what were the effects of America'economic crisis on Pak'ecnomy???
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Global financial turmoil and Pakistan

The impact of the financial crisis
by Shahid Javed Burki

Pakistan: The price of oil fell to $77 a barrel, almost one-half of the level it had reached a couple of months ago. This put a strain on the spending plans of a number of countries in the Middle East. Some of these countries had large investments planned in Pakistan. In the light of these developments the question arises as to what is the likely impact on Pakistan of this crisis? How should Pakistan’s policy makers respond to the developments in America, Europe and the Middle East as they begin to address the problems the country is already confronted with? I will attempt to answer these questions..

Pakistan has severe economic problems of its own not connected with the financial turmoil in the United States and Western Europe. With fast depleting international reserves there is a growing fear that the country may be forced into defaulting on its foreign obligations. It was because of this fear that on October 6, both Standard $ Poor and Moody’s, two of the world’s largest rating agencies, downgraded Pakistani bonds. One such bond will run out of its term early next year and the investors have begun to fear whether Pakistan will be able to pay them back.

Pakistan now has the lowest credit rating in the developing world. According to John Chambers, managing director with Standard & Poor, “only Seychelles has a lower rating and it has already defaulted on its debt”. None of these developments are related to the financial problems faced by the industrial countries. In fact, I believe that there will be positive short-term impact on Pakistan of the current economic turmoil in the developed world. Let me explain. Pakistan’s external account situation is the result in part of the large increase in the import bill.. This happened because of the unrelenting increase in the prices of oil and several agricultural commodities imported by the country. Both food and energy price indices continued to increase through 2007-08, with the oil price increase outpacing the increase in the price rises of internationally traded agricultural products. The financial crisis has suddenly reversed these trends. The price of oil has declined by 50 per cent in a couple of months while the prices of traded food crops have registered significant drops. This should provide Pakistan with some relief and stop the rapid haemorrhaging in its foreign exchange reserves.

The structure of the Pakistani economy and the structure of its financial system will protect the country from feeling the full impact of the financial crisis in America and Europe. Pakistan is poorly integrated with the global economy. This means that the shocks being felt in developed countries will not be felt to any great extent in Pakistan. It will be spared the consequences of the unravelling in many parts of the western financial structure.

It now appears that the financial crises that have gripped America and Europe will also affect the real economies of these countries. Most experts now believe that America and Europe at this time stand at the threshold of deep recessions. The first signs of these have already begun to appear. In September, America lost 160,000 jobs; it is expected that by the end of the year there will be a reduction of one million jobs in the United States. Job losses result in declines in spending. Consumer spending is the main engine of growth in the United States. If it declines significantly, the economy will go into recession. That is likely to happen. Once an economy is in recession, there is a negative impact on imports. We will see a fairly large reduction in the American imports. Of the developing world, the country that will be affected most severely will be China which depends on exports to the United States to drive its trade oriented economy. The affect on China will be felt by a number of countries in its neighbourhood who have become important suppliers of parts and components to the rapidly transforming Chinese production system.

While China has a large trade surplus with the United States, it has begun to run trade deficits with many East Asian countries. Trade, in other words, will transmit to many developing countries the shocks of the current financial crisis in the western world.

Here again, Pakistan is likely to be protected by the underdeveloped status of its trading sector. While the United States is Pakistan’s single largest trading partner, a recession in America will not have a significant impact on either the quantum or value of exports. Most of these are in textiles which, as the economists suggest, are not highly dependent on incomes.

Even though Pakistan may escape the immediate negative consequence of the turmoil in the West, there will be long-term consequences. One of them is the possible impact on remittances from the United States. Over the years the US has become the single most important source of remittances for Pakistan, a good part of which originates not with the Pakistani workers of which there are not too many in America but from the professionals whose incomes will suffer if the US goes into a long and deep recession. What has become the single largest source of external finance for Pakistan may come under pressure.

The main conclusion that I would draw from this analysis is that the policy makers in Pakistan must make an effort to understand the nature of the economic and financial crisis in the West and adopt the policies that will prepare it for both, the short- and the long- term.

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