining trend since then. Pakistan s economy is already facing difficulties. Very few bank assets are tied up in mortgages. Three million citizens working abroad send home about $6. South Asia has been on a rising growth path. Barclays Bank sees Pakistan as one of the best performers in the wake of the global financial crisis which sunk many global banks in the US and European countries. the financial crisis will aggravate it. In particular. The onset of the global financial crisis suggests a significant slowdown in South Asia s growth prospects for 2009-1O. He said banks are . I think Pakistan banking industry is the hero as the industry has surplus liquidity while not a single bank failed here.24 GROWTH PROSPECTS Since 1980. 2008) In attempting to weather the storm.

which can't afford bailouts and deficits. Germany. lowering of discount rates by central banks. bringing in new regulations to ensure risks are taken care of. G-7. France. On November 14. 2009) An unprecedented global economic crisis demands unprecedented initiatives to restore growth. The World Bank Group is helping with the financial rescue but believes that we must remain focused on the human rescue for the many millions left behind. finance ministers from the Group of Seven.7 percent of their stimulus packages.K. the U.S. The concept of the free-market economy as the world had known for several decades has been shattered. etc. or as much as they can in additional money. Even two per cent economic growth is not the worst performance if we see the growth of economies on other part of the planet. . leaders from twenty major economies gathered in Washington to design a joint effort towards regulating the global financial sector. Japan. to a global vulnerability fund to help developing countries. buying of shares of private enterprises by the state. The Bank is calling for developed countries to pledge the equivalent of 0. (Iqbal. various governments have taken extraordinary measures to pull out of recession. (Pakistan and the Global Financial Crisis. and the U. Italy. He said global crisis impacted Pakistan also but the impact was much lesser than the disastrous impacts on other countries. These include stimulus packages by governments. met in Washington but failed to agree on a concrete plan to address the crisis. several European countries nationalized their banks in an attempt to increase liquidity. On October 13. 2009) International Crisis Group senior vice-president Mark Schneider says non-military aid should be an integral part of the U.25 cautious over lending because of rising high non-performing loans (NPLs) and slow economic growth. 2009) On 11 October 2008. he said. Canada. (Iqbal. This is because Pakistan is a domestically-driven economy which received less negative impact of global crisis and recession.S. counterinsurgency strategy against al-Qaida and Taliban fighters taking sanctuary inside Pakistan's border areas. (Zubair. 2009) STEPS TAKEN TO TACKLE THE SITUATION INTERNATIONALLY Since the start of the global financial crisis.

5 billion. extending services." he said.S. The legislation is expected to be similar to the Enhanced Partnership with Pakistan Act of 2008 which will be designed to improve the economic situation in Pakistan. 2009) Moreover. (Thomas. and providing some kind of. creating jobs. Pakistan has already received nearly $12 billion in aid from the United States since 2001. Pakistan s economy was confronted with four major challenges which posed threat to Pakistan s recovery and socio-economic growth including . citizen security and rule of law. (Dawn News. It obtained a $7. providing economic opportunity for the population. (Thomas. as I said.26 "The fundamental objective of the counterinsurgency strategy when you're working with a government is to strengthen that government's capability to broaden its legitimacy. and political needs of the border".6 billion loan from the International Monetary Fund and is to be seeking an additional $4. The government could tap this source only through inflating interest rates and that would be disastrous to the financial sector. Senator. At the beginning of the current fiscal year (2008-2009). the bulk of it for counterterrorism. John Kerry has indicated that he and Senator Richard Lugar. National Saving schemes are mobilizing their deposits from the pool of investors willing to spare resources for the longer term and any preferential treatment may be detrimental for other competing counterparts like commercial banks. 2009) NATIONALLY Pakistan is facing difficulties in financing its current and fiscal account deficit in the current year. The privatization is not the right proposition in the given circumstances. development. 2008) Foreign ministers of Pakistan's major donors agreed on Friday to form a partnership with Islamabad "to develop a comprehensive and coordinated approach to the security. U. And it broadens its legitimacy by governing. will soon introduce our Enhanced Partnership with Pakistan legislation. The State Bank of Pakistan has made its intentions very clear through monetary policy statement that it is not going to be the financer of the deficit anymore. The National Savings is not the right choice because of its poor organizational structure and product development.

iii. e) Government adopted a Nine-Point Program for economic and social recovery encompassing the following elements: i. significant cuts in expenditures to reduce budgetary deficit and a tight monetary policy to fight inflation. removal of unproductive subsidies to reduce the burden on the budget. Regaining macroeconomic stability Poverty reduction Fiscal retrenchment and Weakness in the external account. vii. For the first time. iv. The government adopted the following measures to address the above challenges: a) Strong adjustments in the petroleum prices were undertaken to reduce the budget deficit. Macroeconomic Stability and Real Sector Growth Protecting the Poor and the Vulnerable Increasing Productivity and Value Addition in Agriculture Integrated Energy Development Program Making Industry Internationally Competitive Human Capital Development Removing Infrastructure Bottlenecks through Public Private Partnerships (PPPs) . 2009) In order to ensure that macroeconomic difficulties do not further slowdown the pace of job creation and adversely affect poverty reduction.27 i. iv. vi. b) Significant cuts were made in the expenditures to curtail aggregate demand. d) Electricity tariffs were periodically adjusted to rationalize energy prices. the government has recently reached an agreement with IMF for a US $ 7. and (ii) to protect the poor and preserve social stability through well-targeted and adequately funded social safety nets. ii. iii.6 billion package. The government s new broad-based program for economic stabilization was mainly focused on rationalization of expenditures. c) Tight monetary policy was followed by the State Bank of Pakistan to contain inflationary spiral. v. (State Bank of Pakistan. ii. IMF has accepted Pakistan s homegrown proposals/programs which have two main objectives: (i) to restore the confidence of domestic and external investors by addressing macroeconomic imbalances through a tightening of fiscal and monetary policies until visible signs of demand curtailment.

 The overall fiscal deficit is estimated to have been restricted to 4. g) Directed immediate support to the most vulnerable groups through the Benazir Income Support Programme (BISP). In particular. h) Implemented improved and transparent targeting of Benazir Income Support Programme (BISP) and other programmes aimed at the poor and the vulnerable groups. it called for a comprehensive tax reform to raise budgetary revenue and phase out the electricity subsidies to create greater fiscal space for public investment and social spending. .  T-Bill auctions have been consistently oversubscribed with wide participation of banks enabling the government to retire some of its debt to the SBP  Headline Consumer Price Index (CPI) inflation is estimated to have declined from 25. These are small (Rs.0 million households in 2009-10. The SBA envisaged a significant tightening of fiscal and monetary policies to bring down inflation and strengthen the external position adopting several structural measures in the fiscal and financial sectors including strengthening of the social safety net. the scope of the programme is expected to expand to 7. In addition. 2009) Pakistan s stabilization programme is supported by the Stand-By Arrangement (SBA) with the IMF approved on November 24. and j) Reinforced the importance of sound governance.  SBP reserves have strengthened from US$ 3.1000 per month per family) cash grants channeled through women to help satisfy the most fundamental needs of vulnerable households.2 percent in April 2009. to stabilize the macroeconomic situation.28 viii. the Programme aimed at addressing some of Pakistan s long standing economic problems.5 billion at end October 2008 to US$ 7. i) Intensified public-private partnerships with the objective of making private investments. (State Bank of Pakistan. Currently reaching 3. the most important funding source for economic development. including foreign investors. Initial developments in the economy since the implementation of the Programme have been positive:  The exchange rate has broadly stabilized enabling the State Bank of Pakistan (SBP) to buy foreign exchange on a net basis.5 million poor households.3 percent in August 2008 to 17. managerial and systemic mechanisms to ensure that investments in the social sector are cost-effective and aimed at output-oriented service delivery. 2008. Capital and Finance for Development Governance for a Just and Fair System f) Prioritized the scarce government expenditures available for development-related programs. ix.3 percent in 2008-09.1 billion on end March 2009.

It is. Throughout the year. the government intends to at least double the allocation for BISP to cover 7 million families. children will never be able to exit from poverty because they will be concentrated in low-return employment or remain unemployable. important to address primary needs via social protection. 2009)  INFLATION To contain inflation within desirable limits. This strategy includes imparting training to one member of each vulnerable family to sustain itself. the Economic Coordination Committee (ECC) keep a constant watch over prices and supply of essential . therefore.4 million families or 22. Many of these needs are strongly linked and need to be addressed holistically unless health services are improved. while simultaneously focusing on the mechanisms that ensure that the exit from absolute poverty is permanent for the majority of the vulnerable and a large proportion of the chronically poor. In the next year. This programme would serve as a platform to provide cash transfers to the vulnerable identified on the basis of a poverty scorecard and would be backed by an exit strategy. BISP intends to cover 3. Benazir Income Support Programme (BISP) The sharp rise in international oil and food prices last year and the global financial crisis not only adversely impacted the macroeconomic indicators in Pakistan but also increased the number of the poorest of the poor. the Government of Pakistan (GoP) launched the Benazir Income Support Programme (BISP) in 2008 as its main social safety net programme.29  POVERTY REDUCTION Poverty Reduction Strategy (PRSP) The government is conscious of the cost being imposed on poor families from the sharp escalation in food prices.75 million people in the current year. to be viewed as an approach to a long-term national economic strategy that has its main focus on reduction of poverty. the incidence of ill health will continue to rise. supply augment arrangements through imports and smooth distribution network of essential commodities. therefore. (Thomas. The national Poverty Reduction Strategy covers the three-year PRSP-II period of 2008-09 2010-11 while also providing a framework for thinking well beyond this timeframe and is. the government took various measures such as government expenditure through stringent fiscal discipline. The Programme also envisages a workfare initiative through social mobilization. Recognizing the urgent need to protect the poor and the vulnerable. unless educational retention is improved.

30 commodities in their fortnightly meetings And come up with recommendations to improve supply. 2009) CHALLENGES AND RECOMMENDATIONS Growing fiscal deficits due to food and fuel subsidies and rising inflation suggest that South Asian countries have basically run out of fiscal space and do not have the option of riding out further shocks with expansionary fiscal and monetary policies. An increase of 150 bps in discount rate to 12 percent. So. Introduction of a margin requirement for the opening of letter of credit for imports (excluding food and oil) of 35 percent. 2009. with the following policy recommendations. still it remains high along with the risk of slippages. Following a slight reversal in the mounting inflation. all South Asian countries have responded with some degree of monetary tightening and cutbacks in development spending. 2009)  MONEY AND CREDIT In the light of continued inflationary buildup and increasing pressures in the foreign exchange market. . as noted. ii. Indeed. (State Bank of Pakistan. in the near term growth will need to fall to absorb the shock from the financial crisis. and iv. (State Bank of Pakistan. middle-income countries can also decrease the impact of the financial crunch in the long run. respectively for banking institutions iii. the SBP announced a package of monetary measures on May 21. However. 2008 that included. i. SBP s tight monetary policy and rationalization of fiscal subsidies and expenditure controls are the key factors that contributed a reasonable progress towards macroeconomic stability. even if it requires questioning conventional wisdom in such central aspects as the role of the state and the market in post-crisis conditions. the SBP announced a decline of 100 bps on April 20. Establishment of a floor of 5 percent on the rate of return on profit and loss sharing and saving accounts. and have also adjusted domestic fuel and fertilizer prices in varying degrees to stem the widening of the fiscal deficit. An increase of 100 bps in CRR and SLR to 9 percent and 19 percent. Although the fiscal and external current account deficit reduced during the last year. There is a need to act.

high trade deficit and Pakistan was almost near to bankruptcy. In the short term. o Refocusing policy attention to the next phase of structural and institutional reforms will also help growth to recover. especially in countries like Pakistan and Sri Lanka. in a conference in the Pakistan Society of Development Economist. The report looked at the short-term macro economic framework. high inflation. former Governor State Bank of Pakistan while chairing the session on Global Financial Crisis organized said: o . o Better expenditure management is also a medium-term option for reconciling stabilization with growth objectives. 2 Dr. said that short time ago. Overseas Pakistanis have the potential to change the economic outlook of the country. o Tightening of demand and hence compression in imports. (State Bank of Pakistan. the foreign exchange reserves of Pakistan sharply declined. 2008) Going forward the government has to pursue aggressive trade diplomacy to augment its access to external markets. countries have tended to cut development spending to contain the rise in fiscal deficits. (World Bank. All South Asian countries can benefit from it. social protection strategy and development strategy and institutional framework for development. beside ignite its efforts to diversify exports to optimal exploitation of export potential. Pasha.31 Further reduction of the gap between domestic and international prices and better targeting of open-ended subsidies are possible options especially in Pakistan which faces the largest macroeconomic imbalances. The panel of economists prepared completely independent report. Hafiz A. o Domestic resource mobilization in the medium-term through the tax system that will play a key role to regain the growth momentum. Dr Ishrat Husain. which is contributing to the growth slowdown. 2009) o The government can overcome the financial crisis and repair the economy by providing proper incentives and infusing confidence into resident as well as overseas Pakistanis o Pakistanis living abroad should be encouraged to invest in Pakistan by redressing their genuine reservations and providing them with a level playing field. currency was depreciating. Demand management will obviously need to focus on the right mix between fiscal and monetary policies with a view to ensuring that there is enough liquidity in the short-term to avoid a financial crunch while also ensuring that aggregate demand falls to reduce inflation and improve the macroeconomic balances.

2009) o Reforms in the regulatory framework to include tighter scrutiny and check over the performance and working of all financial as well as non-financial institutions o o Encourage investors to do more saving and less consumption of income Expansion of public investment which will indirectly improve consumers confidence. If consumers feel more protected when facing catastrophic circumstances regarding health. o o Reward more those institutions that performed well relative to those that do not. social security. there should be: o Mobilization of domestic resources rather than depending too much on external sources and foreign debt. Moreover. to consistently increase productivity and improve the economy s competitiveness. o Incorporate knowledge. and so on. Increase coordination among global central banks and worldwide financial stability regulators (Viral V. Acharya. she should retreat on trade liberalization. .led strategy to be really successful that is. o The service sector tax and excise duty be increased o Analysts think it is a dilemma that Pakistan moved too fast on the trade liberalization. This will lead to debt un-sustainability.32 Pakistan has to pursue active monetary and fiscal policies to deal with the global financial crisis which is affecting our economy. o Institutions should be developed for capacity building. The reduction in tariff over the time led to the import consumption society and this is not sustainable for long time. (Garewal. There must be coordination in the monetary policy and fiscal policy coordination. extreme poverty. to the extent that there is significant job creation involved.based economy will increasingly become a necessary condition for any export. they will be induced to have more of a propensity to spend and less to keep precautionary savings. 2009) o Maximize efficiency by being clear about short-run and long-run objectives and corresponding regulatory tools. Moving toward a knowledge. Investment by the government in creating a social safety net can also have a favorable impact on consumers attitudes. the loss of a job. trade and exchange rate policy and the policy on social protection.

2009) o Time will be needed to gradually expand coverage in basic social services until all participants in the labor force.based economy. 2009) But the long run advantages once the reforms and the requisite supporting institutions are in place are huge. the shared sentiment for both politicians and decision makers and regulators is How could we not have seen what was coming? Much explaining and persuading will be required for a multilayered program of reforms to be undertaken and accepted by the general public. both so. highquality jobs. joint private. (Viral V. Fewer economists are telling policy makers We told you so. in the way labor markets operate in order to increase productivity. are included. . Acharya. Much explaining and persuading will be required for a multi-layered program of reforms to be undertaken and accepted by the general public. the challenge of how to persuade society to seriously make this turn toward highquality education. and the like is becoming one of the key strategic issues for middle.33 In the globalized economy. Implementing these reforms again represents a major challenge for governments and policy makers. research and development. not less. Essentially. and more so as a consequence of the current crisis. a new conventional wisdom will need to emerge encompassing six main points: o o Markets will work better if there is more regulation. Instead. these will need to be supported by a wide spectrum of political opinion. Acharya. (Viral V. o Labor and education reforms should be undertaken.called insiders and outsiders. To be successful. CONCLUSION AND REMARKS In the context of the current economic and financial crisis. and in the new institutions required to provide economic security to those changing or losing jobs are all essential to accelerate the transition toward a knowledge.income economies. The changes required in the quality of the labor force.public partnerships to develop innovative visions of the future. one advantage of what is now happening in public discussion is that there are fewer I know it all or The markets will fix it approaches. What is produced and traded should be more in accord with the needed new. These reforms serve as a cushion for a country s economy in distressed times.

derivatives. systemic regulation. The aggressive monetary tightening posture of the SBP has witnessed a reversal in the last monetary policy statement by notional downward adjustment of policy rate in April 2009 to ensure that stubbornness of monetary policy might not hemorrhage the economic activity. o All these changes will require additional resources. consolidated supervision. Pakistan s economy still faces pressures from uncertain security environment. higher inflation driven by spike in food prices. 2009) The International Monetary Fund has recently argued for reforms in middle. (State Bank of Pakistan. and some countries have more of a margin to increase tax revenues than others. as some countries in Latin America and Europe are experimenting with.34 The only way to introduce flexibility in the labor market will be to point toward guaranteed universal social security. investment funds. which should be increased during boom years so as to be better able to deal with nonperforming loans in downswings. an avoidance of the procyclical nature of capital requirements. health care.income countries that include four main components (IMF 2009b): 1. regional banks. Abatement of inflationary pressure remained oblivious and prices depicted stubbornness. innovative formulas relying on a mix of public revenues. The recent monetary policy has tried to strike a balance between sustaining the growth momentum and containing the inflation in stabilization mode. referring to financial conglomerates. targeted household savings. 3. perceptible contraction in the large-scale manufacturing and slowdown in services sector. the acute power shortages. and solidarity funds should be tried. For those with little margin. meaning that all financial institutions must be incorporated in an inclusive supervisory framework not only banks but also insurance companies. and bewildering stock market. and so on. The current slowdown is substantially different from the deceleration of the 1990s or early 2000s. and . and other related financial institutions. 2. international banks. and other companies operating with mortgages. and of provisions required from banks and other financial institutions. mutual funds. and unemployment insurance coverage for workers with different types of employment contracts. o Nevertheless. lower than anticipated inflows and growing absolute financing requirements. which should be supervised not only at the national level but also in coordination with regulators in the advanced economies.

Martin. The other side of the coin is that the world economy is slowing down like never before. referring to the difficulties of changing regulation: Financiers tend to gain the advantage over their overseers. (Michael F. But.35 4. 2009) Sharp spike in the international price of crude along with an unprecedented jump in commodity prices were the two major external culprits behind Pakistan s macroeconomic imbalance. It would be hard to find a more accurate description of the difficulties that must be faced when one attempts to undertake a systemic overhaul of regulatory frameworks. Oil has since come down from a high of $147 a barrel to under $40 a barrel while commodity prices have experienced a drastic trimming. the International Monetary Fund." he said. That comes about from government services.7 billon and Pakistan still needs to find other multilateral and bilateral donors to bridge the whopping gap. The two put together shall provide longneeded relief to Pakistan s trade account (and inflation). Pakistan needs a colossal $13. And.4 billion. supervision by central banks of the price of assets. better qualified and more influential than the regulators. ." But Mark Schneider says Pakistan needs both to survive. "What you really need is trade and aid because trade doesn't do anything with respect to building a police force or training judges or training teachers. For FY 2008-09. The Global Financial Crisis and the accompanying global credit crunch had a minor direct impact on Pakistan. 2009) This rather detailed description of changes suggested by none other than the guardian of orthodoxy and good financial behavior. IMF s contribution is expected to be $4. Acharya. And so you need both aid to help strengthen those government agencies. Legislators are easily seduced by booms and lobbies. (Viral V.4 billion foreign inflow of capital. America is slowing down like never before. Voters are ignorant and bored by regulation. They are better paid. American investors account for nearly 30 percent of Foreign Direct Investment (FDI) into Pakistan. America is our only major trading partner with which we have a trade surplus. to anticipate and regulate when systemic risk emerges. 2009) Pakistani Prime Minister Yousuf Raza Gilani has said that Pakistan wants "trade not aid. and you need trade to permit the expansion of an economy. And this can be illustrated even more clearly by quoting from the editorial page in a recent issue of the Economist. serves the purpose of calling attention to the enormous challenge that is the political economy of regulatory reform. either in advanced or middle. Of the $13.income economies. Consider this: America buys nearly 30 percent of Pakistan s exports. Pakistan s economy remains in the thickest of woods. (Pakistan and the Global Financial Crisis.

Ten years ago. So the country's leaders have become perennial seekers of bailouts. I believe that there may be positive short-term impact on Pakistan of the current economic turmoil in the developed world. it came within a whisker of formally defaulting on its debts and declaring itself bankrupt. Both food and energy price indices continued to increase through 2007-08. The price of oil has declined by 50 per cent in a couple of months . Yet for once. This sum is only 0. the government should help the capital market to restore investor confidence in our economy. Since the terrorist attacks on September 11. Bereft of oil and possessing little natural wealth. The financial crisis has suddenly reversed these trends. we immediately need to strength regulations of the markets to stave off any big crisis that we can t afford to have. This happened because of the unrelenting increase in the prices of oil and several agricultural commodities imported by the country. Today. Pakistan has suffered decades of economic failure and stagnation. the stigma attached to being an international beggar has entirely disappeared. Second. 2008) The meltdown of the American financial system is also believed by the experts to have a few lessons for Pakistan to learn. a well-known diplomatic editor said. Pakistan s external account situation is the result in part of the large increase in the import bill. America has given Pakistan £5 billion of aid.and most are seeking far larger sums than Pakistan with its 165 million people. almost every government is besieged by formerly well-heeled beggars . with the oil price increase outpacing the increase in the price rises of internationally traded agricultural products. In fact. This is barely one per cent of the £458 billion that Washington may be forced to spend on saving Wall Street.£500 billion Pakistan could be rescued no less than 83 times over. (Blair. First. as it has done for more than half of Pakistan's nearly 62-year history. In this time of crisis.1 As David Blair.3 per cent of the amount now devoted to saving the global financial system. For the amount that Britain is prepared to spend to salvage its banks . saving a valued ally has never seemed so cheap.36 Some analysts believe the combination of insurgency and ineffectual governance may prompt the military to step back into the political arena again. President Asif Ali Zardari needs a mere £6 billion to avoid defaulting on his debts and stave off the immediate threat of bankruptcy.

That is likely to happen. The affect on China will be felt by a number of countries in its neighborhood who have become important suppliers of parts and components to the rapidly transforming Chinese production system. The structure of the Pakistani economy and the structure of its financial system will protect the country from feeling the full impact of the financial crisis in America and Europe. If it declines significantly. it has begun to run trade deficits with many East Asian countries. Once an economy is in recession. it is expected that by the end of the year there will be a reduction of one million jobs in the United States. . Pakistan is likely to be protected by the underdeveloped status of its trading sector. the country that will be affected most severely will be China which depends on exports to the United States to drive its trade oriented economy. Trade.37 while the prices of traded food crops have registered significant drops. there is a negative impact on imports. What has become the single largest source of external finance for Pakistan may come under pressure. The first signs of these have already begun to appear. Most of these are in textiles which. Even though Pakistan may escape the immediate negative consequence of the turmoil in the West. will transmit to many developing countries the shocks of the current financial crisis in the western world. Pakistan is poorly integrated with the global economy.000 jobs. Here again. there will be long-term consequences. One of them is the possible impact on remittances from the United States. Most experts now believe that America and Europe at this time stand at the threshold of deep recessions. In September. in other words. the economy will go into recession. We will see a fairly large reduction in the American imports. Of the developing world. It now appears that the financial crises that have gripped America and Europe will also affect the real economies of these countries. Over the years the US has become the single most important source of remittances for Pakistan. Consumer spending is the main engine of growth in the United States. Job losses result in declines in spending. It will be spared the consequences of the unraveling in many parts of the western financial structure. as the economists suggest. America lost 160. a good part of which originates not with the Pakistani workers of which there are not too many in America but from the professionals whose incomes will suffer if the US goes into a long and deep recession. While the United States is Pakistan s single largest trading partner. a recession in America will not have a significant impact on either the quantum or value of exports. are not highly dependent on incomes. This should provide Pakistan with some relief and stop the rapid hemorrhaging in its foreign exchange reserves. While China has a large trade surplus with the United States. This means that the shocks being felt in developed countries will not be felt to any great extent in Pakistan.

. the government will need to do a great deal of hard work. it will be very difficult for Pakistan to attract foreign investment. These weaknesses need to be removed in order to place the economy on a higher plane of growth and development. The country is passing through a perfect storm. Given the ongoing struggle with Islamic extremists in which Pakistan now has taken a decisive position. This one is more severe than many experienced in the past. All of these are not related to economics. Some of this is needed to make the economy more competitive. The economy has been on a rollercoaster ride ever since the country gained independence more than six decades ago. This will come mostly from official sources and will go largely to the government in support of the budget and of the various programmes and policies favoured by the donors. We did have a high percentage of write-offs in Pakistan but nothing compared to amounts that were written off in the US and Europe. The reason is not hard to understand. Private capital flows needed by the entrepreneurial classes will only become available when the country becomes an attractive destination for the investors. the latest report issued by the Islamabad-based Competitive Support Fund to point out the numerous weaknesses in the current structure of the economy. The regulations put in place by the State Bank of Pakistan over the last many years have helped Pakistan emerge out of this crisis relatively unscathed. Without these actions. unlike the banks in the US and Europe. particularly for infrastructure and education.38 The government needs to gain investors confidence and sustain development expenditure. some in the structure of the society and some in the rise of Islamic extremism. and the government did not need to step in to buy shares of failing institutions. the country will manage to receive a significant infusion of capital. At this time it is going through one of its periodic downturns. some have their origin in politics. dealing simultaneously with a number of crises. For that to happen. No financial institution collapsed. These had resulted in Pakistan slipping by nine places in the ranking of the countries on the competitive scale by the World Economic Forum.

the country certainly needs a lot of foreign capital. Development economics began its life as a separate discipline by suggesting that by the transfer of low productivity labour from the countryside to industry and modern commerce personal incomes would increase. as the report points out. They include building the infrastructure for innovation and industryuniversity linkages.39 One way of doing this is to bring to the economy the capacity to innovate. markets would expand. and new opportunities would become available. This represents an enormous change in thinking which has not been fully factored in the work of economic policymakers. At this critical time in its history. But the development of the modern sector needed more than the transfer of labour from less to more productive part of the economy. Building a national innovation ecosystem for Pakistan is a complex and nuanced process containing many components. They include supporting entrepreneurs and businesses in general and in their technology identification and acquisition efforts. These include tax policies. This led to the development of production functions in which labour and capital were the two variables. Left alone to their devices they will only swell the ranks of the disgruntled. It is only recently that economic model builders have introduced knowledge and hence innovation as a direct determinant of growth. They include specialized support. it also needs an economy that can innovate. such as business incubators and tech parks. This was amply demonstrated in the late sixties and the early seventies when the farming community in particular the medium sized farmers quickly adopted the technology associated with high-yielding seeds developed in Mexico (wheat) and rice (the Philippines). and protection of intellectual property rights. The other advantage Pakistan has is the capacity to adapt new technologies and new ways of doing things when conditions are right. This is largely absent at the moment although.2 years which means that tens of millions of young people are entering the workforce every year. It also needed capital. All this would increase the rate of economic growth. The importance economists have begun to place on innovation as a driver of growth and development is of relatively recent vintage. They include strengthening education at all levels to encourage . But to move towards an economic structure that will sustain high levels of growth. The median age of Pakistan s population is 18. there are inherent advantages present which include a very young population. they could lend enormous dynamism to the economy. Properly equipped with education and appropriate skills. government procurement.

(Dawn News. 2009) Syed Javed Hasan. unless. (Dawn News. There is a tide in the affairs of men. stressed the need for improving Pakistan s financial discipline on both. Wahab added. it is clear that good governance is key to steering Pakistan. If world leaders fail to deal with this issue.40 innovation and strengthening the ability of the financial sector to support commercially viable innovation. They include policies as straightforward as support for those wishing to file patents to more complex initiatives such as changing cultural attitudes towards risk. which taken at the flood. all the voyage of their life is bound in shallows and in miseries. For the financial system to cope with demands of an emerging economy with so much potential. this crisis can be converted into a great opportunity but the demand of the hour is proper and timely planning with motivation. but also work together with their counterparts abroad to find a solution to mend this problem and reduce its trickle-down effect on real economies. out of a global recession. Omitted. a senior banker told Dawn. 2009) The banking in Pakistan too is stressed because the other leg of the financial system. we immediately adopt and demonstrate immaculate financial discipline in coming years. there is a light on the other side of the tunnel. it needs the other pillar to be strengthened to provide a sound foundation for an expanding economy. 2009) Pakistan s past economic performance and inadequate financial discipline have made it difficult to pass through the global crisis with minimum damage. (n good) Whatever the outcome. IGI Funds. the securities market is not developed. No decent person can wish others to suffer but the crisis in the West has created a situation pregnant with immense possibilities for Pakistan . As Shakespeare stated in Julius Caesar. (Garewal. It will take cooperation at an international level and for many governments to not only make the decisions that are right for their domestic situations. individual and government levels. it can be taken as a chance by terrorist organizations to utilize the deprived sections of the global society for the attainment of their desired goals. and stressed the understanding that the crisis was not a short-term problem but one that could last longer. leads on to fortune. and the rest of the world. . and a sincere struggle at the global level to pass through this trial. In sum. Chief Executive Officer.

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