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THE FINANCIAL CRISIS 2008 AND ITS IMPACT ON PAKISTAN’ ECONOMIC DOWNTURN
Abstract Following the financial crisis that broke in the US and other Western economies in late 2008, there is now serious concern about its impact on the developing countries including Pakistan. No doubt about that there are particular countries that will be adversely affected, there will also be countries that may be less affected, may avoid recession, and may recover sooner than expected. Although current Pakistan’s Economics downturn has been caused due to its internal economic problems instead of global financial crisis but its economy may suffer as the global financial crisis prolong. This paper discusses the global financial crisis, reasons of Pakistan’s economic meltdown and foreseeable impact of this crisis on Pakistan’s economy. Finally, some options available to Pakistan for minimizing the impact of the crisis have been discussed. The crisis accentuates the urgent need for accelerating financial development, both through domestic financial deepening, domestic resource mobilization. Keywords: financial crisis, developing countries, development finance, financial Development 1. Introduction Indeed, the crisis that by October 2008 had erased around US$25 trillion from the value of stock markets seems largely to have been unexpected.[1] Partly this was because it came on the heels of a seven-year period of high growth and originated in the USA; many had expected a global slowdown to start in the emerging markets Both the initial destruction of financial wealth as well as the psychological shock of seeing many elite Wall Street firms on their knees, prompted numerous commentators to initially raise the spectre of the great depression. Although not the

great depression, it is indeed true that the world is staggering from financial to economic crisis as the US, EU, Japan and other high-income economies entered the recession at the end of 2008. Having decimated Wall Street and then crippled Main Street, the financial crisis seems like a hurricane about to sweep across the developing world. Pakistan has undergone economic crisis during year 2008. Macroeconomics indicators are not presenting a pleasant picture of the economy. Inflation has reached as high as 25.0%, foreign investments have decreased. Foreign exchange reserves decreased to 4.5billions, equivalent to about six weeks of imports meanwhile value of rupee falls. Pakistan is facing economic crisis during that time when world is also facing global crisis. Apparently it seems that Pakistan’s economic crisis is due to the global financial crisis because the timings of the two crises are same. But it is not any logic to draw conclusion. What are the reasons behind current Pakistan economic crisis? Whether the global financial crisis has its impact or not? How the possible impact of global crisis can be minimized? These are the questions which motivated to make an investigation. This paper is an attempt to answer the questions This paper investigates the consequences of the 2008 financial crisis on the Pakistan. It is structured as follows. Section 2 provides a brief outline of the causes of the crisis. This is the necessary background for understanding the likely impact and the required responses. The remainder of the paper examines the likely magnitude and duration of the crisis. Section3 discusses those major factors which lead Pakistan towards current economic meltdown. Section 4 identifies the channels through which it will exert its impact on Pakistan. In this regard the main conclusion is more optimistic of the prospects faced by the developing world including Pakistan, although at the time of writing, many uncertainties remain. Section 5 discusses the options for Pakistan to minimize the impact of the crisis, arguing that the crisis makes it imperative to accelerate financial development in developing countries including Pakistan through both domestic financial deepening and reform of the international financial system. 2. Global Financial Crisis - A brief overview

As far as pay incentives are concerned. to households without the essential means to repay loans. which were then sold throughout the financial system as assets. By the summer of 2007 increasing defaults on mortgages and growing numbers of foreclosures in the US signaled that the subprime market was in crisis. it was the largest in the history of the US. according to Lin (2008) about US$1. stimulated rapid growth in credit. The Federal Reserve. Thus in spite of their underlying risk.Following the burst of the ‘dotcom’ bubble in 2000 and the 2001 terror attacks on the United States. for instance. In the US. lowered its discount rate no less than 27 times between 2001 and 2003 (Lin 2008).[2] This resulted in widespread financial panic. The solvency of Fanny Mae and Freddie Mac. securitized these subprime loans. Two factors in particular have encouraged asset managers to throw caution to the wind: the growing global economy and their pay incentives. the firm of Lehman Brothers filed for bankruptcy. facilitated by the huge trade surpluses which China and other countries used to purchase US Treasury Bonds.3 trillion was lent in subprime mortgages. the US government nationalized Fanny Mae and Freddie Mac. as well as of a number of well known international financial institutions was threatened by these defaults and the drops in house and stock prices. most infamously the institutions known as Fanny Mae and Freddie Mac. on 15 September 2008. took on huge proportions. The latter made it difficult for other institutions to assess the risks of these securitized mortgages and led to increased subprime mortgages (Bicksler 2008). They were able to issue and securitize these bad loans due to a combination of inadequate regulation and financial innovation. subprime market mortgage lending. House prices and financial stock prices started to plummet. Rating agencies in particular seem to have been awarding high ratings much easier under favorable growth conditions. especially through mortgage lending. the US and most other advanced economies embarked on a period of sustained expansionary economic policies to ward off recession. Barth (2008) shows that 45 per cent of all new securities rated by Standard and Poor’s in 2007 were rated AAA. with US$639 billion in assets. they were taken up by financial institutions. This reduced the value of household wealth in the US by trillions. Accompanying rises in house prices further fuelled credit growth. US mortgage lenders. Then. Risk-management tools now seem to have been inadequate in properly assessing risk during the upswing in the global economy. Low interest rates. On 7 September 2008. . Bicksler (2008) describes the overpayment of CEOs of many financial firms as a serious breach of good corporate governance.

. debt defaulting. which according to Taylor (2009: 15) meant that ‘the turmoil in the inter bank market was not a liquidity problem of the kind that could be alleviated simply by central bank liquidity tools. however. investment and trade in initially all of the G7 countries.’..3 trillion. inflation. 3. causing a widespread ‘credit crunch’ and sharp declines in consumption. This refers to the fact that securities containing bad subprime mortgages were distributed across the financial system and institutions did not know where they were. and financial panic and mass selling-off of stocks and a hoarding of cash by banks and individuals.g. a loss of credibility and trust. With the interconnectedness of financial markets. especially amongst the developed countries. followed by an agreement amongst the Euro-zone countries on 15 October on injecting further capital into distressed banks and providing guarantees for inter bank loans. particularly in the inter bank market. at the cost to the taxpayer of more than US$1. weak regulation and supervision of complex financial instruments. Wall Street’s Dow Index experienced its largest one-day point loss in history. Reasons for Pakistan’s Economic Crisis Pakistan witnessed major disruptions in its normal economic activities as the result of acute energy crisis.with large-scale selling of stocks. When the US House of Representatives on 29 September 2008 first rejected a US$700 billion bailout proposal for the financial firms adversely affected by the credit crunch (albeit later adopted).[3] Banks in Europe were soon affected due to their exposure to United States financial markets. The investment banking industry in the United States was wiped out. is what Taylor (2009: 12) describes as the ‘Queen of Spades problem’. e. On 8 October the UK government recapitalized eight of the country’s banks.. Central to the sudden reductions in availability of credit.[4] There are undoubtedly many further interesting and important dimensions to the crisis worth pursuing further (see. insolvency of key financial institutions. the panic spread rapidly. high cost of production. Taylor 2009). For present purposes. the above shows that the anatomy of the crisis is rather simple: easy credit. bad loans. . This created a counterpart risk. which precipitated the collapse of many firms. high rate of interest. Rather it was inherently a counterparty risk issue.

Pakistan’s balance of payment (BOP) crisis in 2007-08. a perceptible slowdown in the manufacturing and services sectors The other international elements include global recession. USA. Pakistan pleaded with the U. As a consequence. and limited access to international markets and specific countries. and Europe.1 Pakistan’s twin deficits Pakistan’s financial crisis predates the global financial crisis. begged Saudi Arabia and urged China for a billion-dollar donation. were engrossed in their own subprime disasters. meant a frightful depletion of foreign exchange reserves. reportedly lured by the United States Department of Defense. but imports end up exceeding $35 billion: a trade deficit in excess of $15 billion a year and a current account deficit of over $1 billion a month. Pakistan’s economic downturn is due to its internal economic reasons instead of direct impact of financial crisis 2008. Desperate for a bailout package. Inflation.6 billion and released the first tranche of $3. poor industrial infrastructure.S.S. incurring a budget deficit of over 7% of GDP. decline in FDI and joint venture with foreign investors. Pakistan has been running unsustainable budgetary and trade deficits. meanwhile. the International Monetary Fund (IMF).deteriorating law and order situation. all to no avail. weak economic prospects of the EU. Finally. On the trade front. on 24 November 2008. shot up to over 24%. a bewildering stock market. 3. announced a 23-month Stand-By Arrangement (SBA) of $7. The government of Pakistan routinely spends some $26 billion a year based on expected revenues of around $20 billion. down to an import cover of less than three months. 3. accumulated exports hardly ever cross the $20-billion-a year mark. Pakistan’s BOP crisis came at a time when the entire donor community.2 Pakistan’s banking sector . foreign exchange reserves jumped from a low of $6 billion to over $9 billion. credit crisis. including the U. and Pakistan was caught in a vicious cycle of stagflation—economic stagnation coupled with high inflation. which occurred as a consequence of $147-a-barrel oil and a spike in commodity prices.1 billion.. For the past several years.

'Pakistan’s banking sector has remained remarkably strong and resilient.Pakistan’s banking sector is made up of 53 banks. and thus tight liquidity and the ‘crowding out’ of the private sector. Provisions for losses over the same period went up from Rs173 billion in September to Rs178. According to Fitch Ratings. The data from the banking sector for the final quarter of 2008 confirms a slowdown after a multi-year growth pattern.6 billion. despite facing pressures emanating from weakening macroeconomic environment [sic] since late 2007'.09% in January 2008 to 14% in January 2009. the SBP has jacked up interest rates: the 3-month Treasury bill auction saw a jump from 9. At the same time. gradually evolved from a weak state-owned system to a slightly healthier and active private sector driven system'. The fact of the matter is that 2 out of 3 Pakistanis are already earning $2 a day or less. In October 2008. 'the Pakistani banking system has. the Executive Board of the IMF agreed to bail out Pakistan through a Stand-By Arrangement (SBA) valued at $7. the international credit rating agency with head offices in New York and London. 3. There were two conditions: Karachi must cut its budgetary deficit from around 7% of GDP to 4. Overall. four specialized banks.3 IMF Loan On 24 November 2008.67 trillion. over the last decade.2% of GDP. Liquidity is tight. A further slowdown would mean increased unemployment. and bank lending rates are now as high as 20%. six Islamic banks. seven development financial institutions and six micro-finance banks. An increase in taxation would mean a further slowdown in the economy.77 trillion in September to Rs3. certainly. and increase taxation from 10% of GDP to 10.9 billion in October.5% of GDP. Pakistan’s banking sector has not been as prone to external shocks as have been banks in Europe. which include thirty commercial banks. A rise in the interest rate would . total deposits fell from Rs3. According to the 2007-08 Financial Stability Review from the State Bank of Pakistan (SBP). but that has little to do with the global financial crisis and more to do with heavy government borrowing from the banking sector.

S. of which $3. Under CSF. aid and military reimbursements to Pakistan over U.1 billion was economic aid and almost $9 billion was for security. With the IMF in the equation. Under the new Obama Administration. . Economic data? 3.S.4 War against terror Since the beginning of 2008. the SBA package will slow real GDP growth to 3% in 2008-09 and add an additional 2 to 3 million to bottom-line unemployment.5 The role of the Coalition Support Fund (CSF) The Coalition Support Fund (CSF) was created by the United States Congress after 9/11 to reimburse key U. The CSF has helped to narrow Pakistan’s ever-widening current account deficit. in the Global War on Terror. The Defense Security Cooperation Agency (DSCA)maintains that The Department of Defense programs for supporting our coalition partners and building partner military capacity enable coalition partners to participate in U. particularly Pakistan and Jordan. There is no denying that the country is in a terrible financial mess. 3. full-blown political crisis can somehow be averted.5bn for the current fiscal year. but the United States unilaterally deducted $55 million and reimbursed a total of $101 million. fiscal years 2002 through 2009 totaled almost $12 billion.S. According to the IMF’s own estimates.S. Pakistan requested a reimbursement of $156 million. Pakistan's economic outlook has taken a dramatic downturn. the question now is whether a serious. for their assistance to the U. Concurrently. operations and conduct counterterrorist operations when they otherwise lack the financial means to do so. the insurgency has forced massive capital flight from Pakistan to the Gulf. allies.S. This heavy slowdown and additional unemployment could very well bring Pakistanis out into the streets—and that would signal a full-blown political crisis. Security concerns stemming from the nation's role in the war on terror have created great instability and led to a decline in FDI from a height of approximately $8 bn to $3.lead to the same thing: this high cost of capital would shut down a lot of Pakistan's industrial units—and this would mean even more unemployment. direct overt U.

In 2008. Minister for Water and Power. and IPPs in turn are unable to generate electricity.Due to low cash balances and liquidity as a result of the debt problem.6 Inflation and Interest Rate Inflation remains the biggest threat to the economy. The circular debt in Pakistan has arisen because the government of Pakistan owes—and is unable to pay—billions of rupees to oil marketing companies (OMCs) and independent power producers (IPPs).0%. following the surge in global petrol prices inflation in Pakistan has reached as high as 25. The central bank is pursuing tighter monetary policy while trying to preserve growth. Raja Pervaiz Ashraf. jumping to more than 9% in 2005 before easing to 7.. As a consequence. According to BMA. Refineries are having problems opening . interest rates? 3. the companies have to resort to short-term financing at high interest rates. a leading financial services entity.7 Energy Crisis-Circular debt On 26 January 2009. 'The circular debt problem is seriously impacting the operations of the entire energy value chain.9% in 2006. told the Senate that the 'federal government [would] settle half of the Rs400 billion circular debt by the end of January'...3. OMCs are unable to import oil or supply oil to IPPs. Neither can refineries open letters of credit (LCs) to import crude oil.

The foreign exchange reserves stood at $10. Power shortage in the country is one of the major reasons for this decline. This depletion of reserves in the five months was lower than fall in foreign exchange reserves for the whole of FY08.8 Foreign Exchange Reserves Foreign Exchange Reserves declined substantially in the initial months of FY09 dropping from $11. 2009.7% in the comparable period of last year. lost significant value against the US dollar and depreciated by 21% during March–December 2008.4 billion by November 25. 2008. 3. 3.8 weeks of imports as of end‐June 2008 but it improved to 12. IPPs like HUBCO and KAPCO are also having difficulty purchasing oil and continuing operations'. including the fact that financing costs in the entire energy sector have skyrocketed. The import coverage ratio declined to an uncomfortable level of 9. The subsequent recovery in November 2008 owed essentially the inflow of $ 3. Most of .4 billion at end‐June 2008 to a low of $6.LCs to import crude oil due to mounting payables and receivables.9 Exchange Rate Exchange rate after remaining stable for more than 4 years.3 billion as of March 27.1 weeks as of end‐October 2008 from 16. Large scale manufacturing (LSM) registered a negative growth of 5.1 billion from the IMF following Pakistan’s entry into a macroeconomic stabilization program.4 weeks of imports by end‐February 2009. The same can be said about the OMC sector.35% in July‐January 2008‐09 as against reasonable positive growth of 5.

however. the exchange rate will remain stable at around Rs. With substantial import compression and revival of external inflows from abroad in the coming months of the fiscal year. the KSE listed a total of 653 companies. foreign investment in the KSE stands at around $500 million. The KSE—as represented by the KSE-100 Index—had its highest close ever on 26 December 2007. Moody’s Investors Service announced that Pakistan’s credit rating had been placed 'under review'.10 KSE Foreign investment On the last trading day in December 2008. at 14. Pak rupee recovered some of its earlier losses against the US dollar and registered a net depreciation of 13.929 points with a market capitalization of Rs1. 3. On 5 November 2007.80‐82 per dollar. the rupee got back some of its lost value.5 percent for the period Jul‐February 2008‐09 [See Fig‐3].58 trillion ($20 billion). the KSE-100 Index stood at 4. With successful signing of Standby arrangements with the IMF.814 points with a market capitalization of Rs4. trade related outflows and speculative activities. As of 23 January 2009. Other estimates put foreign investment at around 20% of the total free float. According to estimates of the State Bank of Pakistan (SBP). .85 trillion ($23 billion). Standard & Poor’s cut its outlook for Pakistan’s credit rating to 'stable' from 'positive' on concerns over deteriorating security. In September 2007.57 trillion ($58 billion). foreign investors were actively investing in KSE-listed securities. with an accumulated market capitalization of Rs1.the depreciation of rupee against dollar was recorded in post November 2007 owing to combination of factors like political uncertainty. a loss of over 65% from its highest point. During the 2006 and 2007 calendar years.

a troubling macroeconomic scenario. There are both direct and indirect ways in which this can happen. In such cases it is likely that banks will reduce lending in order to shore up their capital. banks in developing countries may be affected to the extent to which they hold assets contaminated by subprime mortgages. In a worst-case scenario banks may face solvency problems . 4. These reduce the capital of banks (and of other big firms). Working of foreign banks in Pakistan? Like citi group There is.1 Banking failures and reductions in domestic lending In the wake of the crisis in the US. Directly. domestic security environment. the biggest initial fear in the rest of the world was that of financial contagion. 4. At the time of writing. this does not appear to be a significant concern in case of Pakistan and other developing countries. The impact on Pakistan economy 4. and (iii) Reductions in financial flows to developing countries. Pakistan’s banks had limited interrelationships with international banks. a ballooning trade deficit. Uncertainties over the upcoming Pakistani general election. threatening cloud over the market. (ii) Reductions in export earnings. however.1.1 The main channels How will the above be transmitted to and affect the developing countries including Pakistan? Three main channels are discussed here: (i) Banking failures and reductions in domestic lending. double-digit inflation.The end of 2007 was a bleak one for the KSE. an unsustainable budgetary deficit and a worrying drop in foreign currency reserves created a dark. which in particular causes problems where they do not hold sufficient levels of their capital in cash. a more serious indirect threat through declines in stock market prices and housing prices. This is the danger that financial institutions in developing countries will be negatively affected.

The latter will lead to reductions in demand which. Exports to US and EU countries constitute a major part of total exports. the price of oil fell by more than 70 per cent in the second half of 2008 and inflation is low. since September 2008. commodity prices have been declining in US and EU countries. Reductions in bank lending will have the impact of reduced investment. already with a large balanceof-payments deficit. and an increase in unemployment. For many countries. agricultural goods. For now though. the fact that the advanced economies are entering a recession is likely to hurt them. But it is not just decline in commodity prices that will adversely affect the export. in turn. a decline in demand for their goods from advanced economies. A recession in the United States and other G7 countries will in general reduce the aggregate demand of exports. The expected declines will come through a combination of a decline in commodity prices. lower growth. will reduce economic growth further. it should be noted that the potential may be significant. given that Pakistan has been basing its economic growth in recent years on exports.and may require their governments to recapitalize them. would face further pressure on its trade account. the reduction in export earnings will come at a time when their balance of payments is already under pressure due to rising food and fuel prices in 2007 and 2008.1. Such countries may be . this will translate into less government revenue. and see the value of its currency declining precipitously further against the US dollar. Exports of Pakistan are around $20 billion and goods exported mainly include textile goods. 4. These are briefly assessed. Declines in commodity prices will be detrimental to the export earnings of a large number of countries that are major exporters of commodities. and consequently less means for governments to fight poverty. In such situation a country like Pakistan. and sports goods. However. primarily commodity-importing countries. Pakistan is facing the problem of high inflation and shortage of energy. which are causing high cost of production to the manufacturing sector. The crisis is likely to lead to a substantial decline in the country’s export earnings. Bearing in mind that government revenue depends on growth.2 Reduction in export earnings Even if most developing countries including Pakistan are spared significant damage to their own financial systems.

private investment flows to Pakistan will decline as more risk averse. international trade depends on trade credit being extended.3 Reduction in financial flows to developing countries Pakistan requires financial inflows from the rest of the world to facilitate and accelerate economic growth. Remittances in recent years have grown to be one of the . Reduced portfolio flows will also affect government borrowing. Third. On this basis it can be concluded that if financial crisis prolong in US and EU countries Pakistan will also heavily suffer. trade credits and flows of remittances. FDI is declining. The costs of sovereign bonds and commercial debt—both important sources of finance for developing-country governments—have risen sharply. With the credit crunch starting to bite. This includes both portfolio and FDI. so fewer remittances and also probably lower volumes of remittances per migrant. it has important knock-on effects. First.13 Similarly. These flows include official development assistance (ODA). Remittances to Pakistan will decline because there will be fewer economic migrants coming to developed countries when they are in a recession. but it is expected that FDI flows to developing countries will decrease by 10 per cent in 2008 (UNCTAD 2008: 33). imf Second.1. trade and development. While FDI to Pakistan grew tremendously over the past seven years by 2007. 4. Massa and Te Velde (2008) estimate the decline in financial resources to developing countries to be around US$300 billion.in particular need of balance-of-payments assistance from the IMF as in case of Pakistan or from other source. around 90 per cent of trade is traditionally financed by short-term credit. us aid. All of these are set to be affected negatively during the current crisis. Economic aid. Pakistan official development assistance (ODA). as far as remittances are concerned. there will be dual pressures on developing-country trade: reduced demand for their exports and reduced trade credit. Consequently. investment flows (both portfolio and foreign direct investment (FDI). Fourth. Although this seems relatively small. trade finance has also been reduced as banks limit their risk exposure. Cali. investors move their funds to perceived ‘safer’ havens.

However. the likely responses required in Pakistan would need to include immediate. exceeding US$240 billion in 2007. Over the longer term. . from past experiences of financial crises and given the analysis of the origin and likely impacts of the current crisis. Domestic financial development depends on a better global financial architecture and vice versa. Data . countries should focus on strengthening their financial systems within the context of reforming the global financial architecture. short-term (stabilization) and long-term (structural) policy responses. Table 1 summarizes the key policy responses in a highly stylized manner.most important financial flows to developing countries. (ii) that confidence in financial systems is restored and that (iii) the impact on the real economy is minimized. 5 Policy responses. more than twice the volume of aid flows (Ratha et al. Immediate and short-term policy responses are required to ensure that (i) the financial crisis is contained.minimizing the potential impact There is no ‘commonly accepted theory of financial crisis’ to provide fail-proof advice on the correct policies that each particular country should adopt in the wake of the crisis (Jonung 2008: 566). 2007).

5. Resolution measures aim to redress the balance sheet difficulties of banks and typically consist of direct cash injections. restore confidence in banks and improve their health. and (ii) measures to reduce the fall-out on the real economy. provision of liquidity to financial institutions and forbearance on meeting regulatory requirements. Containment measures typically include guarantees on deposits and inter bank loans. . Since Pakistan and other developing countries have not been hit by the financial crisis that is why there is no as such required to take these immediate measures except providing liquidity to banks.1 Immediate responses Table 1 lists immediate responses to the crisis as including (i) containment and resolution measures to stop the crisis. allowing mergers and acquisitions .

2 Short-term responses Both advanced economies and a number of developing countries have introduced significant countercyclical fiscal expansion packages. and those with difficulties meeting investment and social spending. 5. and in view of the imperative not to repress domestic financial development. pressure on the exchange rates to depreciate. and an outflow of international capital. Most of exports are made to US and EU countries. In order to minimize the balance of payment. Pakistan is facing much higher inflation rates. Since these countries are epicenter of financial crisis so if this crisis prolong the exports may decrease. the various World Bank and International Finance Corporation (IFC). Pakistan should explore new trade markets and exports Arab and Gulf countries should be increased. This was the last option because Pakistan had been exploring other sources of funds to try to avoid stringent IMF conditions but failed to find a deal. But given the need to attract finance and encourage the profitability of their domestic banking sectors. In year 2007 exports were $20bn approximately and imports were $30bn approximately. amounting to $7.Up to what extend these steps have been taken in Pakistan? 5. Countries facing balance-of-payments constraints could need to make use of the IMF’s short-term liquidity facilities. The International Monetary Fund (IMF) has approved a loan for Pakistan. Where countries have the scope for expansionary fiscal policy. quotas and other regulations should encourage exports and discourage imports. and even where they do not.3 Longer-term responses: financial development . For this purpose trade policy which consists of tariffs. the challenge is to ensure that spending on social protection is not compromised.6bn to shore up the economy. Under such circumstances. exports should be increased. many developing countries will probably not have the leeway for expansionary monetary or fiscal policies such as are being followed in the EU and US. these countries would need to take care to maintain positive real interest rates.

Consider this: the United States buys nearly 30% of Pakistan’s exports. There are many ways in which financial sector development matters for growth. as well greater efficiency of the financial system. Over the past decades Pakistan has seen progress in financial development. Taken together.As indicated in Table 1. At the same time. and press for reform of the international financial system more urgently. America is the only major trading partner with which Pakistan enjoys a trade surplus. Investment should be in short term and long term projects. The global financial crisis and the accompanying global credit crunch have so far had only a minor direct impact on Pakistan. but the Pakistani economy remains in dire straits. Financial development refers to the deepening in the financial sector. For the 2008-09 fiscal year.4 billion foreign . the growth of entrepreneurship. It allows a more efficient allocation of capital throughout an economy. It is also important for economic diversification. country should prioritize a number of investment projects according to the requirement. American investors account for nearly 30% of foreign direct investment (FDI) into Pakistan. Moreover. Pakistan needs a colossal $13. Oil has since come down from a high of $147 a barrel to under $40 a barrel. Currently Pakistan is facing energy crisis which is affecting the overall economy. such as improvements in banking regulations increase in number of banks.11 Conclusion The two major external culprits behind Pakistan’s macroeconomic imbalance were a sharp spike in the international price of crude and an unprecedented jump in commodity prices. the world economy is slowing down as never before. providing greater access to credit. Now America is facing an unprecedented economic slowdown. 3. over the longer term countries should promote financial development more vigorously. Immediate investment should be made in order to resolve the issue. The available resources should be used efficiently. the two should provide welcome relief to Pakistan’s trade account and inflation woes. while commodity prices have experienced a drastic trimming. and for the efficient application of fiscal and monetary policies.

the IMF contribution is expected to be $4. [4] See www.co.financialpost. Pakistan must find other multilateral and bilateral donors to bridge the whopping gap.bbc. Of that $13.etftrends.news.uk/1/hi/business/7644238. In its October 2007 World Economic Outlook. still assumed in its baseline forecasts that. ‘market liquidity is gradually restored in the coming months and that the interbank market reverts to more normal conditions’ (2007: xv). although concerned about the subprime crisis in the US and its potential negative impact on slowing down growth.4 billion.com/news/story.html?id=790965. the IMF.com/2008/09/dow-jones-loses-nearly-800-points-volatilesession. for instance. [1] See Giles (2008).html.inflow of capital. Posted in: Economics Newer PostOlder PostHome 0 comments: Post a Comment Links to this post Create a Link Search HERE IMPORTANT MESSAGE . [2] See www.stm.7 billon. [3] See www.

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