ASSIGNMENT NO 1

Topic: Global Financial Crisis and its

impact on Pakistan

Submitted To:
Mr Hussain Riaz

Submitted By:
Tayyab Yaqoob Qazi `
Roll No 817
MBA 2009-2011

Management Studies Department

GC University
Lahore
Global Financial Crisis:
The Global Financial Crisis has been called by leading economists the worst financial
crisis since the one related to the Great Depression of the 1930s. It contributed to the
failure of key businesses, declines in consumer wealth estimated in the trillions of U.S.
dollars, substantial financial commitments incurred by governments, and a significant
decline in economic activity. Many causes have been proposed, with varying weight
assigned by experts. Both market-based and regulatory solutions have been implemented
or are under consideration, while significant risks remain for the world economy.
The collapse of a global housing bubble, which peaked in the U.S. in 2006, caused the
values of securities tied to housing prices to plummet thereafter, damaging financial
institutions globally. Questions regarding bank solvency, declines in credit availability,
and damaged investor confidence had an impact on global stock markets, which suffered
large losses during 2008. Economies worldwide slowed in late 2008 and early 2009 as
credit tightened and international trade declined. Critics argued that credit rating agencies
and investors failed to accurately price the risk involved with mortgage-related financial
products, and that governments did not adjust their regulatory practices to address 21st
century financial markets.

Impact of global financial crises on Pakistan:

The severity as I discussed above, how it has affected poverty, growth, and distributions
in the whole world, in same way it has greatly affected the economy of Pakistan. There
are different views about the impact of the crises on Pakistan. Some peoples have said
that the recession was only in European countries and some has said that it has just
affected the poverty, unemployment and wealth distribution in Pakistan.

It is true that the main reason of the financial crises was due to the soft loans given by the
European countries and later on their recovery became impossible due to this banks were

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crashed and stock markets along with them. But Pakistan has not suffered financial
institutional crises; it has been affected in terms of international relations.

By these crises the goals made by MDG (Millennium Development Goals) seemed to be
far off.

The variables under our study are poverty, unemployment, wealth distribution and their
related aspects in terms of food and nourishment etc.

Economic factors behind the Crisis in Pakistan:

The developing nature of the financial sector has been a saving grace for the Pakistani
economy. Less developed linkages with international markets have meant that the direct
impact of the financial crisis has not been felt by the Pakistani financial sector. However;
effects of the crisis have been felt, even though in a limited manner, by the real sectors of
the economy. The effects of the global slowdown have been transmitted through the trade
balance; with a slowdown in global demand and fall in commodity prices having varying
effects, the capital account; with a significant reduction in private inflows to Pakistan.
Following study about the factor will describe the crises in Pakistan taken from report of
State Bank of Pakistan “Global Financial Crisis: Impact on Pakistan and Policy
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Response.

Financial sector of Pakistan

The operating environment of the financial sector experienced significant deterioration in

2007 and 2008, due to a confluence of factors emanating from both the domestic and
international economic and financial developments. While the domestic environment was
characterized by weakening macroeconomic indicators and the uncertainty caused by the
prolonged period of political transition, the global financial crisis and the commodity
price hike had a feedback impact on the financial sector through the real sector of the
economy. Pakistan, which remained largely unscathed from a direct impact of the crisis,
has been more concerned with issues relating to monetary stability due to rising inflation

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since before the advent of the crisis. With a thriving banking sector, increasingly resilient
to a wide variety of shocks, increasing but still relatively less correlation of domestic
financial markets with global financial developments, a proactive and vigilant regulatory
environment, and most importantly, no direct exposure to securitized instruments, risks to
financial stability were largely contained and well managed as the crisis unfolded and
impacted the financial sectors in advanced economies.

• Capital Flows & Workers’ Remittances

A beleaguered international economic environment has held back Foreign Investment as

it posted a decline of 47.5 percent during the first ten months of 2008-09 compared to the
corresponding period of the previous year. Most of this decrease has come in the shape of
an outflow of private portfolio investment of US$ 1 billion. Investment from countries
such as the United States, United Kingdom, Singapore, and Hong Kong, which have been
at the apex of the international crisis, has dropped significantly. Some Asian economies
have witnessed an anticipated fall in workers’ remittances as unemployment grew in
advanced host economies. However, workers’ remittances to Pakistan remained vigorous
and unaffected by the crisis, totaling US$ 6.36 billion in July-April 2008-09 as against
US$ 5.32 billion in the corresponding period last year, thereby displaying a rise of 19.5
percent.

• Commodity Prices & Trade

An unprecedented hike in international commodity prices wreaked havoc on Pakistan’s

external sector during 2007-08, with the current account widening significantly.
However, in the wake of a reduction in global demand and the resultant decrease in
commodity prices, the import bill has reduced significantly, decreasing the current
account deficit. A key loss to developing countries during the current crisis has been a
decrease in exports as demand from advanced economies contracts. Pakistan has
witnessed a slowdown in exports, but this reduction stands apart from that witnessed by
other Asian economies for two reasons. Firstly, the fall in exports is partly due to a fall in
domestic productivity and it is hard to distinguish between the impact of the crisis and

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internal factors on exports. Secondly, the fall in imports has outpaced the fall in exports,
having a positive effect on the trade balance.

• External Financing

The global crisis has restricted Pakistan’s ability to tap international debt capital markets
to raise funds. An increasing cost of borrowing internationally, coupled with deterioration
in the country’s credit rating has ruled out issuance of government paper as a financing
mechanism. Pakistan’s presence in the international capital markets in 2008-09 was
limited to the repayment of Eurobond amounting to US$ 500 million made in February
2009 with no new issuance at the backdrop of financial crisis engulfing the global
markets.

Report of Mohammed Mansoor Ali ,Director Economic Analysis Department, State Bank of Pakistan on “ Global Financial Crisis:
Impact on Pakistan and Policy Response” in July 2009

Executive Summary

The global financial Crisis in the whole world has come after the first recession in the
world in 1930s. It has affected the poor areas of the world. People living under $2 per day
have been mainly affected. Pakistan has bad effects of this crisis. The poor people of the
Pakistan got more poor and unemployed. We have carried out a study to find the
relationship of the global financial crisis with the bad condition of Pakistan. Pakistan got
this adverse trend by the imports and exports. Pakistan was totally depending on the
imports and other countries raised the bill of imports. When we were unable to buy these
imports we got shortage of food due to unplanned budget. Both made the situation more
adverse. Unemployment and poverty took place when there were no resources available
to industry. The economic factors behind this issue were financial sector of Pakistan,
Capital Flows & Workers’ Remittances, Commodity Prices & Trade and External
Financing. Their determinants were; Impacts of the crisis on aggregate poverty, Impacts
of the crisis on growth and distributional impacts within countries. The determinants gave
the clear picture of the prior and current situation of the Pakistan. Techniques have been
used to overcome the situation. The mixed economy system has been followed by the

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other countries. Now government is making intervention in the economy of these
countries. The techniques to be followed by the Pakistan are; give breaks in taxes,
agricultural uplift, cash subsidies, easing the monetary policy and increasing supporting
programs for the labor intensive activities.

References

(http://en.wikipedia.org/wiki/Financial_crises_of2007%E2%80%932009 )

(http://www.voxeu.org/index.php?q=node/3520 )

(http://www.defence.pk/forums/economy-development/17725-there-recession-
pakistan.html )

On 10 December 2009 at 2:34pm.

Economic Survey 2007-08, 2008-09, PSLM, Labor force Survey

Report of Mohammed Mansoor Ali, Director Economic Analysis Department, State

Bank of Pakistan on “Global Financial Crisis: Impact on Pakistan and Policy
Response” in July 2009