financial crisis and impact on pakistan

8/7/2019 financial crisis and impact on pakistan

http://slidepdf.com/reader/full/financial-crisis-and-impact-on-pakistan 1/15

Following the financial crisis that broke in the US and other Western economies in late 2008, there is now

serious concern about its impact on the developing countries including Pakistan. No doubt about that

there are particular countries that will be adversely affected, there will also be countries that may be less

affected, may avoid recession, and may recover sooner than expected. Although current Pakistan¶s

Economics downturn has been caused due to its internal economic problems instead of global financial

crisis but its economy may suffer as the global financial crisis prolong. This paper discusses the global

financial crisis, reasons of Pakistan¶s economic meltdown and foreseeable impact of this crisis on

Pakistan¶s economy. Finally, some options available to Pakistan for minimizing the impact of the crisis

have been discussed. The crisis accentuates the urgent need for accelerating financial development, both

through domestic financial deepening, domestic resource mobilization.

Keywords: financial crisis, developing countries, development finance, financial Development

1. Introduction

Indeed, the crisis that by October 2008 had erased around US$25 trillion from the value of stock marketsseems largely to have been unexpected.[1] Partly this was because it came on the heels of a seven-year

period of high growth and originated in the USA; many had expected a global slowdown to start in the

emerging markets

Both the initial destruction of financial wealth as well as the psychological shock of seeing many elite Wall

Street firms on their knees, prompted numerous commentators to initially raise the spectre of the great

depression. Although not the great depression, it is indeed true that the world is staggering from financial

to economic crisis as the US, EU, Japan and other high-income economies entered the recession at the

end of 2008. Having decimated Wall Street and then crippled Main Street, the financial crisis seems like a

hurricane about to sweep across the developing world.

Pakistan has undergone economic crisis during year 2008. Macroeconomics indicators are not presenting

a pleasant picture of the economy. Inflation has reached as high as 25.0%, foreign investments have

decreased. Foreign exchange reserves decreased to 4.5billions, equivalent to about six weeks of imports

meanwhile value of rupee falls.

Pakistan is facing economic crisis during that time when world is also facing global crisis. Apparently it

seems that Pakistan¶s economic crisis is due to the global financial crisis because the timings of the two

crises are same. But it is not any logic to draw conclusion. What are the reasons behind current Pakistan

economic crisis? Whether the global financial crisis has its impact or not? How the possible impact of

global crisis can be minimized? These are the questions which motivated to make an investigation. This

paper is an attempt to answer the questions

This paper investigates the consequences of the 2008 financial crisis on the Pakistan. It is structured as

follows. Section 2 provides a brief outline of the causes of the crisis. This is the necessary background for

understanding the likely impact and the required responses. The remainder of the paper examines the

likely magnitude and duration of the crisis. Section3 discusses those major factors which lead Pakistan



towards current economic meltdown. Section 4 identifies the channels through which it will exert its

impact on Pakistan. In this regard the main conclusion is more optimistic of the prospects faced by the

developing world including Pakistan, although at the time of writing, many uncertainties remain. Section

5 discusses the options for Pakistan to minimize the impact of the crisis, arguing that the crisis makes it

imperative to accelerate financial development in developing countries including Pakistan through both

domestic financial deepening and reform of the international financial system.

2. Global Financial Crisis - A brief overview

Following the burst of the µdotcom¶ bubble in 2000 and the 2001 terror attacks on the United States, the

US and most other advanced economies embarked on a period of sustained expansionary economic

policies to ward off recession. The Federal Reserve, for instance, lowered its discount rate no less than 27

times between 2001 and 2003 (Lin 2008). Low interest rates, facilitated by the huge trade surpluses

which China and other countries used to purchase US Treasury Bonds, stimulated rapid growth in credit.

Accompanying rises in house prices further fuelled credit growth, especially through mortgage lending. In

the US, subprime market mortgage lending, to households without the essential means to repay loans,took on huge proportions; according to Lin (2008) about US$1.3 trillion was lent in subprime mortgages.

US mortgage lenders, most infamously the institutions known as Fanny Mae and Freddie Mac, securitized

these subprime loans, which were then sold throughout the financial system as assets. They were able to

issue and securitize these bad loans due to a combination of inadequate regulation and financial

innovation. The latter made it difficult for other institutions to assess the risks of these securitized

mortgages and led to increased subprime mortgages (Bicksler 2008). Thus in spite of their underlying

risk, they were taken up by financial institutions.

Two factors in particular have encouraged asset managers to throw caution to the wind: the growing

global economy and their pay incentives. Risk-management tools now seem to have been inadequate inproperly assessing risk during the upswing in the global economy. Rating agencies in particular seem to

have been awarding high ratings much easier under favorable growth conditions. Barth (2008) shows that

45 per cent of all new securities rated by Standard and Poor¶s in 2007 were rated AAA. As far as pay

incentives are concerned, Bicksler (2008) describes the overpayment of CEOs of many financial firms as a

serious breach of good corporate governance.

By the summer of 2007 increasing defaults on mortgages and growing numbers of foreclosures in the US

signaled that the subprime market was in crisis. House prices and financial stock prices started to

plummet. This reduced the value of household wealth in the US by trillions. The solvency of Fanny Mae

and Freddie Mac, as well as of a number of well known international financial institutions was threatened

by these defaults and the drops in house and stock prices. On 7 September 2008, the US government

nationalized Fanny Mae and Freddie Mac. Then, on 15 September 2008, the firm of Lehman Brothers

filed for bankruptcy; with US$639 billion in assets, it was the largest in the history of the US.[2] This

resulted in widespread financial panic, with large-scale selling of stocks. The investment banking industry

in the United States was wiped out. Central to the sudden reductions in availability of credit, particularly

in the inter bank market, which precipitated the collapse of many firms, is what Taylor (2009: 12)

describes as the µQueen of Spades problem¶. This refers to the fact that securities containing bad subprime



mortgages were distributed across the financial system and institutions did not know where they were.

This created a counterpart risk, which according to Taylor (2009: 15) meant that µthe turmoil in the inter

bank market was not a liquidity problem of the kind that could be alleviated simply by central bank

liquidity tools. Rather it was inherently a counterparty risk issue...¶.

When the US House of Representatives on 29 September 2008 first rejected a US$700 billion bailout

proposal for the financial firms adversely affected by the credit crunch (albeit later adopted), Wall Street¶s

Dow Index experienced its largest one-day point loss in history.[3]

Banks in Europe were soon affected due to their exposure to United States financial markets. On 8

October the UK government recapitalized eight of the country¶s banks, followed by an agreement amongst

the Euro-zone countries on 15 October on injecting further capital into distressed banks and providing

guarantees for inter bank loans, at the cost to the taxpayer of more than US$1.3 trillion.[4]

There are undoubtedly many further interesting and important dimensions to the crisis worth pursuing

further (see, e.g., Taylor 2009). For present purposes, however, the above shows that the anatomy of thecrisis is rather simple: easy credit, bad loans, weak regulation and supervision of complex financial

instruments, debt defaulting, insolvency of key financial institutions, a loss of credibility and trust, and

financial panic and mass selling-off of stocks and a hoarding of cash by banks and individuals. With the

interconnectedness of financial markets, especially amongst the developed countries, the panic spread

rapidly, causing a widespread µcredit crunch¶ and sharp declines in consumption, investment and trade in

initially all of the G7 countries.

3. Reasons for Pakistan¶s Economic Crisis

Pakistan witnessed major disruptions in its normal economic activities as the result of acute energy crisis,

high rate of interest, high cost of production, inflation, deteriorating law and order situation, poor

industrial infrastructure, decline in FDI and joint venture with foreign investors, a bewildering stock

market, a perceptible slowdown in the manufacturing and services sectors The other international

elements include global recession, credit crisis, weak economic prospects of the EU, USA, and limited

access to international markets and specific countries.

Pakistan¶s economic downturn is due to its internal economic reasons instead of direct impact of financial

crisis 2008.

3.1 Pakistan¶s twin deficits

Pakistan¶s financial crisis predates the global financial crisis. For the past several years, Pakistan has been

running unsustainable budgetary and trade deficits. The government of Pakistan routinely spends some

$26 billion a year based on expected revenues of around $20 billion, incurring a budget deficit of over 7%

of GDP. On the trade front, accumulated exports hardly ever cross the $20-billion-a year mark, but

imports end up exceeding $35 billion: a trade deficit in excess of $15 billion a year and a current account

deficit of over $1 billion a month.



Pakistan¶s balance of payment (BOP) crisis in 2007-08, which occurred as a consequence of $147-a-barrel

oil and a spike in commodity prices, meant a frightful depletion of foreign exchange reserves, down to an

import cover of less than three months. Inflation, meanwhile, shot up to over 24%, and Pakistan was

caught in a vicious cycle of stagflation²economic stagnation coupled with high inflation.

Pakistan¶s BOP crisis came at a time when the entire donor community, including the U.S. and Europe,

were engrossed in their own subprime disasters. Desperate for a bailout package, Pakistan pleaded with

the U.S., begged Saudi Arabia and urged China for a billion-dollar donation, all to no avail. Finally, on 24

November 2008, the International Monetary Fund (IMF), reportedly lured by the United States

Department of Defense, announced a 23-month Stand-By Arrangement (SBA) of $7.6 billion and released

the first tranche of $3.1 billion. As a consequence, foreign exchange reserves jumped from a low of $6

billion to over $9 billion.

3.2 Pakistan¶s banking sector

Pakistan¶s banking sector is made up of 53 banks, which include thirty commercial banks, four specializedbanks, six Islamic banks, seven development financial institutions and six micro-finance banks.

According to the 2007-08 Financial Stability Review from the State Bank of Pakistan (SBP), 'Pakistan¶s

banking sector has remained remarkably strong and resilient, despite facing pressures emanating from

weakening macroeconomic environment [sic] since late 2007'.

According to Fitch Ratings, the international credit rating agency with head offices in New York and

London, 'the Pakistani banking system has, over the last decade, gradually evolved from a weak state-

owned system to a slightly healthier and active private sector driven system'.

The data from the banking sector for the final quarter of 2008 confirms a slowdown after a multi-year

growth pattern. In October 2008, total deposits fell from Rs3.77 trillion in September to Rs3.67 trillion.

Provisions for losses over the same period went up from Rs173 billion in September to Rs178.9 billion in

October. At the same time, the SBP has jacked up interest rates: the 3-month Treasury bill auction saw a

jump from 9.09% in January 2008 to 14% in January 2009, and bank lending rates are now as high as

20%.

Overall, Pakistan¶s banking sector has not been as prone to external shocks as have been banks in Europe.

Liquidity is tight, certainly, 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 µcrowding out¶ of

the private sector.

3.3 IMF Loan

On 24 November 2008, the Executive Board of the IMF agreed to bail out Pakistan through a Stand-By

Arrangement (SBA) valued at $7.6 billion. There were two conditions: Karachi must cut its budgetary

deficit from around 7% of GDP to 4.2% of GDP, and increase taxation from 10% of GDP to 10.5% of GDP.



The fact of the matter is that 2 out of 3 Pakistanis are already earning $2 a day or less. An increase in

taxation would mean a further slowdown in the economy. A further slowdown would mean increased

unemployment. A rise in the interest rate would lead to the same thing: this high cost of capital would

shut down a lot of Pakistan's industrial units²and this would mean even more unemployment.

This heavy slowdown and additional unemployment could very well bring Pakistanis out into the streets²

and that would signal a full-blown political crisis. There is no denying that the country is in a terrible

financial mess. With the IMF in the equation, the question now is whether a serious, full-blown political

crisis can somehow be averted. According to the IMF¶s own estimates, the SBA package will slow real GDP

growth to 3% in 2008-09 and add an additional 2 to 3 million to bottom-line unemployment.

3.4 War against terror

Since the beginning of 2008, Pakistan's economic outlook has taken a dramatic downturn. Security

concerns stemming from the nation's role in the war on terror have created great instability and led to a

decline in FDI from a height of approximately $8 bn to $3.5bn for the current fiscal year. Concurrently,the insurgency has forced massive capital flight from Pakistan to the Gulf. Economic data?

3.5 The role of the Coalition Support Fund (CSF )

The Coalition Support Fund (CSF) was created by the United States Congress after 9/11 to reimburse key

U.S. allies, particularly Pakistan and Jordan, for their assistance to the U.S. in the Global War on Terror.

The Defense Security Cooperation Agency (DSCA )maintains that The Department of Defense programs

for supporting our coalition partners and building partner military capacity enable coalition partners to

participate in U.S. operations and conduct counterterrorist operations when they otherwise lack the

financial means to do so. Under CSF, direct overt U.S. aid and military reimbursements to Pakistan over

U.S. fiscal years 2002 through 2009 totaled almost $12 billion, of which $3.1 billion was economic aid and

almost $9 billion was for security.

The CSF has helped to narrow Pakistan¶s ever-widening current account deficit. Under the new Obama

Administration, Pakistan requested a reimbursement of $156 million, but the United States unilaterally

deducted $55 million and reimbursed a total of $101 million.

3.6 Inflation and Interest Rate



Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 before easing

to 7.9% in 2006. In 2008, following the surge in global petrol prices inflation in Pakistan has reached

as high as 25.0%. The central bank is pursuing tighter monetary policy while trying to preserve

growth. interest rates?

3.7 Energy Crisis-Circular debt

On 26 January 2009, Raja Pervaiz Ashraf, Minister for Water and Power, told the Senate that the

'federal government [would] settle half of the Rs400 billion circular debt by the end of January'. The

circular debt in Pakistan has arisen because the government of Pakistan owes²and is unable to pay²

billions of rupees to oil marketing companies (OMCs) and independent power producers (IPPs). As a

consequence, OMCs are unable to import oil or supply oil to IPPs, and IPPs in turn are unable to

generate electricity. Neither can refineries open letters of credit (LCs) to import crude oil.

According to BMA, a leading financial services entity, 'The circular debt problem is seriously

impacting the operations of the entire energy value chain....Due to low cash balances and liquidity asa result of the debt problem, the companies have to resort to short-term financing at high interest

rates. Refineries are having problems opening LCs to import crude oil due to mounting payables and

receivables. The same can be said about the OMC sector, including the fact that financing costs in the

entire energy sector have skyrocketed. IPPs like HUBCO and KAPCO are also having difficulty

purchasing oil and continuing operations'.



Large scale manufacturing (LSM) registered a negative growth of 5.35% in July January 200809 as

against reasonable positive growth of 5.7% in the comparable period of last year. Power shortage in

the country is one of the major reasons for this decline.

3.8 Foreign Exchange Reserves

Foreign Exchange Reserves declined substantially in the initial months of FY09 dropping from $11.4

billion at endJune 2008 to a low of $6.4 billion by November 25, 2008. This depletion of reserves in

the five months was lower than fall in foreign exchange reserves for the whole of FY08. The

subsequent recovery in November 2008 owed essentially the inflow of $ 3.1 billion from the IMF

following Pakistan¶s entry into a macroeconomic stabilization program. The foreign exchange

reserves stood at $10.3 billion as of March 27, 2009. The import coverage ratio declined to an

uncomfortable level of 9.1 weeks as of endOctober 2008 from 16.8 weeks of imports as of endJune

2008 but it improved to 12.4 weeks of imports by endFebruary 2009.

3.9 Exchange Rate

Ex change rate after remaining stable for more than 4 years, lost significant value against the US

dollar and depreciated by 21% during March±December 2008. Most of the depreciation of rupee

against dollar was recorded in post November 2007 owing to combination of factors like political

uncertainty, trade related outflows and speculative activities. With successful signing of Standby

arrangements with the IMF, the rupee got back some of its lost value. With substantial import

compression and revival of external inflows from abroad in the coming months of the fiscal year, the

exchange rate will remain stable at around Rs.8082 per dollar. Pak rupee recovered some of its



earlier losses against the US dollar and registered a net depreciation of 13.5 percent for the period

JulFebruary 200809 [See Fig3].

3.10 KSE Foreign investment

On the last trading day in December 2008, the KSE listed a total of 653 companies, with an

accumulated market capitalization of Rs1.85 trillion ($23 billion). The KSE²as represented by the

KSE-100 Index²had its highest close ever on 26 December 2007, at 14,814 points with a market

capitalization of Rs4.57 trillion ($58 billion). As of 23 January 2009, the KSE-100 Index stood at

4,929 points with a market capitalization of Rs1.58 trillion ($20 billion), a loss of over 65% from its

highest point.

According to estimates of the State Bank of Pakistan (SBP), foreign investment in the KSE stands at

around $500 million. Other estimates put foreign investment at around 20% of the total free float.

During the 2006 and 2007 calendar years, foreign investors were actively investing in KSE-listed

securities. In September 2007, however, Standard & Poor¶s cut its outlook for Pakistan¶s credit rating

to 'stable' from 'positive' on concerns over deteriorating security. On 5 November 2007, Moody¶s

Investors Service announced that Pakistan¶s credit rating had been placed 'under review'.

The end of 2007 was a bleak one for the KSE. Uncertainties over the upcoming Pakistani general

election, a troubling macroeconomic scenario, domestic security environment, double-digit inflation,

a ballooning trade deficit, an unsustainable budgetary deficit and a worrying drop in foreign

currency reserves created a dark, threatening cloud over the market.

4. The impact on Pakistan economy



4.1 The main channels

How will the above be transmitted to and affect the developing countries including Pakistan? Three

main channels are discussed here:

(i) Banking failures and reductions in domestic lending,

(ii) Reductions in export earnings, and

(iii) Reductions in financial flows to developing countries.

4.1.1 Banking failures and reductions in domestic lending

In the wake of the crisis in the US, the biggest initial fear in the rest of the world was that of financialcontagion. This is the danger that financial institutions in developing countries will be negatively

affected. There are both direct and indirect ways in which this can happen.

Directly, banks in developing countries may be affected to the extent to which they hold assets

contaminated by subprime mortgages. At the time of writing, this does not appear to be a significant

concern in case of Pakistan and other developing countries. Pakistan¶s banks had limited

interrelationships with international banks.

Working of foreign banks in Pakistan? Like citi group

There is, however, a more serious indirect threat through declines in stock market prices and

housing prices. These reduce the capital of banks (and of other big firms), which in particular causes

problems where they do not hold sufficient levels of their capital in cash. In such cases it is likely that

banks will reduce lending in order to shore up their capital. In a worst-case scenario banks may face

solvency problems and may require their governments to recapitalize them. Reductions in bank

lending will have the impact of reduced investment, lower growth, and an increase in

unemployment. The latter will lead to reductions in demand which, in turn, will reduce economic

growth further. Bearing in mind that government revenue depends on growth, this will translate into

less government revenue, and consequently less means for governments to fight poverty.

4.1.2 Reduction in export earnings



Even if most developing countries including Pakistan are spared significant damage to their own

financial systems, the fact that the advanced economies are entering a recession is likely to hurt

them. For now though, it should be noted that the potential may be significant, given that Pakistan

has been basing its economic growth in recent years on exports. The crisis is likely to lead to a

substantial decline in the country¶s export earnings. The expected declines will come through a

combination of a decline in commodity prices, a decline in demand for their goods from advanced

economies. These are briefly assessed.

Declines in commodity prices will be detrimental to the export earnings of a large number of

countries that are major exporters of commodities. Exports of Pakistan are around $20 billion and

goods exported mainly include textile goods, agricultural goods, and sports goods. Exports to US and

EU countries constitute a major part of total exports. Pakistan is facing the problem of high inflation

and shortage of energy, which are causing high cost of production to the manufacturing sector.

However, since September 2008, commodity prices have been declining in US and EU countries, the

price of oil fell by more than 70 per cent in the second half of 2008 and inflation is low. In such

situation a country like Pakistan, already with a large balance-of-payments deficit, would face further

pressure on its trade account, and see the value of its currency declining precipitously further against

the US dollar.

But it is not just decline in commodity prices that will adversely affect the export. A recession in the

United States and other G7 countries will in general reduce the aggregate demand of exports.

For many countries, primarily commodity-importing countries, the reduction in export earnings will

come at a time when their balance of payments is already under pressure due to rising food and fuel

prices in 2007 and 2008. Such countries may be in particular need of balance-of-payments

assistance from the IMF as in case of Pakistan or from other source.

4.1.3 Reduction in financial flows to developing countries

Pakistan requires financial inflows from the rest of the world to facilitate and accelerate economic

growth, trade and development. These flows include official development assistance (ODA),

investment flows (both portfolio and foreign direct investment (FDI), trade credits and flows of

remittances. All of these are set to be affected negatively during the current crisis. Cali, Massa and Te

Velde (2008) estimate the decline in financial resources to developing countries to be around



US$300 billion. On this basis it can be concluded that if financial crisis prolong in US and EU

countries Pakistan will also heavily suffer.

F irst, Pakistan official development assistance (ODA), us aid, Economic aid, imf

Second , private investment flows to Pakistan will decline as more risk averse; investors move their

funds to perceived µsafer¶ havens. This includes both portfolio and FDI. Reduced portfolio flows will

also affect government borrowing. The costs of sovereign bonds and commercial debt²both

important sources of finance for developing-country governments²have risen sharply.13 Similarly,

FDI is declining. While FDI to Pakistan grew tremendously over the past seven years by 2007, but it

is expected that FDI flows to developing countries will decrease by 10 per cent in 2008 (UNCTAD

2008: 33).

Third , international trade depends on trade credit being extended; around 90 per cent of trade is

traditionally financed by short-term credit. With the credit crunch starting to bite, trade finance has

also been reduced as banks limit their risk exposure. Although this seems relatively small, it has

important knock-on effects. Consequently, there will be dual pressures on developing-country trade:

reduced demand for their exports and reduced trade credit.

F ourth, as far as remittances are concerned, Remittances to Pakistan will decline because there will

be fewer economic migrants coming to developed countries when they are in a recession, so fewer

remittances and also probably lower volumes of remittances per migrant. Remittances in recent

years have grown to be one of the most important financial flows to developing countries, exceeding

US$240 billion in 2007, more than twice the volume of aid flows (Ratha et al. 2007). Data

.

5 Policy responses- minimizing the potential impact

There is no µcommonly accepted theory of financial crisis¶ to provide fail-proof advice on the correct

policies that each particular country should adopt in the wake of the crisis (Jonung 2008: 566).

However, from past experiences of financial crises and given the analysis of the origin and likely

impacts of the current crisis, the likely responses required in Pakistan would need to include

immediate, short-term (stabilization) and long-term (structural) policy responses.



Immediate and short-term policy responses are required to ensure that (i) the financial crisis is

contained, (ii) that confidence in financial systems is restored and that (iii) the impact on the real

economy is minimized. Over the longer term, countries should focus on strengthening their financial

systems within the context of reforming the global financial architecture. Domestic financial

development depends on a better global financial architecture and vice versa.

Table 1 summarizes the key policy responses in a highly stylized manner.

5.1 Immediate responses

Table 1 lists immediate responses to the crisis as including (i) containment and resolution measures

to stop the crisis, restore confidence in banks and improve their health, and (ii) measures to reduce

the fall-out on the real economy.

Containment measures typically include guarantees on deposits and inter bank loans, provision of

liquidity to financial institutions and forbearance on meeting regulatory requirements.



Resolution measures aim to redress the balance sheet difficulties of banks and typically consist of

direct cash injections, allowing mergers and acquisitions

.

Since Pakistan and other developing countries have not been hit by the financial crisis that is why

there is no as such required to take these immediate measures except providing liquidity to banks.

Up to what extend these steps have been taken in Pakistan?

5.2 Short-term responses

Both advanced economies and a number of developing countries have introduced significant

countercyclical fiscal expansion packages. Where countries have the scope for expansionary fiscal

policy, and even where they do not, the challenge is to ensure that spending on social protection is

not compromised.

But given the need to attract finance and encourage the profitability of their domestic banking

sectors, many developing countries will probably not have the leeway for expansionary monetary or

fiscal policies such as are being followed in the EU and US.

Pakistan is facing much higher inflation rates, pressure on the exchange rates to depreciate, and an

outflow of international capital. Under such circumstances, and in view of the imperative not to

repress domestic financial development, these countries would need to take care to maintain positive

real interest rates.

Countries facing balance-of-payments constraints could need to make use of the IMF¶s short-term

liquidity facilities, and those with difficulties meeting investment and social spending, the various

World Bank and International Finance Corporation (IFC). The International Monetary Fund (IMF)

has approved a loan for Pakistan, amounting to $7.6bn to shore up the economy. This was the last

option because Pakistan had been exploring other sources of funds to try to avoid stringent IMF

conditions but failed to find a deal.

In order to minimize the balance of payment, exports should be increased. For this purpose trade

policy which consists of tariffs, quotas and other regulations should encourage exports and

discourage imports. In year 2007 exports were $20bn approximately and imports were $30bn



approximately. Most of exports are made to US and EU countries. Since these countries are epicenter

of financial crisis so if this crisis prolong the exports may decrease. Pakistan should explore new

trade markets and exports Arab and Gulf countries should be increased.

5.3 Longer-term responses: financial development

As indicated in Table 1, over the longer term countries should promote financial development more

vigorously, and press for reform of the international financial system more urgently.

Financial development refers to the deepening in the financial sector, providing greater access to

credit, as well greater efficiency of the financial system. There are many ways in which financial

sector development matters for growth. It allows a more efficient allocation of capital throughout an

economy. It is also important for economic diversification, the growth of entrepreneurship, and for

the efficient application of fiscal and monetary policies. Over the past decades Pakistan has seen

progress in financial development, such as improvements in banking regulations increase in number

of banks.

Moreover, country should prioritize a number of investment projects according to the requirement.

Currently Pakistan is facing energy crisis which is affecting the overall economy. Immediate

investment should be made in order to resolve the issue. The available resources should be used

efficiently. Investment should be in short term and long term projects.

3.11 Conclusion

The two major external culprits behind Pakistan¶s macroeconomic imbalance were a sharp spike in

the international price of crude and an unprecedented jump in commodity prices. 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. Taken together, the two should provide welcome relief to Pakistan¶s trade account

and inflation woes.

At the same time, the world economy is slowing down as never before. Consider this: the United

States buys nearly 30% of Pakistan¶s exports. America is the only major trading partner with which

Pakistan enjoys a trade surplus. American investors account for nearly 30% of foreign direct

investment (FDI) into Pakistan. Now America is facing an unprecedented economic slowdown.



The global financial crisis and the accompanying global credit crunch have so far had only a minor

direct impact on Pakistan, but the Pakistani economy remains in dire straits. For the 2008-09 fiscal

year, Pakistan needs a colossal $13.4 billion foreign inflow of capital. Of that $13.4 billion, the IMF

contribution is expected to be $4.7 billon. Pakistan must find other multilateral and bilateral donors

to bridge the whopping gap.

[1] See Giles (2008). In its October 2007 W orld E conomic Outlook, for instance, the IMF, although

concerned about the subprime crisis in the US and its potential negative impact on slowing down

growth, still assumed in its baseline forecasts that, µmarket liquidity is gradually restored in the

coming months and that the interbank market reverts to more normal conditions¶ (2007: xv).

[2] See www.financialpost.com/news/story.html?id=790965.

[3] See www.etftrends.com/2008/09/dow-jones-loses-nearly-800-points-volatile-session.html.

[4] See www.news.bbc.co.uk/1/hi/business/7644238.stm.

REACTIONS:

LABELS : ECONOMICS

0 C O M M E N T S :

P O S T A C O M M E N T

L I N K S T O T H I S P O S T

Create a Link

Newer PostOlder Post

financial crisis and impact on pakistan

Documents