ICMAP SEMINAR ON GLOBAL FINANCIAL MELTDOWN

SHAMSUL GHANI
shams_ghani@hotmail.com

Feb 09 - 15, 2009

The Karachi Branch Council of ICMAP organized on February 06, a seminar in ICMAP auditorium to discuss various dimensions of one of the most stunning and destabilizing financial crisis after the 1930 depressions. The occasion was graced by the chief guest Dr. Ishrat Hussain, former State Bank Governor (1999-2006) and present Dean and Director, IBA. Other speakers included Mr. Mohammad Hanif, Director, Strategic Development, Getz Pharma, Mr. Mohammad Sohail, Director Research, JAS Global Capital and Mr. Hasan A. Bilgrami, President ICMAP and President and CEO, Bankislami Pakistan Limited. Dr. Ishrat Hussain, a former member of the elite Civil Services of Pakistan, a renowned World Bank development economist, and an accredited central banker is known for his grip on the international economic and financial developments and apprehension of the issues of globalization.

The global financial meltdown which has now become the nemesis of the world economy has it roots in human greed. It was made possible with the help of the lax control systems. The American banks finding it difficult to carry out business in the wake of the history's lowest bank rate opted for derivatives to create breathing space. The derivative market boom led to the generation of sub-standard and finally toxic assets. Mortgage loans increased from 8 per cent in 2003 to 22 per cent in 2005. Sub-prime market swelled from $240 billion in 2003 to dollar two trillion in 2007. The banks passed on a good part of their risk to non-bank sector namely insurance companies, investment houses, brokerage companies, hedge funds etc. The regulating bodies failed to take timely actions. The rating agencies too, indulged in 'drawing room award' of categories. Moody, Standard & Poor and Fitch have now acknowledged flaws in their rating systems. More than 300 law suits relating to sub-prime mortgage were filed. The foreclosures are now stated to be more than 70 per cent.

The program started around 7.00 pm, with the recitation of Holy Quraan. Thereafter, Mr. Ataullahl A. Rasheed, Chairman, Karachi Branch Council, ICMAP gave a welcome address and apprised the audience of the aims and objects of conducting such seminars. He informed that it was the first seminar organized after the formation of the new Karachi Branch Council. He was of the view that Pakistan's economic problems in the backdrop of global financial meltdown were immense and that Pakistan needed planners with Pakistani approach. Afterwards, Mr. Mohammad Hanif, in his usual cutting style described the background of global financial meltdown which was made possible by the deadly combine of greed, fraud and recklessness. .He talked of the fourth dimension namely knowledge management and said that this tool if properly utilized can be vital in preventing recurrence of such destructive happenings. He asserted that greed factor has hit the burgeoning economy of India as well where $1.5 billion fraud has been committed by the Satyaram group Chief. The impact of financial tsunami has destabilized Indian giants like ICICI Bank, Tatas and Ambanis. He also presented the global economic outlook for the year 2009 when the world is expected to record a cumulative growth of only 0.5 per cent with a number of developing economies likely to hit the red zone.

The next speaker Mr. Mohammad Sohail, Director Research, JAS Global Capitals, while appreciating his predecessor for speaking at length on the issue of global financial meltdown, restricted his speech to the current capital market affairs. He told the audience that the global stock markets had suffered most because of four factors namely risk aversion, capital flight, leveraging and weakening of the economy. According to him, our capital market problems were home-grown. The unjustified closure of stock market (freezing of indices) for quite some time caused immense damage. He said that during the last 13 months, our market capitalization in dollar terms has eroded by 70 per cent decreased form $75 billion to $22 billion. The artificial market closure has led to the canceling of Pakistani shares' quoting on international exchanges. He said that the non-existence of brokers' code of conduct (which is still in draft form) is a big negative.

Dr. Ishrat Hussain, in his highly informative address, told the audience that the globalization has generated both problems and opportunities. In the wake of globalization, the world trade grew at a rate twice than that of the actual output. Pakistan's $150 billion economy can benefit from the $2 trillion global trade. He said that the impact of global financial meltdown is much more than the initial estimates. The US government, having already injected $700 billion, is now planning to put another $800 billion as fiscal stimulus for which a bill is to be put up before the Congress. In the current recessionary situation, the global inflation is going to be around 0.25 per cent. Under a falling inflation rate scenario, the monetary prudence warrants cut in the interest rate. With the global interest rates already touching the rock bottom, the global economic management has become a big dilemma.

Dr. Ishrat is known for his pragmatic approach and an optimistic frame of mind. He said that while 2009 could be a difficult year for Pakistan, the following years should be the harbinger of good tides. He said that globalization resulted in financial integration, technological innovations and global poverty reduction. He further said that the global financial meltdown has mostly hit the non-bank sector (which he calls shadow banking sector). US and European banks, during 2007-08 had access to Middle Eastern sovereign wealth funds as those countries were awash with liquidity due to the rising oil prices. On the other hand, the non-bank sector was not in a position to attract this excess liquidity of Middle Eastern countries. Speaking on the linkage between the financial and real sectors, he said that the real sector has suffered in consequence of the liquidity crunch banks are now globally facing. The real sector's low productivity will hit the world trade which in turn is bound to affect the developing economies. He informed that Pak rupee depreciation has increased non-traditional items' export and falling oil and commodity prices have reduced country's import bill. He said that in sharp contrast to the residents who transferred their capital to foreign countries, the overseas Pakistanis were real patriots who continue to send in their hard-earned money. The growing size of foreign remittance holds great promise for country's economic revival.

After a brief question answer session, Mr. Hasan A. Bilgrami concluded the seminar by giving a summarized version of the proceedings in addition to presenting his own brief views on the global financial situation. He stressed that in view of the growing complexities of the global financial system, our students ought to take high doses of quantitative subjects like Statistics, Mathematics etc. After a short plaque-awarding session, the audience was served with the dinner.