As if our own economic woes were not enough, the world economy has been hit by the financial crisis like never before. In today's globalised world once the world's leading economies start melting down, nobody is safe. The worst hit is the economy like ours, which was in trouble even before the simmering economic crisis erupted in the United States of America.
Of course the epicentre of the financial Tsunami was US, where leading financial institutions tumbled. Once again, after Enron and other major companies crashed, it was evident that the US and some of the western countries' regulators were caught napping. Many European banks and markets have declared red alert. This has pushed all the Western governments to forget about the so-called free market economy principles and launch multi-billion dollar rescue packages. Market economy fundamentalists have been proven wrong. But then all kind of fundamentalism whether it is political, economic or religious proves to be damaging for any society.
This made people nervous and susceptible to the rumours that the financial Tsunami which has hit the leading world economies is now going to hit us hard. Another reason which made people nervous is that till a few days back it was felt that the PPP-led government is not giving due attention to the economy. Naveed Qamar was appointed as an ad hoc Finance Minister because Ishaq Dar had resigned. Members of the Economic Advisory Committee (EAC), which was formed by the government, confessed privately that their recommendations are not taken up seriously. One member said that "it was waste of time."
The new government which was installed in February inherited a number of problems. Most of them had originated more from the turbulent 2007. Almost the whole year was lost because of political instability and postponing of important economic decisions. The previous government had to its credit some economic achievements, which now many opportunists fail to acknowledge, but it squandered them in 2007 by avoiding the right decisions because of political expediency. Major mistake was not to absorb the impact of global inflation, when oil prices soared by over 90% and food prices swelled by over 40%. Indeed the decision to pass on these shocks would have been very unpopular, still postponing these tough measures did not win them the elections.
All this was done by taking short term measures. The worst was excessive borrowing from the banking system, which sapped the liquidity of the banks. And when the State Bank started tightening the monetary policy, the crunch was felt all around.
The new government lost considerable time in squabbling over political issues and not concentrating on the immediate economic challenges. Even a proper economic team was not put together. Ideally political parties should have a shadow government and think-tanks who should be preparing plans even when they are not in power. But in Pakistan political parties leaders are mostly in jail or in self-exile when they are not in power, in such a political culture their growth is retarded.
In the absence of any short-term or long-term economic plan of the government to meet the economic challenges and reports that major global banks and stock markets are in trouble, it was not surprising that rumours about some Pakistani banks going bankrupt were readily believed. The rumours were that the government was going to freeze the foreign currency accounts, break open people's lockers at the banks and was about to go bankrupt were circulated in the last few days at the speed of sms transmissions.
Many questions were raised by the media on the following day, when these rumours had already caused substantial damage to the financial sector. One question which was asked by most TV talk shows anchors was who started these rumours and why? Now it's very difficult to investigate what was the source of rumours. I rang up a few bankers and leading financial market players the next day to find out who was the major beneficiary of these rumours and where did the mischief start from.
Nobody could actually point a finger to a single person. But most of them agreed that it all started with the market rumours that some leasing companies which were facing serious default from their lessees were at the verge of defaulting. This created concern in the financial sector about the banks that were major lenders to these companies or belonged to the same group. From there it was like a forest fire, which spread with all kind of wild speculations. According to unconfirmed reports, this led to the withdrawal of deposits from the banks to the tune of Rs200 billion. Most of the money it is said went to the currency market which increased the demand for the dollar in the market.
Some savings were also transferred by wary depositors to the National Savings Schemes. This created a serious liquidity crunch in the market, which may now ease up a little bit because of SBP measures announced on Friday. The other beneficiaries of these rumours, all agree were the usual speculators who are astute in this game. They have now shifted their attention from the frozen stock market to the currency market.
Now the government is desperately trying to control the damage. The first move was to induct Shaukat Tarin as Advisor to the Prime Minister on Finance and Economic Affairs. According to some PPP insiders, Shaukat was President Zardari's first choice when his party took over the government. Then one of his ministers benevolently offered the finance ministry to PML (N) during negotiations which the party regretted later. Again after Ishaq Dar, the ministry was offered to Shaukat Tarin but he was reluctant to accept the offer. However, when Zardari became President, it was difficult for Shaukat Tarin to decline the offer. Many critics feel that taking a Citibank professional again as finance minister is a mistake. But PPP leaders maintain that he would be assisted by EAC and the economists committee formed by the Planning Commission, which has brilliant economists like Dr Hafeez Pasha, Dr Navied Hamid and Dr Akmal Hussain.
Some friends of President Zardari say that he has many good ideas to attract foreign investment into Pakistan. One such idea is to open all investment fields to Chinese, oil-rich Arab countries and Indian investors. I have doubts that the establishment would let him open Pakistan for Indian investors although the whole world is being benefited by it.
On the face of it, this looks like a good combination provided they work as team. But unfortunately I am not getting positive vibes from the economist group. At least one member said that traditionally reports of such groups are shelved. However, looking at the previous track record of Shaukat Tarin he is considered to be a team player and a doer. But this time he has taken up a challenge where many factors are beyond the control of any finance minister. The good news is that oil prices have tumbled down by almost 50% and same is the case with edible oil rates. This might provide some relief from the pressure on our balance of trade deficit.
Still the government has to raise around five to seven billion dollars to go through the mill this year. Not a tall order but time is of essence so it has to move fast and focus on the economy.
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