Maaz Research

8/8/2019 Maaz Research

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INTRODUCTION

Recession is perhaps one of the most important phenomenons of economics. It is basically gradualslowish trend in the business activities and generally its main cause is low spending or spending below

the required rate which should be enough to make the business cycle run efficiently. During recession

macroeconomic indicators all of them almost have the same effect i.e. declining effect with a different

rate, all of them fall but the declining level is not similar. These macroeconomic indicators include GDP

(gross domestic product) , inflation , profits earned through businesses, employment , money for

investment , income of the household etc. It is a common observation that bankruptcies and rate of

unemployment rise during inflation which is perhaps the most important reason for worsening the bad

condition.

It is believed by economists that the major cause of the recession is the imbalance between earning and

spending, specifically lowish spending rate is the main cause of the recession. Governments mostly try

to counter the situation by using policies that restore the balance that was discussed earlier. This is done

mostly through expansionary macroeconomic policies. These policies refer to increase in money supply,

increasing the spending rate of the government, and relaxing taxes.

There are several rules of thumbs for detecting recession but most commonly used is the two down

quarters of GDP which refers to constant decline in the gross domestic product for atleast two

consecutive quarters but some of the economists refer to the unemployment rate of the determination

of the recession , they commonly determine it by observing a constant hike of 1.5% in the

unemployment rate within 12 months .

A more rare and devastating form of recession is called as economic depression which is caused by a

constant and prolonged recession but there are people who believe that this kind of severe recession

has different causes and therefore it has different treatment.

Different kinds of processes are used to mobilize economies and one of them is the bringing interest

rates to zero. This particular situation is called as a liquidity trap as the economy is trapped while trying

to increase the liquidity in the economy. As for theory is concerned zero interest rates should initiate

cash flow in the market as borrowing will increase and so will be the spending but in practice this does

not happen. In fact zero interest rates have less effect on the consumption and investment behavior.

This is regarded as the reason for the recent recession in the United States. Common remedy that isused to tackle liquidity traps in to increase the money supply.

Since the great economic depression of 1930s this economic depression of 2008 was perhaps the most

devastating one. It occurred and its presence was felt due the failure of some large financial firms of the

United States. The subprime mortgage crisis has been reported to have played the important role in the

causing the crisis. The downfall of the major economic financial institutions in the united states

provoked chaos for most of the international financial institutions like European banks, downfall in


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various stock indexes, and a strong decrease in the value of equities internationally. Liquidity problems

and deleveraging of most of the financial institutions of major economic powers also accelerated the

crisis. The world political leaders and senior bank officials sat together to tackle the problem but this

crisis went on and created a new currency crisis where most of the investors transferred their large

capitals from weaker to stronger currencies leaving the economies money deficient.

The most recent economic crisis was originated in the developed countries and later on transferred on

to other developing nations. It is certainly not the first time that such kind of economic crisis has taken

place. In 1997 countries like Indonesia and Thailand were devastated , in 2001 united states faced an

financial crisis due to IT failure and the lowering of interest rates in united states for tackling recession

led to free and more liberal lending for construction and mortgages, this bubble finally burst in 2007 and

led to the subprime crisis.

Forecast of the crisis

A research paper named global economic outlook 2007 used a very beautiful sentence and predictedthe crisis saying that the united states invests far more than it saves and the rest of the world saves far

more than its invests. this implies that there is a big imbalance in the economy. This suggests that there

is a massive amount of cash out flow to the world from US. This transfer of money is so significant that

whenever there is a slight change in this cash flow the world economy experiences a big change in their

economic growth. We can easily say that as for the prevention of economic crisis and the channelizing of

resources from the richer to poor economies the global financial system has changed considerably.

Following are the global trends that led to the financial crisis.

Higher prices of commodities:The prices of many commodities in 2008 rose so high that they were appearing to have the potential to

cause a crisis, some of these commodities were oil and food stuff. There were a lot of record prices hikes

in 2008 as the oil price per barrel crossed $100 that year and by the end of July the price per barrel

reached $147. These prices hikes were showing that the crisis was at the corner.

Trade:

The Baltic dry index fell by 50 percent in one week which is a measure of shipment. It happened so

because of the liquid and credit crunch and the exporters were unable to get letter of credits for their

shipments.

Inflation:

In 2008 Reuters claimed that the global inflation had never been so high and its almost an historic era

that inflations have risen that much including the domestic inflation. There were many possible reasons

that were attributed to have caused inflation like excess money supply around the globe , easy


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monetary policy in Asia , speculations regarding commodities , failure of agriculture , the increased cost

of imports from china and rising demand of commodities and food. In the mid 2008 the IMF reported

that the developing Asian countries and countries that exported oil have the highest rates of inflation.

Unemployment:

It was reported and predicted by the international labor organization that due to the crisis at least 20

million jobs may be lost. They regarded the following sectors to be effected mostly like the construction

business, financial services. Real estate and auto mobile sector. If this happens or had happened the

world unemployment rate would have reached to 200 million for the first time in history.

PREDICTORS

The specialized people have developed different indicators and tools through which they claim that withthese tools we can predict recession. Some of important ones are as follows ,

y The inverted yield curve uses the yields of treasury securities of 10 years and sometimesof 3 months.

y The unemployment rates and jobless claims.y Index of mix financial indicators.y Lowering of assets pricesy High levels of personal and business debts.y Constant decline in the stock market.

Another important thing that is noticed that different people treat the same phenomenon i.e. recession

in different ways for e.g. the monetarists try to solve the situation by expanding the monetary policy,

Keynesian followers try to initiate economic growth using high level of government spending , people

dealing in the supply side believe that relaxing taxes can be a better option so on.

It is very interesting that mature and full impact of recession on employment cannot be felt for quite a

large period. And those people who are unskilled are most likely to be effected by the during this period.

The production level of bussinesses fall during the initial stage of recession but it rises again to some

extent as small firms close down. The differnces in profitibility increases between firms . the recessionmay also provide some bussiness oppurtunities for some companise in a competitive environment but it

is on profitable and good for economy at the large level.

Recession also have other important impacts on the large scale on social and populative aspect of the

society . people whose income are not fixed rather they depend on wages etc etc they are more

vulnurable to recession than those having fixed income.


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Impact on developing countries:

Without any doubt this has been a very serious and disturbing crisis for most of the poor citizens of poor

nations. In fact whenever such c risis occurs even if they are not of the same amplitude as we are talking

about poor people are the most to be effected and they dont recover easily either. This is really quite

interesting that whether it is an crisis that is taken birth domestically or a crisis that has foreign origin

they effect the poor people in the same bad way.

The world bank report on Global financial crisis and their implications on the developing countries

described the effect on the lives of the people of developing nations as follows,

y No country whether it is an industrial or developing country has been spared during therecession although countries having less affliation with the international markets have been

least effected.

y The world trade volume and the projected growth rates for the countries have or will crash.y The concerns about the credit growth have been proven valid.y The investment sector will suffer the most as it has direct relation with the international crisis.y The credit markets have been in a position of freeze if they dont have restore quickly they could

have bad effects on the economy.

y The remittences from the host countries will have an declining effect and the exchange rate willplay an important role in the received money.

y The low income countries although the channels of transmission of the crisis are different aresuspected to be effected badly.

y The number of the extremely poor have increased due to increase in the food and fuel prices.y The challenges that he developing countries were facing have increased due to the financial

crisis.

y The impact of the economic recession will be different from country to country but still thefollowing factors would be same for almost all nations which are weaker exports revenue ,

pressure on current accounts and payments, low rate in investments and growth and decline in

empoyement.There can also be social impacts on the developing countries like increase in the


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poverty rate , crime , low health facilities etc.

RECESSION AND PAKISTANS ECONOMY

The pakistan economy has never enjoyed freedom to grow at a constant rate thoughout its life time. It

has always experienced different obstacles both from internal and external fronts. Internally weak

political environment is responsible for entrupting the economic growth while externally global price

hikes of fule and edibles are responsible for the phenomenon. As pakistan`s economy is almost never

stable due to factors stated above so these economic recession further worsen the situation and

economic growth drops considerably. For the economists the major problem is to find a way through

which economy should be able to find the right track even in tough situations. The analysis of financial

data before and after the recession should be very helpful so as to find out the extent to which the

economy is effected.

The study of the topic should be divided into following parts , initially the channels through which it

reaches pakistan , analysing the performance data before and after recession , how the govt responds to

the situation and finally devising policies and recommendations that should be ideal for the situation.


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HOW RECESSION PENETRATES THE DOMESTIC ECONOMY

The main routes that recession takes to effect pakistans economy are goods and services trading , cash

flows , money entering from forign countries , and values of equities. The major portion of pakistan

forign earning comes from exports to western countries during recession the demand for goods fall in

this way earning of pakistan from exports falls down considerably, similarly the exports also drop .

Foreign direct investments are very important for the growth of economy , as during recessions the

paying power of the people decreases considerably therefore investors lose confindence to invest their

money in countries where there is liquidiy problem , pakistan like many other third world countries

observes outflow of foreign direct investments during recessions.

Imports and imports growth performance

Foreign private investments

Similarly another major source of inflow of foreign money is remittences. It is interesting that the

remittences have held up rather than decreasing during recession , it is partly because that most

pakistanis work in middle east countries and many of them not stoped employing people except for

some states. There can another case for this helding up of the foreign remittences this can be because


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of the returing immigrants bringing foreign money in accumulative forms for investment purposes

partially because of depreciation of the local currency.

Workers remittances

Stock markets can also serve as channels for effecting an economy due to global financial recession. In

pakistan this factor is not that strong for channelising the effect to economy because pakistan stock

market is that much exposed to the international financial institutions. As a result of world recession the

risen food and fuel prices have gone down and this has brought some relief on the people .

Selected commodity prices


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An brief outlook of macroeconomic performance before and

after the crisis

Pakistans economic performance was quite handsome in the years before the economic crisis. In 2007

the economic growth slowed down to 6.8% from its orgininal place which was 7.5 in 2006 , this healthy

momentum was basically due growth momentum in the manufacturing and serives sector. The

industrial sector grew impressively with an impressive rate of 9.5% and most of this growth was led by

the manfucturing industry , gas and electric distribution , construction and mining. The growth in the

sevices sector couildnot not overlooked as well as it was 7% in that period. And if we consider the whole

services sector a broad base the financial sector gave about 15% of the growth.

GDP and sectorial growth rate

It is quite interesting that Pakistans economy started to get weak even before the global financial crisis.

The fiscal defecit rose to 7.4% in 2008 and same is the case with inflation rate which rose to 12% from

4.6% , this is indeed very high increase in the inflation rate.

Fiscal indictors as percentage of GDP


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Annual average inflation rates

In the periods preceeding the crisis Pakistan maintained very solid external balances. While in lateryears

the economy faced deterioration specially in the current account balances .

Current account balances and exchange rates

During the period preceeding the crisis Pakistan observed a substantial increase in foreign direct

investments and they amounted to $5026 million in 2007 while in the year 2004 they were $906

millionAlso the domestic currency showed little depreciation as compared to ealier years as the nominal

exchange rate rose to Rs 60.6 2007 from Rs 57.6 in 2004. Pakistani exports also showed good growing

signs during the years as they jumped from $9028 milliion in 2000 to $16533 in 2007 but most of the

demand of Pakistani exports are from western countries and there fore Pakistani exporsts remained

vulnureable during that time period.


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Pakistans exports by destination

Export and import performace

After the crisis

The global financial was a very bad news for Pakistans economy as the economy was already receivingshocks from risen prices of fuel and food material. The global economic break down hit pakistans

economy real badly as the current accounts and fiscal defecits increased considerably , the inflation

accelerated quickly , the foreign exchange reserves melted down and the domestic currency that is the

rupee depreciated. During 2004 to 2007 the growth rate of the economy was 7.3 but in 2008 it scrolled


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down to 4.1%. the GDP growth further fell down in 2009 due to weakened investment sector and the

political and security instability further worsened the situation.

GDP growth rates

As Pakistan is highly import dependent economy it faced more shattering due to the increase in the

current account deficits. The current account deficit was 4.8% in 2007 and then it increased to 8.4% of

the GDP and further the deficit rate was expected to meltdown to 5.3% in 2009. As the current account

deficit increased the pressure on the domestic currency increased considerably and the currency

depreciated sharply. The budgetry side was not also safe it also suffered increase in the fiscal deficit as

the fiscal defecit increased from 4.3% of GDP in 2007 to 7.4% of GDP in 2008. This also caused weak

revenues. This had also decreased the spending on the public sector and was expected to cause high

interest rates.


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Trends in inflation

The hike in inflation caused rising of prices in food and fuel sectors and it continued for some time even

after the economy was hit by the global recession. From the figure it is visible that the inflation rose

quickly from 6% in 2007 to 25% in 2008 and after then it came down mostly due to tight monetary

policy. The financial crisis had the potential to cause lot of unemployement in the region as Pakistan was

expected to cut almost 3 million jobs in different sectors. Most vulnerable sectors to this unemployment

were textiles , automobiles and construction businesses. Private consumption has played an important

role in growing of the economy commonly known as consumer financing which helped the middle

income consumers to buy stuff mostly automobiles as the tighter policies increased the interest rates

therefore these consumer businesses and buying ability of the consumers was hit quite badly , similarly

the construction business also suffered.

Small and medium enterprises have also played significant role in the uplifting and growth of the

economy. It is rather interesting that most of the SMEs have an inclination towards exports and these

exports mainly are sports goods , textiles , IT material , surgical equipment etc as most of the demand of

these materials are from western countries therefore these export-oriented SMEs also suffered a lot.

And further high cost of financial resources and tight monetary policies have added to worse situation.


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SHOCK ABSORBERS AND AMPLIFIERS

Shock aborbers and amplifiers are regarded as an important phenomenon in economic systems , shockaborbers tend to reduce the bad effect of the situtaion while amplifiers intensify the effect.

A common and wellknown shock absorber is a strong financial system , it is generally accepted that

pakistan has relatively a sound financial system so it has the ability of withstanding tough times.

Pakistans economy is relatively less exposed to the international financial markets therefore even in a

global economic disaster pakistans economy is rather less effected.

Another key shock absorber for pakistan is relying on domestic consumption than on exports so

therefore even in bad global bussiness evironment the domestic bussinesses support the overall

economy as we can see from the figure that private consumption almost have 70% of GDP in 2009.

Privateinvestmentand consumption

Economic stablility can also lessen the bad effect but in pakistan this factor is less operative due to

fluctuation in inflations rates and fiscal deficits.

High level foreign exchanges can provide resistance against shocks. It serve a dual purpose i.e it not only

strenghthens the domestic economy but also increases the investors trust and confidence. But only

healthy foreign exchanges can help as shock absorbers , as pakistan donot have strong foreign exchange

reserve back therefore they are not able to provide good resistance to shocks that applied from the

external markets.

leve

l of foreign

ex

changes


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Similarly amplifiers are those economic activities that intensify the shocks and major form of shock

amplifiers in pakistan are less focus on economic diversification i.e investing and dealing in specific

bussinesses , and dependence on external sources for financing. Pakistan economy highly depends on

the exports of textile and external financing are an important source for raising funds. Both of these

phenomenon are quite operative in pakistan like in exports textiles are the most significant product and

when during recession their target markets were hit and similarly food and fuel price hikes and

depending on exteranl sources of finance these all factors ampified the effect on economic recession

regarding pakistan.

Savingandinvestmetsgap

EFFECT ON PAKISTANS ECONOMY

Pakistan is the second largest economy of the southasia and is seriously vulnureble to the international

economic crisis. Following things have placed Pakistan economy in very serious situations and they are

weak currency , decline reserves , deficits in current account , fast growing inflation rates and a very

unstable economy. Pakistan stood in a very difficult situations in those times while china and india

recovered quite quickly using the stimulation packages. These currencies had a good amount of foreign

exchange reserves and they could go for this luxury but Pakistan could not adopt this strategy as is had

low foreign exchange reserves. To further worsen the problem Pakistan had political unstability at that

time . due to these conditions Pakistan was forced to lessen its expenses and was not able to use an

stimulation package. Pakistan then tried to stop and halt the effect of the economic crisis by using

demand management which included tightening of monetary and fiscal policies. Pakistan borrowing

ability was already in a mess and issuance of bonds was not feasilble due to large spread. Through the

financial crisis the non official foreign capital flow become more expensive. The shocks on the financial

sector were estimated to be enormous but one good news was that pakistans banking was showing the

potential to withsatand the stress. Perhaps this was due to the improved past reforms. In November


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2009 pakistan also initiated a stabilization programe that was supported by theIMF whose main pupose

was to prevent default on the foreign debts. In 2007-08 there was a sharp increase in the fuel and food

price specially in the wheat prices which severely disturbed the microeconomic balances. The slow down

in the global demand and decline in the commodity prices effected the trade balnce which effected the

Pakistan economy. These effects are given briefly as

FINANCIAL SECTOR

The financial environment in Pakistan was effected quite badly in 2008-09 as the operating environment

detoriated to a great extent . this detoriation was caused due to factors both from the external and

internal fronts. The domestic economic environment was effected by weak macro economic indicators ,

consistent and prolonged political uncertainity and the price hikes had added to bad impact of the global

economic crisis.

CAPITAL AND REMITTANCES

As a whole the investment environment fell down as compared to last few years. Some of the asian

countries temittances from the foreign countries also fell down as the rate of unemployement grew in

the host countries but pakistans remittances were mostly unaffected. The workers remittances should a

hike of 19.5% with the increase from 5.32% to 6.36%.

PRICE HIKES

Paksitans economy suffered badly due to external price hike of the commondities , but as the demand

for the commondities decreased resulting in decrease in prices helped the situation and helping the

current accounts deficit to recover. Pakistan did experienced a drop in the exports level but this

lowering rate of exports was bit different from other countries having the same effect. This decrease in

exports was partly due to decreased level of productivity from domestic producers and partly due to

recession so it quite difficult to comprehend the situation and find out the main cause. This fall in

exports still was less as compared to fall in imports still having a good net effect on the economy.

EXTERNAL SOURCES OF FINANCE

Pakistans depends on external sources of finances a lot as during recession the sources themselves are

effected and with an increased cost of borrowing and bad credit ratings of countries it is quite difficult to

raise funds from external sources.


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IMF programe Pakistan had to strictly follow tight monetary and fiscal policies to recover the

imbalances. The state bank of Pakistan further tightened the policy to tackle the fast growing inflation

rates. The rise in the interest rate have lower down the growth level of private investment while its

impact on inflation was moderate. In that scenario the government did try to reduce the public

expenditures and increase the public revenues. The subsidies on the gas and electricict were tried to be

phased out , improving public development , and reforming tax policies.

After these steps were taken there came good signs for the economy , inflation eased out , foreign

exchange reserves increased and the current account deficit has been decreased. But inspite of all these

the country is still in bad law and order situation and further the political unstability is still a threat for

the countrys economy.

Vulneraibility

Pakistan is still vulnerable to economic crisis if they happen and its vulnerability have been summarized

by the world bank as follows,

y If Pakistan is still not able to raise revenues in the future it will very likely to hit by economiccrisis within and if there is crisis beyond the borders . Pakistan will have utilize its resources to

the maximum effect inorder to increase its chances economic growth and survival. Pakistan

would be very vulnerable if the investments planning which is for the development of human

and physical infrastructures dont go as desired and they are not as profitable as desired.

y Pakistan will have to decrease its dependence on the external financing as most part of the higheconomic growth in the early part of the decade was due to reliance on the external sourreces

of the financing. And even though there was economic growth but level of saving and revenues

didnt increase.

y Similarly dependence on the external financial resources created a payment crisis which cameabout in 2007-08. To avoid these kind of situations in the future Pakistan must cut its

dependence on external financing and they should make efforts to mobilize the domestic

business industry.

Literaturereview

A lot of studies and researches have been conducted about the topic and there have been quite

interesting results as they vary from researcher to researcher. There are various reasons due to which

recession effects pakistan and different stratigies are recommended by differnet people to tackle this


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situation. There have been mulitple recession in the recent past but it is quite interesting that almost

same stratigies with little or no difference are recommended for the situation.

According to nawab sheikh the world economy has lost its way and due to their way ward policies the

recessions take place regularly after some time period.during this time period the stock markets

collapse and most of the financial institutions fall , and even the wealthiest nations are not able ot copewith the problem and this has got severe effects on the economies and living standards of the people of

third world countries .price hikes in the food and other regularly consumed items increase considerablly

and worsens the situation (sheikh, 2008). As most of the fDIs come from western countries so a

meltdown in their econommies means a direct effect on the pakistans economy. But there have

contrast rather optimistic views about the FDIs as an article in bolichistan times suggested that during

recession the FDIs inflows are still positive as compared to other countries and the logic and reason

suggested for this is that pakistan attracts foreign direct investmenst in natural resources and energy

sectors which are least vulnerable to the economic crisis. Dr khalil hamdani professor at pakistan

institute of economic studies suggested that the domestic industry of pakistan has lot of potential

therefore the govt should take steps to strengthen the economic infrastructure and build the investorsconfidence ,he further said investors from gulf countries and china should be attracted to pakistan.

(hamdani, 2009)

Bloomberg, according the IMF the demand for pakistani exports decreases during economic recession ,

the uncertaninity ragarding the worker remittances increases and weak financial prospects of the

country can strictly effect the growth of the country. (IMF, 2009)

Muslehudin studies the effect on economic recession in detail and also suggest ways how to prevent

and lessen the bad effect of recession. His research has got a very comprehensive methodology and is

divivded in differecnt sections. In the first sections he has elaborated ways through which recession

enters and pentratrated pakistan, studying the performance of economy before and after the economic

crisis,how the govt should react to the situation and how should they devise pollicies and in the last

sections he has given recommendations and conclusions. (Muslehudin, 2009)

How should the government respond to the situation and what policies and stratigies should they apply

during recessions times to overcome the low economic growth ,this is also a very imporatent qurery in

order to find a applieable solution to the process. Mohammad mansoor ali has done his reserch on this

regard . according to him different sectors of the economy has different levels of effectness while in

recession. He argued that the financial sector was very effected due to local and exteranal factors

Foreign direct investments also decreased considerably while the workers remittances were not thatmuch effected as most of the pakistani workers work in the gulf regions which were effected to a little

extent as compared to their western counter parts. The external finacing that pakistan enjoyed also

suffered during the time. According to mohammad monsoor ali the policy response should be

comprised of monetry policy , fiscal policy and managing external debt policy. . (Ali, 2009)

There has been a misconception that recession has been the sole reason due to which pakistan

economy detoriated. Anas mohmmad did work on this regard and find out that recession is not


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resposible alone for bad growth rather its effect is amplified by other factors as well which are taken for

granted and most important of these are domestic security situation , war against terror and a

consistent political unrest. (Muhammed, 2009)

Some of the analysts have argued that the impact of recessions on pakistans economy is very minimal

and it is on front for some other reasons while behind some other factor s are in operation. The mostimportant factor that has caused downfall in the pakistans economy is economic mismanagement. This

argument was put infront by feroz ahmed bawany and he argued that that decline in the manfucturing

sector is the basic and most important reason (bawany, 2009). Similar things are argued by khadija

ranjha , she says that pakistan had been named by world bank as best reformer in the region in 2005

and by by 2006 pakistan was able to reduce its poverty level by 21% which is indeed a great win but now

and in the recent past the slow or no economic growth cannot be attributed to recession only rather its

the politicla unstability which is the most important reason as it provides the basis for any economy to

grow. (Ranjha, 2009).

According to malik.subhan,Azam and khan most of the financial institutions have not been effected to a

great level but banks were effected a great degree in the developing countries in this case pakistan. The

major cause according to them was low lending and financial flows. The effected areas can be divided

into four parts , money market , equities , inflation ,external sector. (Nida, 2009)

Mohammaed usman worked on presenting the detailed impact of recession. According to him the

economic activity slowed down considerably during 2008-09 but with the help of IMF the foreign

reserves of pakistan gained a little strength. During the recession times investment also dropped down.

He said that pakistan will have to avoid dependence on external financing ,failure to raise funds and

revenues and strengthen domestic bussiness environment in order to bear the shocks of global

recession. (Usman, 2009)

According to shahid javed barki pakistan is mostly spared from the full impact of economic recession but

it will certainly have long term effect on pakistans economy and most important of them is level and

quality of remmittances from US. There fore he recommends that policy makers should not only focus

on the immediate effects rather they should make policies that can protect the economy from the long

term effects as well. (Burki, 2008)

Here the author says that world recession has adversely effected pakistan. Most chunk of

pakistani exports goes to USA but due to low demand there exports were highly effected.

Foreign exchange also decreased considerably. Due to political unstability pakistan also suffered

major cash outflow , which is very interesting because this is another reason which is wronglyattributed to recession i.e the withdrawl of investments from pakistan. He further said the

major reason for unemployement during recession was many MNCs leaving the country due to

less production. He has named several issues that pakistan had to resolve during recession

times and important ones were the decline of foreign exchange , liquidity crunch , out flight of

forign currency and deposit shrinking. so he argued that the govt should take this very seriously

and should protect the bussiness sector for the progress of the economy.


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Mohammad saqib aziz says that as for as pakistans economy is not interlinked with the

interanational economy it will be least effected from global recessions. Further the

phenomenon of mortgage banking is still not practiced to a greator extent and the decline in

the prices of oil and food have rather helped pakistan . according to him these kind of decline in

the bussiness activities can be a blessing in desguise for developing countries like pakistan. (aziz,

2009)

Sadiq ahmed who is worlds bank chief economist for the sounth asian region says that

countries in this region including pakistan should do a number of things to resume their

economic growht. According to him the govt should preserve the macro economic stability and

should support the domestic bussiness sector, they should focus on public spending so as to

create jobs and reduce unemployement,efforts should be done to make the banking sector

more effective and efficient and last but most important to stop corruption. (Ahmed, 2009).

Some critics and reseachers have critizised capitilism for not having the guts to prevent these

economic downfalls to happen. Afshan Subohi has strongly critisized this system and he has

argued that these reccessions have exposed the vulnurabelities and weaknesses of the

capitilisam economic system. He quoted some of the analysts words as, pakistan has not been

effected so for by global economic reccessions not because it has got some extraordinary

safeguards against these crisis situations rather it has not intermingled in the internatioanl

bussiness community , said an experienced banker and senior economist. Dr khalid mirza head

of compitition department said pakistan is not totally immune to the crisis but it is still quite safe

from its bad impact. Mr zubair soomro a senior Citi bank executive said that that our banking

system has benefited from some good policy making and efficient financial reforms which has

provided strength to our financial institutions to bear the external economic shocks. Another

senior retired banker said that we cannot be complacent and we must strengthen ourinstitutions. (Subohi, 2008) .

Arshad ali says that pakistans economy was hit badly be the international oil prices as worsened

the fiscal and trade balances and economy was caught under stagflation or in simple words

stagnant economic growth with high inflation. According to him pakistan also suffered liquidity

and payment crisis as it highly depends upon external aid and while the donor countries were

themselves in recession the local economy felt desperatly for financial assistance which later

one came through IMF. Mr Arshad ali suggests that pakistan should rather realise its geographic

and stratigic importance and gain from it rather than begging for financial aids. During the

recession pakistans FDI reduces considerably , banking sector felt the liquidity cruch and further

the impact of recession was channelised into the local banking sector through foreign banks

working in the domestic environment. He recommends that govt should focus on the the region

rather on the west for eg china should be attracted towards pakisan as it has large investment

potential and has a strong place in the region. (Ali A. , 2009)

According to miss urmila sarkar the economic recession has also other very serious effects which

are taken for granted and most important of them is increase in child labour. According to her


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poverty level only plays a partial role in making a decision to make a child work rather it is

basically a combination of the some other important phenomenons with the income level which

determine that whether the child should work or not. And most important of these are family

income levels, school enrolment levels, income inequality and demographic variables etc. all

most all of them are directly or indirectly effected by recession and economic slowdowns.

(Sarkar, 2009)

Most of the analysts believe that economic recession has also effected the social and family

behavior for example if we consider the feeding practices of people it has been effected quite

badly as the amount and number of meals per day have decreased considerably as the

economic crisis worsened. According to Sam taylor these things are mostly taken for granted but

they play an important role in making a good and prosperous economy. Poor families have been

hit real badly as the economic recession effected the local economy. (Taylor, 2009)

Waqar ahmed and Cathal o donghue has pointed out that poverty has increased due to world

economic recession specially in developing nations like Pakistan. According to their results and

stats the poverty has increased from 30 to 40 percent during 2007 and 2009 and they have

attributed this to the chaos caused by the economi slow downs.


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Recommendations and lessons for Pakistan

The global financial crisis have negatively effected the economies of the developing countries but never

the less one can still learn lessons so as to cope with situation better.

y Certain policies must be developed like cuts in the expenditure , tight monetary policyand improving governance.

y Pakistan is basically an agrarian country therefore it must develop such policies toimprove and utilize strength of its agricultural and diary products.

y Government should evolve such contingency planning that should help the economy insuch conditions.

y A proper check and balance system should be introduced in the country so as toeconomy should run smoothly.

y Reforms should be made in the banking sector so that the loan should be used moreproductively.

y The international financial assistance comes at a big cost so therefore efforts should bemade to use them as a last resort.

y Friends of Pakistan like forum should be asked to provide meaning ful support ratherthan promises.

y Our overseas community must help Pakistan by increasing the forex remittances.y We need to have institutions that have financial and economic intelligence that should

help paksitan incase of economic meltdowns.

y We must develop and use Islamic banking for financial operations which is perhaps themost effective tool to curb the economic crisis situations.

Islamic banking..?There have multiple problems and economic slowdowns in economic activities which has raised

questions against the feasibility and strength of using the modern financial system. These

weaknesses of the interest based financial systems have initiated a new dimension of thinking

which the interest free financial system or simply the Islamic banking. In Islamic banking the

concept of interest is not supported rather there is another concept called the risk and reward

sharing concept. The Islamic modes of financing increase with the real growth of economy and

its slows down the excessive credit expansion. This leads to lavishness and economic

uncertainilty and instability. There is need to learn how to curb these economic crisises throughIslamic ways and how to create a business envrironment where these slowndowns dont occur

in the first place. Islamic banking dont allow short selling because you call only sell things that

one owns. Islamic financial system is perhaps the best and most increasing being used system as

as alternative in the most of the muslim world.


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Conclusion

Pakistan is a developing country therefore such kind of economic crisis situations could easily derail

Pakistan from its real path. Rise in food prices and uncertainity and instability In the industrialized

nations can have an compounded effect on developing countries like Pakistan. High fuel prices and rising

commodity prices with the fear of an economic crisis were very worrying for developing nations. We

must accept the challenges from the outer world and face the situation . we should learn lessons from

this crisis and how to tackle economic slowdowns in the future. Countries like china can be the best

example where they held their nerves and were strong enough to fight against it. This Chinese proverb

will be sufficient to say a crisis is an opportunity riding the dangerous wind. This paper has tried to

study the various caused of economic recessions and view the macroeconomic and development

policies that are important and strong enough to withstand the bad effects of these economic

meltdowns. It is quite interesting to know that pakistans economy has always been suspictble to shocks

due to strains from the internal and external fronts.

This study has provided a frame work which contains both the macroeconomic and developmental

policies that may help the economy to sustain its growth even in harsh conditions. These

macroeconomic policies should be made to ensure a strong macroeconomic conditions that will

encourage the investor sector and hence will increase the economic growth.

These recessions are an ongoing phenomenon and they have the potential to put countries in bad

situations and hit them badly. All the events described above were the impact of financial crisis on

Pakistans economy and Pakistan economy has fought well considering its internal and external threats

that Pakistan as a nation and as an economy is facing . its effects are not likely to end soon but

paksitans economy has the potential to surpass these threats and become one of the best economies of

the world.


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Maaz Research

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