Apr 20 - 26, 2009

Syed Salim Raza, Governor State Bank of Pakistan has said that developing countries will have to stimulate their domestic economies to increase their capacities to consume surplus production in the wake of shrinking exports and achieve sustainable growth to effectively weather international financial crisis.

Pakistan was not adversely affected by the global financial crisis like the rest of the world. Nevertheless, one impact of the global financial meltdown is that private capital inflows we witnessed until 2007 have dried up. "The implication is that the role of multilateral inflows has become all the more important. And, the fact that our macroeconomic stabilization program is on the right track will help these type of flows to materialize speedily," he said.

Speaking as a Chief Guest at a lecture on "Financial Meltdown and Global Economic Recession: Causes and Effects" organized by Karachi Council on Foreign Relations, Economic Affairs and Law (KCFR) at a local hotel in Karachi, the SBP Chief dwelt at length on the causes and the effects of the ongoing crisis in the international financial markets.

In the wake of global financial meltdown, emerging markets have suffered a sharp fall in demand for their products, whether commodities or manufactured goods as major economies have contracted. A sharp slowdown in private capital flows to the tune of over $500 billion between 2007 and 2009 has taken place.

Mr. Raza said Pakistan's economy is likely to grow between 4 to 4.5% in the next fiscal year. Responding to a query, he said the inflation is likely to be in a single digit in the next fiscal year. He said the Federal Government has successfully implemented macroeconomic stabilization program and added "we have been able to meet all the targets of the International Monetary Fund".

Mr. Raza also appreciated the role of IMF in the macroeconomic stabilization programme of Pakistan. SBP Governor said the pledges of $5.28 billion made at the recently concluded Friends of Pakistan meeting in Tokyo show the confidence of international community over economic performance of the Government.

He said that how emerging markets are going to adapt themselves to the changing scenario will depend partly on how the major economies strategically respond to the problem of substantially weakened financial intermediation capacity in their economies and on how fast in the future their economies would turnaround.

Governments in the West are providing heavy support to banks via capital injections and via purchase of overvalued assets. However, the concern here would be that if the process of reviving bank's capacity to resume active lending, at more normal risk premiums, become conditional on tight regulations and on the repairing of the domestic markets - mainly the mortgage markets as opposed to the much more global scope of investment and lending, that has become increasingly the practice of financial market leaders since the mid '90s, then there could be a prolonged slowdown in the cross border flows of capital to the emerging markets.

"Secondly, if the resumption of growth in the major economies is delayed, that too will impinge on emerging markets via the slow revival of demand for their exports," he said. "It is not clear at this stage whether or not we are looking at 2010, or beyond as the watershed for the turnaround," he added. He said the shift of the damaged asset pool is itself dependant on the revival of demand, and on the stabilization of the housing market prices which, in turn, are at least partly dependent on bank's capacity and willingness to lend. For the US to lead the revival in demand is going to be difficult. US households' total liabilities have increased by 2.5 per cent to $14,242 billion since mid 2007. Their assets, however, have fallen in value by 16 percent to $65,719 billion. "So without increase in demand from other parts of the world, and a revived banking system, that when sustainable recovery will begin will remain somewhat uncertain," he said.

Stressing upon the need to stimulate inter-regional channels of trade, Mr. Raza said that what had gone wrong was the increasing disconnection between the real economy and the financial economy, which greatly exaggerated the amount of liquidity that was available for global growth. "This 'leverage' is now progressively being rationalized, and we will see lower growth for sometime as the adjustment occurs," he said, but added it should remain our objective that the globalization of trade and capital flows remain a priority and the world's economic managers discourage protectionism policies firmly.


The total liquid foreign reserves held by the country stood at $ 11,228.9 million on 11th April, 2009.

The break-up of the foreign reserves position is as under:-

i) Foreign reserves held by the State Bank of Pakistan: $7,865.1 million
ii) Net foreign reserves held by banks (other than SBP): $3,363.8 million
iii) Total liquid foreign reserves: $11,228.9 million