REPERCUSSIONS OF GLOBAL ECONOMIC MELTDOWN FOR PAKISTAN
FOZIA ISHAQUE (Fozia.email@example.com)
Mar 23 - 29, 2009
A global economic slowdown is underway. The whole setback actually started in the single sector in the single economy - the housing market in the United States. However, it engulfed the world economy and became a global issue. Recently, IMF forecasts a marked slowdown in the USA and a more moderate, but still significant, slowdown in other industrial countries.
Large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. During January 2008 to October 2008, the US stock market capitalization has fallen by about 40%, its worst performance since 1937, wiping out almost $7.3 trillion in wealth, or equivalent to about 53% of the USA's GDP. Some of its biggest and most powerful banks have collapsed. About 3.6 million Americans have lost their homes in the wake of the sub-prime mortgage crisis and more continue to lose their homes.
Economy of Pakistan is also not immune from the global economic slowdown either. In Pakistan, the aftermath of this crisis delineated the sudden slowdown and virtual fall of stock market. As the international financial crisis aggravates, the World Bank has predicted a significant slowdown in Pakistani and Indian growth prospects for 2009-10. Pakistan's economy is already facing difficulties and the global crisis will worsen them.
Elevated inflation, low reserves, high fiscal deficits, a weak currency, and a declining economy have put Pakistan in a very difficult situation. Reduction in capital flows and possible slowdown in the growth of exports will hurt India's prospects. The beginning of the international financial downturn has rendered a significant slowdown in South Asia's growth prospects for 2009-10, but Pakistan being much more fragile faced the most vulnerability in the region.
At the onset of 2007 and until the middle of 2008, stock market in Pakistan had been playing a pivotal role in attracting foreign investments in the country. There were several investors from the European and the Gulf countries exhibiting interests for pouring money in various sectors of the Pakistan's economy. The energy, construction, and housing sectors were becoming the hub of attraction especially for the investors from the Middle East, Malaysia, and Singapore. Then the financial crisis broke out in America and Europe, which imparted indelible marks on the rest of the economies of the world.
Global energy and food crises dumped the poor economies that were already susceptible to external shocks in a heap of trash. Pakistan's commodity, money, and stock markets also suffered huge setback. With further and gradual deepening and penetration of economic slump, poor nations are no longer beneficiary of globalization. The production of manufacturing engines in the west was also inhibited by the crash of the consumer spending in the west. This phenomenon drove much of the developing world's economic growth down to the ground. Consequently, hefty swaths of the population plunged into destitution. For instance in China, exports are plunging, hundreds of factories are closing down, and millions of jobless workers are migrating from the glowing coastal cities back to their home villages.
In Pakistan, economy is already facing so many daunting challenges. On top of this is the brewing energy crises and supply side mismanagement of vital food and consumer items. Despite bumper wheat and rice crops, consumers in Pakistan are still paying very high prices for staple foods. In Afghanistan, Sri Lanka, Pakistan, Bangladesh, and Nepal, food prices made a bigger impact on inflation than fuel. The combined effects of lower food and fuel prices along with demand management are reducing inflationary pressure in most South Asian countries, except Pakistan. Occasionally vital food items like wheat flour remain out of market even in big cities. On the other hand, farmers are not getting proper supply of their vital inputs at reasonable costs. Secondly, Pakistan has very weak and constrained ability to borrow from external agencies and bond spreads are very high.
Black marketing, smuggling, hoarding, and profiteering continue unabated and unpunished. The nosedived values of shares as well as bearish stock market was mainly victimizing the unprotected small and poor investors, devastating their meager income. Shortages of electricity and frequent load shedding are putting exports target at stake. According to an estimate, exports in the textile sector may suffer a loss of over $5 billion alone in the current fiscal year mainly due to load shedding. Despite being highly efficient, the sector has become a victim of flawed policies and broken promises.
Pakistan and India actually gained from the increase in global commodity demands, in specificity rice exporters of both the countries are registering good exports, while other South Asian countries suffered a huge loss of income from a severe terms-of-trade shocks because of a surge in global commodity prices.
Islamabad approached the IMF last year for a rescue package as it was weathering a 30-year high inflation rate and fast-depleting reserves that were barely enough to cover 9 weeks of import bills. The State Bank of Pakistan raised interest rates by 2 percentage points to 15% in November, the same month it received the IMF loan to stave off a balance of payment crisis. Pakistan's economic growth is expected to fall to between 3.5% and 4.5% this fiscal year.
Global financial crisis is likely to worsen these trends, particularly on the growth and balance of payments fronts. This will adversely affect South Asian exports and could hurt inflows of remittances. 'The government will have to make revolutionary changes in its export policy to get the trade deficit narrowed but that will take a few years,' Kaiser Bengali, an economist, told AFP. Lower foreign capital flows and harder terms will reduce domestic investment. Both will lower growth prospects.
In the short term, countries have tended to cut development spending to contain the rise in fiscal deficits, which are contributing to slowdown in growth. The better expenditure management, the report said, was also a medium-term option for reconciling stabilization with growth objectives. Pakistan being a developing country needs investments in almost all the sectors of the economy. For a developing economy, it is very much crucial to strengthen the base of the economy not only by investing in the vital sectors for producing plenty of goods and services but also for improving the human capital.
Investment in human capital results in increased productivity and qualitative improvements in goods and services. The investment in human capital includes foods and clothing, health and education, training etc. Previously human capital development was not assigned due importance. Forgetting this part of our economy ignominiously is regrettable.