FOCUS ON DOMESTIC MARKET TO REBALANCE GROWTH & TO REDUCE RISING POVERTY

AMANULLAH BASHAR
May 11 - 17, 2009

In the face of collapsing demand in the international export markets, the Asian economies need to rebalance growth through focus on meeting domestic demands and shift from exports in order to return to pre-crisis growth rates.

The ongoing operation against the militants in NWFP is feared to add fuel to the most serious issue of rising poverty level which has touched the mark of 38 percent.

Though the poverty alleviation has been on top of the agenda of the governments including the present one yet the poverty level continued to rise and has reached with an alarming level from 24 percent in 1997-98 to 38 percent in 2007-08.

The increasing poverty rate in Pakistan having population of 165 million plus of which one-half are under the age of 17 and about 40 percent living in urban areas are becoming restive because of the deprivation caused by the reverse economic downturn.

Present economic crises have badly affected lower and middle segments of the society as over 60.4 million people in Pakistan have to live below poverty line. This has generated various problems amongst which law and order situation is the key problem on the back of growing unemployment and the economic crunch.

Some of the contributing factors behind rising poverty level include high cost of borrowing, energy crises, international financial turmoil, and other related economic issues.

The developed economies especially the United States as well as the West & East European countries which are the worst sufferers of the worldwide financial turmoil resulting in the death of demand in the international export market are leaving a little room for exports from the developing countries like Pakistan or even countries like India and China.

Realizing prevailing economic crisis, the International Monetary Fund has rightly suggested the developing economies to focus on developing domestic demand rather than looking for exports especially when the demand has collapsed in the international export markets.

IMF RECOMMENDATIONS FOR ASIAN ECONOMIES

Much of Asia relies heavily on technologically sophisticated manufacturing exports, products for which demand has collapsed. At the same time, Asia's financial ties with the rest of the world have deepened over the past decade, which is instrumental in exposing the region to the forces of global de-leveraging.

Discussing options for quick recovery from the shocks of global crisis IMF said that China is already trying to catalyze private consumption, which has been falling for a decade relative to GDP.

In principle, there should be scope to do this in many other Asian countries, particularly by building stronger social protection systems that will reduce the need for precautionary savings to meet necessities related to health, education, and retirement.

In fact, forceful counter cyclical policies need to be sustained, to help Asia come out of the recession more quickly and vigorously, and to provide insurance against downside risks.

It will be important to sustain the stimulus injected in 2009 into next year, not least as an insurance policy against risks that have yet to reveal themselves. At the same time, it will be critical to preserve fiscal credibility by signaling that such stimulus packages are extraordinary and will be unwound once the recovery is firmly established. On the monetary policy side, many central banks still have scope to reduce policy rates, while some may need to support credit to the private sector through unconventional measures. Japan's experiences with the crisis of the 1990s, however were that these measures may need to be accompanied by timely steps to address any underlying stress in the financial system as well as in household and corporate balance sheets.

Over the longer term, exchange rate appreciation also might help-by providing price incentives to shift resources towards production for domestic use and by raising real household income, thereby spurring consumption.

The spillovers from the global crisis have affected Asia with considerable speed and force. GDP in emerging Asia excluding China and India plummeted by no less than 15 percent on a seasonally adjusted annualized basis in the last quarter of 2008, and a further decline is expected for the first quarter of 2009.

In many ways, this severe impact was unexpected. Asia is far from the epicenter of the crisis, not just geographically but also in the sense that it did not indulge in the financial practices that led to serious problems in advanced economies' banking systems.

Moreover, before the crisis the region was in sound macroeconomic shape, and thus in a strong position to resist the pressures emanating from advanced economies. In the event, however, the impact on Asia has been even swifter and sharper than in other regions.

Looking ahead, Asia's growth path will continue to run parallel to the global economy. For the rest of 2009, the external shock is expected to continue to spill over into private investment and consumption, causing many countries to register negative growth rates. Then, as the global economy revives in 2010, so too will Asia. But the recovery is likely to be tepid-and not only because the global economy will remain weak.

Historical experience shows that investment tends to recover slowly from downturns, especially those that involve financial stress. The risks to this baseline scenario are skewed to the downside. In particular, a delayed global recovery may trigger more insidious feedback loops between the real and financial sectors in Asia.

Persistent weak demand and tighter financial conditions could lead to a surge in corporate distress that could feed back into Asian banks, making them even less able or willing to extend credit to the private sector. At the same time, a surge in corporate bankruptcies could spill over to domestic demand, with a sharper-than-anticipated increase in unemployment rates putting a dent in consumption.

Over the longer horizon, Asian economies are at risk of a structural decline in demand from advanced economies. Households in advanced economies have started repairing their over-leveraged balance sheets, as the era of easy credit to finance purchases of consumer durables is well over. In that case, the growth rate of Asian manufacturing and exports could be structurally lower for many years, and Asia's export-led growth strategy may no longer pay the same dividends as in the past.

PAKISTAN'S LIQUID FOREIGN RESERVES POSITION

The total liquid foreign reserves held by the country stood at $ 11,109.0million on 2nd May, 2009. The break-up of the foreign reserves position is as under:-

i) Foreign reserves held by the State Bank of Pakistan: $7,750.5 million
ii) Net foreign reserves held by banks (other than SBP): $3,358.5 million
iii) Total liquid foreign reserves: $11,109.0 million