State Bank of Pakistan (SBP) Governor Salim Raza said here on Saturday that the developing countries would have to stimulate their domestic economies, increase their capacity to consume surplus production in the wake of shrinking exports and achieving sustainable growth to effectively weather the international financial crisis.
Delivering a lecture as chief guest on 'Financial Meltdown and Global Economic Recession: Causes and Effects', organised by Karachi Council on Foreign Relations, Economic Affairs and Law (KCFR) at a hotel here he dwelt at length over the causes and effects of the ongoing crisis in the international financial markets.
He said that Pakistan had not been adversely affected by the global financial crisis like the rest of the world, and added that the country's economy was likely to grow by 4 percent-4.5 percent in the next fiscal year. "Nevertheless," he said, "one impact of the global financial meltdown is that private inflows of the order we witnessed until 2007 have dried up."
The SBP Governor said that in the wake of global financial meltdown, emerging markets had suffered sharp fall in demand for their products--whether commodities or manufactured goods--as major economies have contracted, and a sharp slowdown in private capital flows to the order of over $500 billion between 2007 and 2009 had taken place.
"The implication is that the role of multilateral inflows has become all the more important. And, the fact that our macroeconomic stabilisation program is on the right track will help these types of flows to materialise speedily," he said.
Responding to a query, Raza said that inflation was likely to be in single digit in the next fiscal year. He said that the Federal Government has successfully implemented macroeconomic stabilisation program, and added that "we have been able to meet all the targets of the International Monetary Fund".
He however, appreciated the role of IMF in the macroeconomic stabilisation of Pakistan. The SBP Governor said the pledges of $5.28 billion made at the recently concluded Friends of Pakistan meeting in Tokyo showed the confidence of international community over economic performance of the government.
He said that how the emerging markets were going to adapt themselves to the changing scenario would depend partly on how the major economies strategically responded to the problem of substantially weakened financial intermediation capacity in their economies, and on how far, in the future, their economies would turn around. He said that governments in the West were providing heavy support to banks, via capital injections and via purchase of overvalued assets.
However, the concern here would be that if the process of reviving banks' capacity to resume active lending, at more normal risk premiums, became conditional on tight regulations and on the repairing of the domestic markets - mainly the mortgage markets - as opposed to the much more global scope of investment and lending, that had become increasingly the practice of financial market leaders since the mid-'90s, then there could be a prolonged slowdown in the cross border flows of capital to the emerging markets, he said.
"Secondly," he said, "if the resumption of growth in the major economies is delayed, that too will impinge on emerging markets via the slow revival of demand for their exports. "It is not clear at this stage whether or not we are looking at 2010, or beyond as the water shed for the turnaround," he added.
He said that the shift of the damaged asset pool is itself dependant on the revival of demand, and on the stabilisation of the housing market prices which, in turn, is at least partly dependent on banks' capacity and willingness to lend. For the US to lead the revival in demand is going to be difficult, he added.
He said that US households' total liabilities have increased by 2.5 percent, to $14,242 billion, since mid-2007. Their assets, however, have fallen, in value, by 16 percent, to $65,719 billion. "So, without increase in demand from other parts of the world, and a revived banking system, when sustainable recovery will begin, it will remain a somewhat uncertain exercise," he said.
Stressing on the need to stimulate inter-regional channels of trade, Raza said that what had gone wrong was the increasing disconnect between the real economy and the financial economy, which greatly exaggerated the amount of liquidity that was available for global growth.
"This 'leverage' is now progressively being rationalised, and we will see lower growth for some time as the adjustment occurs," he said, but added that "it should remain our objective that the globalisation of trade and capital flows remains a priority, and the world's economic managers discourage protectionism policies firmly."
Kaiser Bangali eminent economist, said that Pakistan was a development state during the 1947 to 1977, whether the government was political or not. However, after that it had become a security state, which directly hit the economy. He said that the current economic crisis in the country could be attributed to last 10 years' economic policies, especially the government led by Pervaiz Musharraf and Shaukat Aziz.
At present, due to a security state, the country's assets are depleting and collapse of Northern Bypass, Ran Pethani Bridge, and KPT berths were some examples of the poor policies, he added. Criticising the rising defence and current expenditures, he said that during the last fiscal year the country's tax revenue stood at about Rs 1 trillion, while overall defence and current expenditures were over Rs 1.16 trillion.
Najmul Saqib Khan said that the prevailing economic crisis could be attributed to the housing policies and subprime mortgages in US, while at present China is emerging as an economic super power, as its economy has not been hurt by the economic meltdown, and only four Chine banks were saved from losses.
Lieutenant General Moinuddin Haider, chairman of KCFR, highlighted the problems faced by local and foreign investors and demand proper policies for the economic development. Najam I Chaudhri, vice chairman of KCFR, and Ahmed Ali, a former minister of port and shipping, also addressed.