World economic crisis - impact on Pakistan
KARACHI (February 05 2008): News headlines at the weekend are scary. The fall out of sub-prime crash in USA has the world banking system reeling in disbelief.
The fiasco at Northern Rock in UK, Societe Generale in France, followed by a hit on UBS (Union Bank of Switzerland), rumble at Rabobank in Holland, all point to a disastrous chain of events that are likely to engulf the entire money management teams in the globe.
The esteemed "Newsweek" calls the recession looming large on the US and the world horizon as something comparable to the Great Depression, or even worse. It may be pertinent to ask why problems of mortgages (or sub-prime) faced by banks in the USA affect the rest of the world? NOURIEL ROUBINI, writing under "Meltdown" (NEWSWEEK, February 4 issue) explains:
"We went from a system where banks held mortgages on their books, to one in which banks originate mortgages. (They) then securities and distribute them, to reduce systemic risk by getting the risk of holding mortgages out of banks, and into the capital markets, and out of USA and into the global economy."
He goes on to say (about recession in USA and its global ramifications),"It is worse than 1987, when we just had a Stock Market crash. It is worse than the Savings and Bank crisis of the late 1980s.It is much worse than the Long Term Management crisis of 1998.It is much worse than the Tech burst of 2000 and 2001.
You have to go back to the Great Depression for something comparable." The repercussions across the global banking network have shaken the money managers every where, who now fear a dreadful recession that will wipe out all the advances made during the post WWII period.
With the global population now touching 7 billion mark (as against around one billion after WWI, followed by recession in the late twenties) the problems are tremendous and a lot more people are going to be affected in nearly every country. How is it going to impact on Pakistan's economy?
For starters, let us consider SBP's response by hiking the base rates of interest, contrary to the general trend nearly every where else. The inflation factor here is getting out of control. The money supply is gathering speed, as the government continues to borrow from SBP and other banks at an unprecedented level.
The budget deficits and adverse balances on current accounts, fall in revenues, near disappearance of FDI of any consequence, and the mounting defence expenditure to combat 'terror', have all combined to deliver more than a 'triple whammy' in the words of one renowned international economist. The question is if, when, and how we can hope to come out of this mess?
While US dollar falls in value against all major currencies, in Pakistan the reverse is the case, as the Rupee is falling even faster. Some people think of it as a blessing in disguise, as it can provide a competitive edge to our exports. However, several other factors belie these hopes.
The largest inhibitor is the energy crisis. With oil in the world market hovering around the century mark (in dollars) per barrel, acute shortage of gas supplies and consequent fall in generation of electricity mean shutting down of mills and other industrial/commercial units for extended periods daily. The losses include non-compliance of export orders and customer dissatisfaction leading to a long-term loss of repeat business or fresh orders.
That makes the already grim situation even worse. No wonder we are missing every target of our planned performance. Losses in major state-owned corporations, so far subsidised by government massively, seem to be getting even worse. Planned development projects seldom get off the ground or the drawing board even.
Food shortages and other scarcities, fuelling a run away inflation, are driving the people to despondency, and are one of the contributing causes leading unemployed youth to desperate acts and terrorism.
So a vicious circle has been formed, leaving no chance of breaking out. Social and political unrest is compounding the problems, and it is doubtful if the forthcoming elections will produce a leadership that can overcome these difficulties.
Paradoxically, banks in Pakistan are earning record profits and shine at the stock exchange, acting as the motor for bullish sentiments in an otherwise bearish environment. This, however, is a deceptive phase, and soon the truth will dawn on all concerned.
Questions are being asked about huge loan write-offs, and when the truth emerges, many a banker will rue the day, like their counterparts in USA and Europe now. What other mishaps are in store, no one can say for sure, but if present indications are any guide, things will not be rosy.
Business Recorder [Pakistan's First Financial Daily]
