Impact of Global Financial Crisis on Pakistan

By Shahid Javed Burki


For Wall Street, the week ending Friday, October 10 was the week that will enter its crowded history and would be remembered for a long time.


The week saw a number of records broken. It saw the largest weekly decline in the Dow Jones index of 30 industrial stocks which fell by 18 percent, draining $8.4 trillion from investment and retirement accounts. This is more than one half of America’s current gross domestic product.

It saw the index move up and down by 1000 points in one day, looking for some direction before settling down for another loss of 128 points on the last trading day of the week.

This was the tenth consecutive decline in the index. Briefly the index breached the 8000 level last seen in 2003. The week had President Bush addressing the country five times, once every day, appealing for calm. He has appeared 22 times before the public in 27 days. His appeals were largely ignored.

The week saw the finance ministers of the world’s seven rich economies – the G7 – meeting the American president to indicate that the industrial countries were working together to come up with a programme all of them could support. Finally, over the weekend it had President Bush go down Pennsylvania Avenue to the headquarters of the International Monetary Fund, (IMF), to meet the finance ministers of the group known as G20. The group includes not only the G7 but also a number of large developing countries such as Brazil, China, India, Indonesia, South Africa as well as some of the large oil-producing countries such as Saudi Arabia and Nigeria. Pakistan is conspicuously absent from the group reflecting the low position it now occupies on the international totem pole.

It was clear that the panic in the financial markets had disturbed the political world as well.

Initially the view was – that the financial crisis that began in the USA and then spread to Europe would not seriously affect the economies of the developing world. Most developing countries were not closely linked with the global financial system anchored in the US. However, on 6th October 2008 many large develping countreis saw record declines in their stock markets. The declines were registered in the sectors in which there were close connections with the developed world.

India: For instance, the Indian IT companies saw sharp fall in their share prices. There was a fear that outsourcing from the stressed financial companies in the US on which these companies depended for a significant amount of their revenues would decline. Tata Motors that had recently acquired Britain’s Jaguar saw a major fall in its share prices. Other Indian businesses with foreign assets also saw fall in their market values.

Pakistan: The price of oil fell to $77 a barrel, almost one-half of the level it had reached a ouple 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’s Financial grounds? 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? The writer will attempt to answer these questions…

Pakistan has severe economic problems of its own not connected with the financial turmoil in the US and Western Europe. With fast depleting internationational 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, tw 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 percent in a couple of months while the prices of traded food crops have registered significant drops. This should provide Pakistan with some reief and stop the rapid haemorrhaging in its foreign exhcange reserves.

The structure of Pakistani economy and its financial system will protect the country from the full impact of the financial crisis in America and Europe. Pakistan is poorly integrated with the global economy. 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 on 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 econlmy. The affect on china will be felt by a number o countries in its neighbourhood who have become imporant suppliers of parts and components to the rapidly transforming Chinese production system.

While China has a large trade surpls 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 ountries the shocks of the current finanical 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 sugest, 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 consequnces. One of them is the possible impact on remttances fom the United States. Over the years the US has become the single most important source of remittances for Pakistan, a good pard f which originates not with the Pakistani workers of which there are not toomany 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 drawn 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.

Courtesy: DAWN ECONOMIC & BUSINESS REVIEW, Oct 20-26, 2008.

P.S.: I’ve noticed this post has been widely read and has made more hits on my blog as compared to any other post. Would appreciate if all those who read this post their comments and suggestions on how they would attempt to improve the economy and what measures they deem appropriate. Will keep you guys posted insha’ALLAH.


12 Responses to “Impact of Global Financial Crisis on Pakistan”

  1. Patriotism of Pakistanis could be tested any where in the world by asking them to help their country in rainy days but what about super class of people (richest fuedals, industrialists, drug lords and above all the politicians who successfully run the highly profitable business of politics in the Pakistan. An estimated rate of profit in Pakistani politics is 1000 to million per cent, details can be calculated by politicians increasing wealth. Majority of Pakistanis living abroad are labor class and highly skilled professional. No body give them money for nothing. They have to work hard for it. Some of them are businessmen who also work very hard to earn their fortune. There is no favor or nepotism in open markets of the world. After all these hard work they should give money to the country because few people of super class have taken country wealth abroad. I have lived and worked in Middle East and visited Europe and now living in USA for last 10 years, I found average Pakistan more patriotic that upper class of the country. We are ready to come forward again and will help/ invest in the country but this upper class should be stopped to taking national wealth abroad and participate accordingly in saving and investing in the country. At present two richest group of politician in power, they should provide the biggest share instead of going for begging to the rich nations. The richest nations are not rich by begging but by hard work. The upper class should go and observe how hard, Chinese are working, come to USA and observe how people work and live here. The government of Pakistan should imediatly issue foreign currency investment bond offering good rate of return, still better than IMF and world Bank, We Pakistanis abroad will buy with our savings and is a great help. The bonds should be gaureneted by international authorities The editor of Pakistan Times is a talented lady who invite us to write these comments. Her services are highly appreciated by Pakistanis living abroad. Pray for the country where majority population is helpless in front of few exploiters of super class of rich politicians and defense forces have no choice but to defend them in the system. All the best. KHWAJA AFTAB ALI, Advocate & I.P. Attorney, presently residing in Florida state of USA.

  2. Dear Mr. Khwaja,

    I completely agree with you that these feudal lords (politicians) have been exploiting Pakistan for the past 60 years. However, a common man’s fault is that he is not committed to his fellow common men – unity is what we lack. Should we all unite against these feudal lords who have been tearing Pakistan apart since the first day of its inception, believe me these exploiters will not only fall back, they’ll run away like coward dogs, never to return. But no, our problem is that if I’m offered a small prize in the return of betraying my fellow commoners, I will accept the prize and screw up the commoners instead of refusing the bribe. In this way, a few cruel people have been running the show, by reigning over the greed of poor men. We look at the short-term advantage of the bribe we receive to harm our brothers, but we don’t look at the long-term disadvantage, that tomorrow, someone else will be bought, again at a small price, to finish us off, just like we did. Tit for tat.

    But then, how can we think all this? Our 80% is illiterate. The reason why they’ve been KEPT illiterate is the same. The day they learn and realize their rights, they’re going to stand up against you. So never let them stand up, keep them crippled and handicapped forever. Unfortunately, those who have the faith and believe in right are so rare and dispersed, that they can’t unite on one platform and take the present and past rulers to task. Reason being simple, out of those that are literate(20%), 5% have been bought to keep the remaining 95% busy, frustrated and confused. And out of that 95%, 65% are living and working abroad. Leaving Pakistan with a total of 35% of the 95% out of the 20% that are literate. How many people does it make? Few? Very few. Very few people can do nothing to bring a change to a land of people as adamant and ignorant as the Pakistanis. An important need of the hour is that all the well-established Pakistanis living abroad get in touch with each other and unite on one Platform, with one motive, and one at all. “Save Pakistan”, because as time is going by, things are moving towards the “now or never” stage. So either we make history, or we become history; by simply accepting the fact that Pakistan was simply a dream of Iqbal, and even though for 60 years after the so-called realization of this dream, the true realization never took place… it was just a night-mare, a fraud. Last but not the least, I would still like to repeat my slogan “Save Pakistan, Save the world.” If Pakistan is attacked, no one will be able to live in peace anymore, not just in Asia, but across the globe. Believe me, and think over it. You’ll know its true.

    Thanks for commenting. I hope to see you around in future as well.



  3. Should we call Pakistan, a nation of baggers as this is the only product we are producing for the last many years. Our recent factories to produce these unique product is by two richest political groups who are governing the federal government and Punjab government respectively. they start distributing money to help poor in the society. The huge money could have been used to create jobs and let these poor work and earn living for themselves. But as a nation we become baggers, what it makes different if you are sitting/ standing by the road in dirty cloths or visiting richest countries capitals in expansive outfits, you are basically BAGGING and bring your nation down in front of the one from whom you are bagging. Baggers always give reason and excuse for this worst kind of behavior for a dignified person or a nation. Could we as a nation are respectful enough to stop thinking of this bagging excuses as most of the time we as a nation go and beg from nations who earned hard their fortune and was not for granted. Pray for betterment in Pakisan. Khwaja Aftab Ali,Advocate & I.P. Attorney.( a former PRO, Iranian Embassy, Saudi Arabia).

  4. FACTS ON THE GROUND IN PAKISTAN.Reference to the Islamic history and Pakistan’s independance period, I want to go a step further and will recomend to select/elect every Chief of Army staff as president after retirement and the present Army chief should be be given extra time for his oustanding services at national and international level and all other Corps. Commanders of the Army and COS of Airforce and Navy should be apponited Governors and Deputy Governors of the provinces and regions ( by creating regional governments in all four provinces, 2 in Punjab 1 in each province- these regions already exist based on language, culture and history , such as Saraiki, Potahari, Upper Sind-Sukkar, Dera Ismail Khan in NWFP and Gawadar- Balouch Area. And all additional bureaucrates who love to live in provincial capitals should be trasfered to these remote areas of the country. These new regions should invite and attrect the foreigner and Pakistani origin people to invest in the area to creat jobs and eliminate poverty.) This is the only way we can stop further intereption/ coup in Pakistan . After all armed forces personnel are wel diciplined and organized . And above all represent Pakistan’s divercified population.And it;s leadership do not transfer within family but earned by hardwork and talents only. Every second family in Pakistan is represented in the army one way or the other and the Pakistan Army is the only ever lasting popular party-yes it’s an important ruling party other than Bhuttos and anti-Bhuttos, Sharif brothers. With this arrangement no one is loser except few feudals and industrialists, who reprent non of the masses in Pakistan. We already have a quota system applied for superior services since 30 years and had killed thousands of innocent talented young people, why not try this arrangement for the welfare of the country which will effect none but very few so called politicians who after all deal with generals, behind the curtains.And it’s good to know that supporters of these politician are 500/600 Mafia families who live in 125 districts in Pakistan and provide so called public leadership for national, provincial and local levels. Any restriction to stop them is useless. Recent example of education condition brought their unseen educated women forward in politics. All 8000/9000 candidates in recent elections were from the same mafia group who are the biggest law breakers and around 1000 leading law breakers have been elected as new law makers who will take care of themselves but none. They all are involved in worst kind of crimes on this earth against humanity with the colaboration of junior police officials.An enquiry by a nuetral agency may prove my claim.WOULD THE EDITOR PUBLISH THIS LETTER in the larger interest of the nation. KHWAJA AFTAB ALI,(a former Secretary, Iranian Embassy, Saudi Arabia,1975-88), first and only post graduate of Intellectual Property Laws on scholarship from USA. Residing in Orlando, Florida.U.S.A. email.all_languages@ phone 4077293983

  5. hi, i m a student of economics this paper is very good and in formative, i want to do thesis on this topic, would u like to help me in this matter i want an econometric model which i couldnt find in JSTOR articles kindly give me some info if u can.

    • pakistanization Says:

      Dear Sara,

      Thanks for the appreciation. This article is only one out of a chain of articles that appeared in our esteemed paper DAWN. I’m glad you found it helpful. I’ll see where i can help you out.



  6. Rehan Ahmed Says:

    good information keep it up !!!!

  7. Aisha Shafi Hashmi Says:

    Respected Sir
    i read your article.First plz accept my good wishes for you and for your writings.Secondly sir being a student i wana let you know about reality that students are facing nowadays.Sir HEC is an institute which is giving guidelines for the universities but does not have a check and balance on them.Sir government has recently announced that it has no funds for HEC.,which means that more than 500 hundred students who wanted to go abroad for higher studies will not be able to do their studies.Secondly private universities are raising their fee dues quite rapidly which means students who are doing job and self financing their ownselves further cant do studies any more.because there are no jobs and in last the goverment universites are also doing such programmes which can be availed by those students who have lots of money in their pockets.

  8. Salam,Ammad, student of Economics & Finance IIUI. u have really made a very good effort to disclose the facts related to the financial crisis.It’s really helpful to the students, In the PARA that starts with ‘initially the view was” u have made some Spell mistakes, can u corect it. otherwise the article is full of info…..

  9. great work, i think its going to help me out in my css exam tomorrow of current affairs.. because The financial crises is going to remain the hottest topic for some years now i think.. so thank you so much sir

  10. MALIK WASIM Says:

    hi every body,
    Mr khawaja, i agree with you and really happy that a person like you is available for us,but i would like to ask we all talk about problems and issues ok i agree that we must stop these so called leaders to do such sins. but i would like to ask what practical measures we have taken to do this. i am not asking only from you i am asking from my self, from all those who are expressng their views over here

  11. Semrah Ayub Says:

    an excellent piece of work..

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