GLOBAL ECONOMIC CRUNCH

The global economic recession that started in the fourth quarter of 2008 is expected
to continue till mid-2010. It has affected almost all countries and Pakistan is no
exception.

The world has not seen anything as serious in terms of an economic crisis as this
since the Great Depression of 1929.

Initially the view was that the financial crisis that began in the US and then spread to
Europe would not seriously affect the economies of the developing countries. Most
developing countries were not closely linked to the global financial system based in the
US. However, very soon it became clear that developing countries including Pakistan
would be affected by the global financial crisis. Developed countries have been worst hit
but so have developing countries like Pakistan.

Since the start of the global financial crisis, various governments have taken
extraordinary measures to pull out of recession. These include stimulus packages by
governments, lowering of discount rates by central banks, bringing in new regulations to
ensure risks are taken care of, buying of shares of private enterprises by the state, etc. The
concept of the free-market economy as the world had known for several decades has been
shattered.

In the light of these developments the question is: what has been the impact on our
economy so far and what does the future hold for us? Let us look at the targets set by our
budget planners for this fiscal year and see how the targets will be affected by the global
recession.

The growth rate is targeted at 3.3 per cent against the actual achievement of two per cent
in FY09 while the tax-to-GDP ratio is targeted to increase from nine per cent to 9.6 per
cent. The inflation which in FY09 was over 20 per cent is slated to be in single digits for
this fiscal year.

Similarly, challenging targets have been set for exports, imports and the resultant gap in
trade and current account deficits. In view of the global recession continuing for another
year or so, as per the assessment of most economists, how will Pakistan achieve the
above-mentioned targets? Did our budget planners take into account the global economic
crisis?

Let us first see how the export target would suffer from this recession. We will see
lowering of demand from markets in the US, Europe and Japan. We may have some
improvement from January to June 2010 but our exports will continue to suffer. We
missed the export target for the financial year that ended June 30 despite a downward
revision, as the global economic crisis dampened the demand for goods and dragged
down the growth of the manufacturing sector, which had a negative growth of 3.3 per
cent in FY09.

For FY10, the export target is set at $18.3bn which can only be achieved if the EU and
the US provide more market access. The import bill is also under serious threat especially
in view of the rising oil prices. Our oil bill consists of more than 30 per cent of the total
import bill which means that as the oil prices in the international market start rising so
will our import bill. Earlier in the year, oil prices went down to $34 per barrel but are
now around $60 to $70.

However, tension in Iran and some other factors could drive the prices upwards. The
increased import bill will not only have a negative effect on our current account and trade
deficits but would also put pressure on our foreign exchange reserves and consequently
on our currency.

The global recession will also adversely affect remittances from overseas Pakistanis. We
did achieve record remittances in FY09 amounting to $7.8bn but unemployment figures
for overseas Pakistanis will result in a much smaller figure for FY10. The privatisation
process has also been seriously affected by the global recession. The next one year will
see a further slowdown in the privatisation programme. In the last decade, our
privatisation process was successful mainly due to the participation of foreign companies
which are presently not interested due to the global recession although there are several
state-run enterprises which are up for privatisation.

There is also a serious concern on the foreign direct investment (FDI) front this fiscal
year. In the last fiscal year, Pakistan received about $2bn in foreign direct investment but
it was mainly related to old projects. However, the impact of FDI would be less severe as
compared to other sectors of the economy. Pakistan attracts FDI in the natural resource
and energy industries which are less vulnerable to global trends compared to the export
sector. The government needs to gain investors’ confidence and sustain development
expenditure, particularly for infrastructure and education. Without these actions, it will be
very difficult for Pakistan to attract foreign investment.

On the plus side, investors have somewhat regained confidence in the Pakistani capital
markets. In recent weeks, net investment by foreigners has been positive in the Karachi
Stock Exchange. This trend is expected to continue in FY10 and we may see some
growth in this fiscal year against a net outflow of $450m in FY09. This, however, is
mainly dependent on the end to the war on terror in the first quarter of FY10.

The regulations put in place by the State Bank of Pakistan over the last many years have
helped Pakistan emerge out of this crisis relatively unscathed. No financial institution
collapsed, unlike the banks in the US and Europe, and the government did not need to
step in to buy shares of failing institutions. We did have a high percentage of write-offs in
Pakistan but nothing compared to amounts that were written off in the US and Europe.
However, Pakistan will continue to face challenges as long as the world remains in
recession. How well the government in Islamabad manages its economy this fiscal year
will determine the final outcome.

Compiled by: KHURRAM ABID MUKHTAR