Opportunities for Pakistan in the Global Financial Slump
Saad Sarwar Muhammad
November 16, 2008
The whole world is undergoing a major financial crisis which has caused the downturn of almost all the developed world economies with job losses, bailouts and financial losses becoming the order of the day. In such unprecedented times of financial trouble the developed world is looking towards developing countries with huge reserves and financial muscle. Countries like China, Saudi Arabia and Turkey fit the bill. They were invited in the recently held summit of the G-20 to help the developed economies recover from the slump and in some way bail out the developed countries from the fiasco they are in.
The world has been undergoing a rollercoaster ride when it comes to the prices of different commodities, the stock market index levels and the value of dollar and yen versus other major currencies. Oil and Gold are two commodities that have hit a nosedive in recent times. Iran has reportedly given the intent to convert its reserves into Gold in order to overcome the deficit that can result in the reduction of price of oil. The value of dollar and yen is soaring at a time against major European currencies giving the indication of more trust in the resilience of the US economy as compared to the EU.
Pakistan has been suffering its own financial crisis lately, which somehow seems unrelated to the recent global recession. Pakistan´s problems have mostly been homegrown based on the energy crisis due to shortage of alternative energy power sources such as hydel, wind, solar and to some extent nuclear. Pakistan´s financial crisis has resulted from the withdrawal of funds from Pakistan´s stock market, the Karachi Stock Exchange (KSE) since the coming of the new civilian government. Pakistan´s stock market, KSE, has lost close to $36 billion dollars this year in market capitalization. Resultantly, the Pakistani rupee has also borne the brunt with the value of rupee falling from around 60 to a dollar from the beginning of the year to around 80 to a dollar at the moment (many currency dealers have also been arrested in the wake of the rupee devaluation, famous among them the firm of Khanani and Kalia). Not to mention the floor imposed on the KSE to allow the stock market to breathe a sigh of relief. The sigh has converted to deep sleep as the floor remains imposed after many many weeks. On the side-note, I for one feel that the floor should be removed gradually by keeping new periodic floors say at 8000 and 7000 levels if the need be. However, the 9000 floor should be removed immediately, now that Pakistan has got IMF funding which would help stabilize the rupee as well, in case stock funds are withdrawn from the country.
The dwindling reserves of the State Bank of Pakistan have called into action, the IMF, which has been asked to support Pakistan by providing close to 7.6 billion dollars of low interest loans. However, IMF brings with itself tough demands to ensure fiscal discipline, which has resulted in the State Bank of Pakistan raising key interest rate, the discount rate to 15%, a move which according to many might hurt Pakistan´s financial sector instead of aiding it to come out of turmoil. IMF´s policies have historically resulted in a financial mess of the countries which it offered to support. One should hope Pakistan comes out of it without much trouble.
All is not bad however, for Pakistan in the current scenario. Receding oil prices, falling shipping rates and cheap essential commodities for the Pakistani industrial sector like cotton, wheat and cement bode well for the Pakistani economy. There has also been renewed interest in the Pakistani real estate sector following the fall of Dubai´s stock market and the real estate slump it has witnessed of late. The power situation of the country has also vastly improved and the Pakistani industrial units can operate at full capacity if the need be. Rupee devaluation has also made Pakistan´s exports more attractive for foreign buyers with cement paving the way and earning Pakistan valuable foreign exchange. Cement exports have jumped around 70 percent since last year. Pakistan is also set to become the world´s third largest rice exporter sidelining the current no. 3 the United States. Only if Pakistan manages to curb its appetite for imports which have grown tremendously over the past few years to around $40 billion dollars, Pakistan can come out of the current account deficit with flying colors. Curbing or banning imports of non essential items remains the key.
The world has been undergoing a rollercoaster ride when it comes to the prices of different commodities, the stock market index levels and the value of dollar and yen versus other major currencies. Oil and Gold are two commodities that have hit a nosedive in recent times. Iran has reportedly given the intent to convert its reserves into Gold in order to overcome the deficit that can result in the reduction of price of oil. The value of dollar and yen is soaring at a time against major European currencies giving the indication of more trust in the resilience of the US economy as compared to the EU.
Pakistan has been suffering its own financial crisis lately, which somehow seems unrelated to the recent global recession. Pakistan´s problems have mostly been homegrown based on the energy crisis due to shortage of alternative energy power sources such as hydel, wind, solar and to some extent nuclear. Pakistan´s financial crisis has resulted from the withdrawal of funds from Pakistan´s stock market, the Karachi Stock Exchange (KSE) since the coming of the new civilian government. Pakistan´s stock market, KSE, has lost close to $36 billion dollars this year in market capitalization. Resultantly, the Pakistani rupee has also borne the brunt with the value of rupee falling from around 60 to a dollar from the beginning of the year to around 80 to a dollar at the moment (many currency dealers have also been arrested in the wake of the rupee devaluation, famous among them the firm of Khanani and Kalia). Not to mention the floor imposed on the KSE to allow the stock market to breathe a sigh of relief. The sigh has converted to deep sleep as the floor remains imposed after many many weeks. On the side-note, I for one feel that the floor should be removed gradually by keeping new periodic floors say at 8000 and 7000 levels if the need be. However, the 9000 floor should be removed immediately, now that Pakistan has got IMF funding which would help stabilize the rupee as well, in case stock funds are withdrawn from the country.
The dwindling reserves of the State Bank of Pakistan have called into action, the IMF, which has been asked to support Pakistan by providing close to 7.6 billion dollars of low interest loans. However, IMF brings with itself tough demands to ensure fiscal discipline, which has resulted in the State Bank of Pakistan raising key interest rate, the discount rate to 15%, a move which according to many might hurt Pakistan´s financial sector instead of aiding it to come out of turmoil. IMF´s policies have historically resulted in a financial mess of the countries which it offered to support. One should hope Pakistan comes out of it without much trouble.
All is not bad however, for Pakistan in the current scenario. Receding oil prices, falling shipping rates and cheap essential commodities for the Pakistani industrial sector like cotton, wheat and cement bode well for the Pakistani economy. There has also been renewed interest in the Pakistani real estate sector following the fall of Dubai´s stock market and the real estate slump it has witnessed of late. The power situation of the country has also vastly improved and the Pakistani industrial units can operate at full capacity if the need be. Rupee devaluation has also made Pakistan´s exports more attractive for foreign buyers with cement paving the way and earning Pakistan valuable foreign exchange. Cement exports have jumped around 70 percent since last year. Pakistan is also set to become the world´s third largest rice exporter sidelining the current no. 3 the United States. Only if Pakistan manages to curb its appetite for imports which have grown tremendously over the past few years to around $40 billion dollars, Pakistan can come out of the current account deficit with flying colors. Curbing or banning imports of non essential items remains the key.