Pakistan: Economic Outlook & Perspectives

Article excerpt

The economy of Pakistan continues to perform well. This is commendable given the political noise in the country and the growing challenges in international economic and financial markets. 2000 onwards by and large world economy enjoyed a fairly benign economic environment. However it is now certain, more than in the last few weeks that financial and economic vulnerabilities have grown across the world and are likely to impact global outlook. Upfront it has to be acknowledged that despite these adverse developments by all accounts the world thus far has persevered recent shocks quite well given that underlying financial health a macroeconomic fundamentals of both advanced and emerging economies were quite strong.

Among the key factors impacting global economy is the financial market turmoil. It originated in US Sub-prime mortgage markets in 2006 but spread with incremental speed from June 2007 into the money markets and transcended boundaries hitting Europe and other economies and resulting in an unprecedented liquidity crisis in advanced financial markets as I manifested by the rising spreads in credit markets. Financial and economic costs of this episode are still being unfolded but are large. It has already caused US and Europe central banks to inject liquidity and prompted losses of (close to $300 billion in US Sub-prime markets (of $1.2 trillion). The losses are bound to further rise as interest rates resets on these transactions hit the borrowers further. Furthermore, profitability of a number of large and strategic commercial banks has been lowered as banks had to write off and provision for the losses on their own balance sheets of Sub-prime and other asset backed commercial paper as well as assume loss making off balance sheet transactions, while rescuing structured vehicles and/or troubled affiliates. The financial market turmoil has impacted private equity and debt markets where spreads have risen. The problems of now well acknowledged to drag, the housing sector of US and its growth.

Additional risks which cloud global economic prospects are rise in inflationary pressures given volatile oil markets and rise in commodity prices going beyond precious and industrial metals to foods such as wheat, soybean oil and palm oil that have reached record highs during 2007. A weakening dollar has further amplified the oil price surge. Combined with financial turbulence this is now inducing investors to diversify away from dollar denominated financial assets to commodities - this second round impact carries risks of magnifying the inflationary pressures.

With this backdrop, I propose to provide briefly Pakistan's economic update attempting to lay down some emerging trends for FY08 which require stronger vigilance at economic policy making level and industry and private sector to be more responsive. In general, it has to be underscored that despite domestic and international events, Pakistan economy's prospects remain strong.

Barring impact of international commodities prices which I will discuss shortly, Pakistan financial markets has remained by and large insulated from the financial market turmoil as it did not have exposure to mortgage or other asset backed securities. The external sector which has thus far been manageable could however see some spillover impact of US down-down if it turns out to be more severe.

Not with standing this conjecture, some emerging trends could have implications for economic outcome of FY08. On production side, growth is likely to be impacted by setback to two major crops, i.e., cotton and rice as they were hit by pest attacks and other problems. Part of the agriculture crop shortfalls could be offset by the higher than expected other crops. For instance sugarcane harvest is likely to touch new high level of 62.3 million tons - up by 13.5% relative to last year.

July-October 2007 data for industrial production reflects a mixed picture. …