Risks to global growth

According to Claudio Borio, the Head of the Monetary and Economic Department of the Bank of International Settlements (BIS) - the body that represents central banks - a new recession could come "with a vengeance" and "the end may come to resemble more closely a financial boom gone wrong". The reason behind this dire forecast: emerging markets such as China, Brazil and India are showing signs of their economies overheating like the US and the UK demonstrated before the financial crisis of 2007-08. Or, in other words, 'risky bank lending' during the past year could well threaten stability of the global financial system. The BIS in its annual report further warned governments that a recovery in global trade and improving levels of Gross Domestic Product (GDP) may generate complacency and lead to policymakers ignoring signs of excessive lending from the financial sector.
The annual BIS report added that the disconnect between the exuberance of stock market investors and bond investors who lend funds to nation states was also a destabilising factor and that "there is tension between stock markets, which have soared, and sovereign bond yields [the interest rate on the debt], which have not risen much as economic prospects have brightened. And, unfortunately, the unwelcome long-term developments we termed "the risky trinity" in last year's report are still with us: unusually low productivity growth, unusually high debt, and unusually narrow room for policy manoeuvre."
The report notes that the credit-to-GDP gap indicator shows debt is building up far above long-term averages. The measure, an "early warning indicator" for a country's banking system, shows China, Hong Kong and Thailand are extended far beyond other major economies. China's ratio stands at 24.6, according to the BIS, indicating its banking sector is far more stretched than the UK or the US, which show negative readings on the same scale.
With respect to Pakistan, three observations are in order. First and foremost, one would hope that the Ishaq Dar-led Finance Ministry desists from citing the Price Water House and Coopers (PWC) report that inexplicably ranked Pakistan 24 globally in terms of purchasing power parity in 2016 and projected the country attains a ranking of 20 by 2030. PWC, apart from other critical factors, ignored the element of risky financial lending and assumed that emerging markets would set the stage for global growth. However, the BIS and the PWC report both refer to the need for structural reforms to improve macroeconomic fundaments and institutions and that is as applicable to developing countries as to the developed countries (with a focus on the financial markets).
Secondly, the BIS report warns that soaring stock markets, which have become detached from underlying values, are another sign that unjustified exuberance had replaced last year's overly pessimistic reaction to political events such as the US election and the UK's Brexit vote. Needless to add, Finance Minister Dar continuously cites a soaring stock market as proof positive that the economy is stable, however, economists warn that the Pakistani stock market's exuberance is also unjustified and has as much to do with manipulation by a few stock brokers in response to low taxes as it is to political events unfolding in Pakistan.
And finally, BIS warned that "keeping interest rates too low for long could raise financial stability and macroeconomic risks further down the road, as debt continues to pile up and risk-taking in financial markets gathers steam." Dar has been keeping government interest rates low by slashing the applicable rates for customers of National Savings Centre Directorate to understate the debt servicing costs; as well as for the private sector to encourage productivity, however, with high input costs relative to other countries, mainly due to heavy taxes and inefficiencies, and inordinate delays in refunds productive sectors are borrowing to meet their liquidity needs and retire previous debts rather than to enhance productivity.