THE DAY THE WORLD CHANGED?
The economic fall out on Pakistan
By Syed M. Aslam
Sep 16 - 22, 2002
Today we have broken relations, broken hearts, broken trusts and broken homes, broken buildings and towns... The last September 11th has made us all more sensitive to this brokenness in all of us."
Thus wrote the US-based scholar Muzammil Siddiqi on behalf of IslamOnline, the website dedicated to news, views and issues from the Islamic world. The question was put by Thomas, who identified himself only as non-Muslim from America, who wanted to know what the Muslim world had to say on the first anniversary of the kamikaze attacks in the US last year.
The world has been able to recover from the shock only partially. The wounds have failed to heal fully and the global mistrust has seemed to have grown. The sole worldly superpower, the US, remain angered still and after overthrowing the Taliban in Afghanistan and continue chasing its most wanted terrorist Osama bin Laden, is in the process of expand its 'war against terrorism' to other lands and other peoples, majority of them Muslim — Iraq being its top priority at present.
The event has polarized the world to the extent of distinctly unipolar. Redundant and hackneyed terminologies such as "You are either with us or against us" or "You are either a friend or an enemy" have crept back into the lexicon. The modern history has but a single reference date — September 11, good even if the year is not mentioned — rendering all previous historic dates irrelevant.
This, in short, is the world we inhabit today. The moral, social, diplomatic and political norms have evaporated as if they never existed. The ethics of decency; fair play; issues pertaining to human dignity — and rights — have taken a back seat. Environment, health, education, poverty, etc., etc. have all been replaced by more pressing issues of how to get rid of the 'axis of evil' from the world.
The attacks which razed the twin towers of New York's landmark World Trade Centre as well as a wing of Pentagon, the headquarter of US defence and intelligence, has demolished more than the buildings — they brought down with them the entire fabric of everything the world held sacred previously. Thousands perished in the attacks and thousands more were killed in the US' reprisal against Afghanistan and elsewhere.
Thousands of born and naturalized citizens were arbitrarily detained, questioned and later deported. Thousands still keep on languishing in jails. The majority of those arrested, investigated, deported and incarcerated were Muslims, particularly of Arab origin and Pakistanis. Trust between the Muslims and the rest of the world, particularly the developed, have touched the lowest ebb.
The impact on the economy has been no less damaging. The event precipitated a domino-like chain reaction as the economic of the world's greatest consumer and producer, the US, went into a tailspin. Dow Jones Industrial average tumbled by 420.08 points or 4.72 per cent to 8,483.32 while the Nasdaq Composite sank by 102.59 points or 6.6 per cent to 1,452.49 points. For the first time in its history, the New York Stock Exchange remained closed for a whole week since that ignominious Tuesday. When the NYSE opened for trading on September 17 airlines' shares behaved highly erratically.
The initial impact of the terror attacks was no less devastating for the Pakistani economy. Karachi Stock Exchange shed 107 points and lost Rs 24 billion on September 12, the day after the people witnessed the ghastly live coverage the previous evening local time. KSE 100 Index closed at 1,139.4 points on Wednesday September 12. The situation at the other two national bourses was no different forcing the officials to suspend operations at all three stock exchanges for three days from September 17-19. The trading, however, remained suspended for the entire week.
The mighty dollar witnessed wild fluctuations and the international oil and gold prices rose sharply. The global insurance industry faced a dilemma forcing while the US government to announce a $ 16 billion bailout package for the US aviation industry.
The economic sluggishness in the major economic powerhouse of the world extracted a heavy toll on the global economy. Like many other countries, Pakistan also suffered a setback in the last quarter of the last year: Exports came to trickle as orders receded while the ensuing uncertainty also resulted in reduced imports. London-based Joint War Committee of Underwriters (JWCU) imposed the war risk insurance while shipping lines increased the freight rates to push the prices of Pakistani exports incompetitive in the international market which have few buyers at that time. The international reinsurers, on whom the local insurance industry depends heavily, refused to provide terrorism cover to deprive the external trade of a vital protection.
The uncertainty about the then impeding US retaliation against Afghanistan brought financial, industrial and trading activities to a near standstill across the country. The reason that dollar, which fluctuated widely internationally, remained more or less stable in Pakistan was due primarily to its comparatively small buying and selling.
Gold prices in Pakistan, however, witnessed record increase on Friday September 14 when international prices touched $287.50 an ounce compared to $ 272 an ounce on September 11. Gold prices at Karachi bullion market increased by Rs 175 per 10 gram to Rs 6125 on that day.
Suddenly, Pakistan was turned around into a frontline state in the US' war against terrorism which started with Afghanistan in early October last year. Despite immense internal pressure the Pakistani leadership decided to become the most strategic ally of the US due mainly to its proximity with Afghanistan.
It was at this point in time that Pakistan, according to foreign media, asked the US and other developed countries to reciprocate its gesture by writing off heavy foreign loans burdening its economy. The attempt received an encouraging response from the US Secretary of the State Colin Powell who said that 'Pakistan would be fairly rewarded for its support to the US.'
However, the situation on the ground looked less optimistic. Exports orders worth $ 1.5 billion were cancelled while new orders came to a trickle. The situation was further complicated by the shedding of the value by dollar against the rupee to render Pakistani exports incompetitive in the international market. The inter-bank exchange rate of the dollar which stood at Rs 63.95 and Rs 64, for buying and selling respectively, on Monday September 10 dropped to Rs 62.70 and Rs 62.75 respectively on Friday October, 5.
THE PLUSES AND MINUSES
For Pakistan, which has to spend the biggest portion of its budget on the repayment of loans, the year proved to be mixed bag of pluses and minuses. Pakistani economy was deprived of $ 1 billion in exports for the year ended June 30 this year. It fell short by 10 per cent to achieve its export target of $ 10 billion last year and the national economy suffered a budget deficit of 7 per cent, 2.1 per cent above the target to restrict it at 4.9 per cent.
However, Pakistan's unflinching support for the US-led coalition against terrorism helped it make many friends in the developed world. It helped President Pervez Musharraf to acquire a sort of legality to bring the country out of the isolation it faced after the military in October 1999.
The goodwill helped Pakistan reschedule a portion of the massive foreign loans and has also softened the attitude of such vital lenders as the IMF and World Bank. This eased the bludgeoning burden on the national economy providing it a breathing space, for the short time at least. The US and EU made their markets more accessible to Pakistani goods, particularly cotton and textiles, to lessen the initial blow after the September 11 incident by end of the fiscal year.
Besides the rescheduling of loans and greater market access, another factor played an important role to help neutralize the impact of the drastic reduction in exports. It also played a vital role to build up the foreign exchange reserve which stand at over $ 7.5 billion today. September 11 made the world more conscious about the global flow of funds, particularly through non-banking channels, and successfully establishing a link between it and terrorist activities. The narrowing gap between the official and open market exchange rates also encouraged the expatriates to send their remittances through banks. At times, the official rates dipped below the open market and today the difference between the two is almost negligible.
This concern and incentive encouraged Pakistani expatriates who previously used to prefer the non-official channels to send remittances through banking channels to help boost the sagging remittances over the previous years. Gross home remittances soared to around $ 2.39 billion for the fiscal ended June 30 this year depicting a 120 per cent increase over $ 1.09 billion a year previously.
THE CURRENT FISCAL HAS STARTED OFF EVEN BETTER: During July, gross home remittances totalled $ 307.4 million compared to $ 84.7 million in the same month last year, a hefty 262 per cent increase. Over 99 per cent or Rs 305.4 billion of this gross remittance was sent by expatriates working abroad. The welcomed change also made the government to introduce a scheme to sending money back home through official channels offering such incentives as duty free purchases for sending a fixed minimum amount annually. The foreign exchange build-up has also helped the central bank, the SBP, to stop buying dollar from the open market from July this year.
The first-month performance indicates that home remittances during the current fiscal would surpass the $ 2.39 billion of 2001-02. This is indeed a welcome change to help maintain the foreign exchange reserves at a respectable level.
Targets, in Pakistan like elsewhere, are hardly ever achieved and the same is also true for export. As already mentioned, exports failed to achieve the $ 10 billion target by $ 1 billion in 2001-02- this time around for a genuine reason of the sluggish global economy in the wake of September 11.
This year the government has fixed an export target of $ 10.4 billion while import target was fixed at $ 11.1 billion. The target is expected to slash the trade deficit by $ 700 million. Like the home remittances the exports during the first two months of the fiscal year has shown a remarkable performance. Fiscal 2002-03 has started off with a trade deficit of $ 110 million according to the provisional foreign trade figure released by the Federal Bureau of statistics for the month of July.
During July exports totalled $ 815.987 million which was 19.31 % higher than the $ 683.919 million figure in July the last year. However, it was 15.39 per cent lower than the previous month. Imports in July totalled $ 926 million. It is important to note that exports value this July is the highest ever in any July since 1983 which exports crossed the $ 800 mark for the first time ever.
In August, the performance of the foreign trade got even better. Exports totalled $ 896.9 million showing an increase of 9.83 per cent over the previous month and a good 15 per cent compared to August last year. In the first two months exports increased by 17 per cent while imports surged by 9.9 per cent compared to the comparative period last year. Most importantly, the trade deficit in August was $ 110.5 per cent which was over 51 per cent less than the deficit in July-August 2001.
RELIEF TO PEOPLE
While many of the factors responsible for the soaring foreign exchange reserves are external — the greater access to exports in the major markets, the rescheduling and writing-off of loans, the tremendous increase in home remittances due mainly to stricter rules of fund transfers, etc — the same has not discouraged the top officials to take a credit for themselves. However, the soaring forex reserve has failed to provide any relief to the salaried class and the common man as the prices of such basic utilities power, petroleum, gas as well as commodities have been on a constant rise.
For the majority of people the tremendous increase in the foreign exchange means little as cost of living has increased substantially eroding the purchasing, power not to mention the saving power, immensely. In addition, the substantial erosion of dollar and the reduction of import duties by 5 per cent to maximum 25 per cent has not translated into a similar reduction in a country which is heavily dependent on imports be it raw ingredients or a finished products.
What is even more astonishing is that there has been no attempt by the policy makers to curb the unethical business practices rampant at all levels of the business, trade and industry. The soaring foreign exchange reserve, the erosion of the dollar value and the reduction of import duties has failed to bring down the prices at the chagrin of the people who are incessantly burdened by the routine increase in the prices of petroleum twice every month and rising cost of utilities, eatables and consumer goods.
The rising petroleum and utility prices are also taking heavy toll on the industrial activities, particularly those export-oriented by increasing the production costs at a time when dollar stands eroded.
INTERNAL AND EXTERNAL THREATS
Just as Pakistan's strategic support to the US against the Russian invasion in Afghanistan 23-years ago introduced arm and drug culture in Pakistan, the reversal of policy poses many inherent threats. The most visible of this internal threat is terrorism the kinds of which the country has witnessed in recent months — the suicide attack which killed a dozen French naval technicians in Karachi, the attack of the US Consulate in the same city and attacks at Churches and Missionary Schools across the country.
These acts of terrorism which resulted in the loss of many precious lives, both foreign and nationals, forced many foreigners to leave the country on the one hand and brought their arrivals to a trickle. They also give a negative impression about the country thus shying away the potential investment the country needs so badly.
The frontline status has created immense law and order problems for the country as police, intelligence and protection infrastructure requires immense sum of funds to do it work properly. This puts an enormous pressure on a developing country like Pakistan which is experiencing the perils due mainly to its proximity to the battle line called Afghanistan.
The changed global scenario has also made India to flex its muscles to intimidate Pakistan. The fact that the two arch rivals, who have fought a number of wars in the past, possess nuclear weapons has made the situation even more serious. The flashpoint of Kashmir remains the single most important issue for the conflict which has always been there for the last 55 years.
For the last nine months there is military stand-off between the two nuclear neighbours and the possibility of it developing into an all out war, though receded, still can not be ruled out. Just how real is the threat is clear from President Pervez Musharraf's address to the 57th session of the UN General Assembly in New York on the 12th of this month. The President warned that the peace in South Asia was hostage to one accident, one act of terrorism, one strategic miscalculation by India. He has also expressed concerns that if the US attacks Iraq, as President Bush announced jointly with British Prime Minister Tony Blair, the possibility of India attacking Pakistan could not be ruled out.
TAPPING THE POTENTIALS
Reports of strained relation between the Arab world, particularly Saudi Arabia which enjoyed the reputation of one of the most reliable US ally prior to September 11, have pushed many rich investors to pull out their investment from the US. The news, though denied strongly by the two sides at the highest level amidst poisonous remarks by a Rand Corporation analyst, has fueled reports of withdrawal of hundreds of billions dollars from the US. The report denied by both the Saudi and US officials nevertheless shows the anxiety of the Arab and Muslim investors in the backdrop of mandatory arrests, investigations, money laundering charges and freezing of assets of Muslim charities in the US as well as the developed West.
The failure of the Islamic bloc to develop reputable financial institutions on the one hand and the tendency on the part of their wealthy elite to prefer all things foreign, including banks is depriving the Muslim World of immense financial benefits for the development of their countries and people. The need for just such an institution is imperative for safeguarding the financial interests of the Muslim world whose immense collective wealth is benefiting the other economies.
DEBUT OF 'COMMON ISLAMIC CURRENCY'
It's not that the Islamic world is not aware of the challenges of the changed world. Though there seems to be an absence of collective will, Malaysia has tried to offer a parallel common currency system to better protect the interests of a number of Muslim States.
Malaysia and a number of Islamic countries are looking forward to the debut of Islamic gold trade system from next year. Malaysia and a handful of other Islamic countries have come out with a monetary system to not to use western currencies using gold to settle bilateral trade. The proposed trade system is based on a unit of value called a gold dinar which Malaysia hopes would help foster trade among the world's 1.3 billion Muslims.
The proposed unit, gold dinar, is aimed to eradicate what Malaysia sees as an unstable and unjust global monetary system. Today the global trade is settled by major currencies like US dollar and euro which leaves big room for manipulation by the speculators which can make or break a national economy. Malaysian Prime Minister Mahathir Muhammad criticized this dependence of major international currencies as it makes the Islamic countries to trade through Europe or some other non-Muslim country.
While the global economy has started showing signs of recovery it will take years to be healed fully. With the US and Britain bent on removing Saddam Hussain one way or the other at any time the uncertainty across the globe remains intact.
Even in the US the situation remain still grim. The all powerful Federal Reserve chairman Alan Greenspan warned the US lawmakers on the 12th of this month to divert their attention on the deteriorating US budget. Highlighting the need for restoring fiscal discipline as the top priority he cautioned that a climate of continuous large deficits would bring back the high interest rates of the bygone years to fuel low investment and slower growth of productivity.
As is the US budget is forecast to hit a deficit of $ 157 billion this fiscal ending this month compared to a budget surplus of $ 127 billion last year. The deficit is feared to remain $ 145 billion next year and a surplus is expected until 2006.
The terror attacks have caused a loss of $ 95 billion to the economy of New York alone. According to New York City's chief auditor William Thompson this include a loss of $ 21.8 billion in costs of replacing the destroyed or damaged building, infrastructure and lost tenant assets will alone come to $ 21.8 billion and $ 17 billion in lost wages. It has also resulted in 146,000 lost jobs and another 63,000 projected jobs.
The global economy is still coming out of the ashes of the terror attacks as the biggest producer and the consumer of the world still battles with the actual and projected losses. For Pakistan, whose economy heavily depends on the US, the situation would keep on posing many challenges in the months to come.