The State Bank of Pakistan said that the global economy is at the precipice of another recession, which may hurt Pakistan's exports. According to SBP's annual report new recession could be even more severe than the sub-prime mortgage crisis, as the underlying cause is market borrowing by many Organisations for Economic Co-operation and Development (OECD) countries to finance unsustainable fiscal deficits.
The current problem has been triggered in the European periphery, with the market pricing in the real possibility that Greece, Italy, Spain, Portugal and Ireland may be pushed into sovereign default. The report said that immediate worry is the possible slowdown in Pakistan's exports, as the US and EU are the primary destination for Pakistani goods. "We cannot deny this risk, but would suggest the outlook is not as worrying as may appear at first glance", it added.
The bulk of Pakistan's exports are low-end textiles, which are not likely to experience a fall in demand as they are income inelastic as the same time Pakistan's export receipts may be hit harder by the price effect if cotton prices continue to soften. However, the negative price effect may not be as pronounced going forward, as current international prices are where they were before the spike started in mid-2010, the report pointed out.
The report mentioned that Pakistan's economic outlook is not totally counter-cyclical with the global economy and a recession in the OECD will hurt foreign direct investment, and the recent cut in domestic interest rates may discourage fixed income inflows. The only consolation is foreign investment and remittances are likely to be small and should not have a serious impact on Pakistan's external sector. A greater concern is Pakistan's relationship with the international financial institutions (IFIs), since official flows are larger than private capital flows, the report said.