Mar 9 - 15, 2009

Originated from sub prime mortgage crisis in July 2007, the ongoing global financial crisis has resulted in multiple crises- credit crisis, banking crisis, currency crisis and trade crisis across the world. By September 2008, several US giant financial firms were either failed or merged. The failure of leading United States-based financial firms took the form of a global credit crisis resulting in a number of European bank failures and declines in various stock indexes, and large reductions in the market value of equities.

The crisis led to a liquidity problem and the de-leveraging of financial institutions especially in the United States and Europe, which further accelerated the liquidity crisis, and a decrease in international shipping and commerce. The world-wide financial crunch has jolted the developed economies and is sending shockwaves to the rest of the world. As most of the developing countries are export-oriented economies, they also started feeling the heat of this global phenomenon in the shape of decreasing exports, which are mostly consumed by the developed economies of Europe and North America.

The global economic recession has taken its toll on the exports of developing countries, as the exports of all of the countries witnessed negative growth last year. How global financial crisis has affected or is affecting the Pakistan economy? And how is it likely to have an impact on the economy? Pakistan has so far suffered less as compared to neighboring India in terms of negative growth in exports owing to the global financial crisis. The country remains immune from the devastating aftermath of the global financial crises owing to the composition of its export base.

Pakistan suffered less as compared to India in terms of negative growth in exports, but in comparison with Bangladesh, which is among the top competitors of the country in textile and clothing, the damage was higher due to the global financial crisis. A comparative analysis of exports in first five months of current financial year shows that the average negative growth in the exports of the country was 3.72 percent, lesser than the India, which witnessed 6.64 percent negative growth in its exports during the same period. In case of Bangladesh, the average negative growth in export during July-November 2008 was 1.39 percent.

According to the official sources, the exports from the Pakistan registered growth during July-December of current fiscal, as compared to other countries like India, China, Indonesia, Thailand and Turkey, which recorded negative growth in their exports during the same period. Pakistan's exports, which comprise low value textile products, fruits, rice and some other products, are mostly consumed by North America and Europe, which are the epicenter of the ongoing global financial crisis.

During first half of the current financial year (July-December), the country continued to export low value textile products to the United States and European markets more or less in the same quantities. However, though jewelry export witnessed growth during the same period, the export of gem witnessed over 29 percent negative growth. For its high value export base, India is suffering more comparatively to Pakistan.

Pakistan exports to Europe and North America is related to their basic needs, which are supposed to be catered even in hard and turbulent times, according to the analysts. The exports so far remained immune from the global financial crises due to the massive rupee depreciation against the dollar, which helped the local exporters to make up the losses. Some Pakistani exporters see the global economic recession as last nail in the coffin of exports, which were already battling to keep their market share intact because of high cost of production. The exporters were however able to make profits due to 23 percent devaluation of rupee against the US dollar.

Critics however say that Pakistan's past economic performance and inadequate financial discipline have made it difficult to pass through the global crisis with minimum damage, unless, the country immediately adopts and demonstrate immaculate financial discipline in coming years. Though the country can not avert the current global financial crisis, it can exercise restraint and prudence in facing the difficult times ahead. The business community should make serious efforts for developing new export markets other than Western Europe and the US.

The global economic turmoil is taking a toll on Pakistan's economy, hurting demand for exports and curbing remittances from workers abroad, so economic policies need to be recalibrated, according to a statement issued by IMF last month following a 12-day staff mission to review a $7.6 billion stand-by lending program. The IMF said Pakistan's current monetary policy stance was "appropriate and will continue to promote domestic and external stability".

Pakistan intends to ask for additional $4.5 billion loan from the IMF in April. People and the local businessmen have already affected adversely by the IMF prescriptions such as eliminating all subsidies on utilities and agriculture inputs, slashing government spending and raising taxes. Local analysts fear that seeking new loan from IMF would infest Pakistan's industrial landscape with dead and sick units resulting in massive unemployment. The country's foreign debt and liabilities have risen by $15.01 billion during the last three and a half years from $35.834 billion at the end of June 2005 to $50.85 billion at the end of December 2008. The additional IMF loan will further enhance our debt servicing obligations, thereby squeezing the resources meant for developmental projects, according to the analysts.

On global scale, the world leaders need collective efforts to control current global financial crises before it turns into a human tragedy. The ongoing financial crisis is the result of the sub prime mortgage crisis that emerged in 2007 after a dramatic rise in mortgage delinquencies and foreclosures in the US. This adversely affected the financial markets and banks across the world. The crisis in fact has exposed the weaknesses in financial industry regulation and the global financial system.

Sub prime is the practice of lending in the form of mortgages for the purchase of residences, to borrowers who do not meet the usual criteria for borrowing at the lowest prevailing market interest rate. If a borrower is delinquent in making timely mortgage repayments to a bank or a financial firm, the lender can take possession of the residence using the proceeds from the mortgage, in a process called foreclosure.

In the third quarter of 2007, sub prime adjustable rate mortgages (ARMs) making up only 6.8% of USA mortgages, outstanding also accounted for 43% of the foreclosures which began during that quarter. By October 2007, approximately 16% of sub prime ARMs were either 90-days delinquent or the lender had begun foreclosure proceedings. By January 2008, the delinquency rate had risen to 21% and by May 2008 it was 25%.