The impact of financial crisis on Pakistan

Pakistan already has a fragile economy and is one of the countries in the South Asian region, which has been hit hardest by the financial crisis. During the crisis Pakistan faced a serious liquidity crunch and a refusal from the Saudi government to give concessions in trade oil.  As a last resort Pakistan approached the International Monetary Fund (IMF), which set stringent restriction for the nation.

Aftermath of suicide bomb which assassinated Benazir Bhutto,
27 December 2007 

The main sectors in Pakistan which were affected by the crisis were; trade deficit; balance of payment; inflation; foreign exchange reserve; poor banking sector performance; and the Karachi stock exchange. Political and economic stability complement each other; in Pakistan as well the economic crisis it also faced a growing political crisis with the assassination of Benazir Bhutto (Head of one of the biggest political parties in Pakistan); the war on terror; and the increased rate of daily suicide bombings.

The health of a country’s economy can be monitored by its GDP growth rate; in Pakistan it was 9.0% in 2005 and dropped to 2.0% in 2008. The growth of exports dropped to 2.6%, decreasing $16.4billion to $16billion from July to August 2008. The core inflation went up 18% and even crossed 20% for a brief period. Pakistan’s foreign reserve was $14.2billion in October 2007 and decreased by $3.4billion by October 2008.

The Karachi stock exchange was described as the “best performing stock market of the world for the year 2002”. However, on 26 December 2007, The Karachi exchange (represented by the KSC-100 index) closed by 14814 points, with a market capitalisation of Rs 4.57trillion ($58 Billion). Within a year the Karachi stock exchange had 653 listed companies with an accumulated capitalisation of Rs 1.85trillion ($23 billion). In January 2009, the KSC 100 index was 4929 points with a market capitalization of Rs 1.58trillion ($20 billion).

Due to the financial crisis food and fuel prices increased and were the main source of inflation in Pakistan. In 2008 the rate of inflation was 14.7%, which rose to 18% by 2009, which resulted in high prices and supply shortage of wheat, wheat flour, sugar and meat etc.

The Effects of the Financial Crises on Unemployment

As a result of the financial and banking crises of 2007-08, a large numbers of workers have been laid off. Those lucky enough to hold their jobs have had to compromise by having their salaries reduced; a reduction in working hours; and other benefits, as organization seek to reduce labour cost in order to survive. For healthy social and economic dimensions unemployment rate is a very important indicator. From an economic prospective, unemployment shows there is unused labour available. Increasing the rate of unemployment may result in individual income loss and increased pressure on the government’s social fund, for example social security or job seekers allowance.

In the USA the financial crisis began in December 2007, at which point job losses start. Unemployment increased dramatically following the bankruptcy of the Lehman Brothers. The USA’s unemployment rate suddenly rose by 8.7% and within six months unemployment peaked at 10.0% and then began to drop. This 10.0% drop represented 3.1 million young persons, who became unemployed as a result of this crisis. The unemployment rate in the world increased during the crisis as can be seen in the diagram below and by clicking here.

Shows world unemployment rates in eight bands arranged in an iron-grey palette

There was a large fall in the UK’s retail industry; especially in sectors such as DIY and furnishing. Business sales and profitability were falling and banks were not in the position to support them for continued trading. Several well-established market brands either went out the business or had to shut down a large numbers of their stores like; MFI, Woolworths and Blacks etc. These closures/reductions were the main reason for the rise unemployment particularly in the 18 to 24 age range. With the reduction in retail sales and an increase in unemployment government tax revenue also fell. In Q4 of 2008 UK’s gross domestic products (GDP) fell by 1.5% and as a result the country officially entered a recession period.

Financial Crisis and Housing Market

The meltdown of the sub-prime residential mortgage market in the USA was the start for the financial and banking crises 2007-08 and these crises spread globally, triggering after-effects that are still being felt today. There were many reasons for these crises occurring which were influenced by financial institute regulators, credit agencies and government housing policies. Several financial institutes collapsed but the housing market was the main victim of the financial disaster in terms of consequences and causes.

In the USA the houses prices increased by 124% during 1997 to 2006 but by September 2008 housing prices declined by over 20%. This horrific crisis meant many home owners have negative equity in their homes (their homes were worth less than their mortgages). By November 2008 10.8% of all home owners (approx. 12 millions) had negative equity in their homes. According to a survey conducted by simplyzigzag.com 60% of home owners said that the financial crisis effected their buying decisions and 33% were those people who are still waiting for stabilisation before re-entering the housing market. The financial crisis not only affected the housing market but also created psychological havoc in buyers’ minds.

UK home prices have increased dramatically between 1998 and 2007; 90% faster than any Eurozone country except Spain, but after this, prices fell dramatically by 13%. As for the issue of affordability, the financial crisis in the UK housing market faces a further major problem, particularly in relation to housing market finance (i.e. mortgage). Prior to the financial crisis borrowers were able to finance up to 95% (and sometimes more) of the purchase price using mortgage debt. Post crisis, banks withdrew the majority of their offers because of lack of consumer affordability and most banks still require a 25% down-payment compared to a historical average of 10%. It is now, after six years, that analysts can say that the UK housing market is showing signs of its first significant revival since this crisis. See http://www.bbc.co.uk/news/business-21385919.

The impact of the financial crises on banks

In 2007-2008 the financial and banking world suffered global financial crises. These crises are considered by many economists to be the worst since the Great Depression of the 1930s. The Great Depression was a severe worldwide economic crisis suffered in the decade before the Second World War. The global depression of 2007-2008 has resulted in the collapse of large financial institutes and the bailout of banks by national government.

The first event of note occurred in the United Kingdom in August 2007 when BNP Paribas (a French global banking group) halted withdrawals from three of its investment funds that specialised in U.S mortgage debt. The significance of this event was not immediately recognized but soon led to panic as investors and savers attempted to liquidate assets deposited in highly leveraged financial institutes.

The international Monetary fund (IMF) estimated that large U.S and European banks lost more than $1 trillion assets and from bad loans from January 2007 to September 2009. U.S banks losses were forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. The IMF estimated that U.S banks were about 60% through their losses but British and Euro banks only 40%.

People queuing outside a branch in Golders Green London, on 14 September 2007, to withdraw their savings due to fallout from the crisis

The first victim in British banking was Northern Rock. The highly leveraged nature of its business led the bank to request security from the Bank of England (BoE). This in turn led to investor panic and a bank-run. The U.K government have failed to find a private investor for the bank and it was taken into the public sector. Northern Rock’s problems proved to be an early indication of the troubles that would soon befall other bank and financial institutions in the UK.