Assignment # 1

Topic:

Global financial crises and its effects on

Pakistan economy

From:
Muhammad Usman Mukhtar
Roll # 239
Sumera Kauser
Roll # 211
M.com 4th Semester

To:
Sir Imtiaz sb

DEPARTMENT OF COMMERCE
GOVT. COLLEGEUNIVERSITY FAISALABAD

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ACKNOWLEDGEMENT LETTER

I would like to express the deepest appreciation to my teacher Sir

Imtiaz sb who has the attitude and the substance of a genius: he
continually and convincingly conveyed an excitement in regard to
teaching. Without his guidance and persistent help this project would
not been possible.

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ABSTRACT

In many parts of the developing world, the global financial crisis

(which followed the food and oil price crisis) wiped out the gains
made towards the achievement of the millennium development goals
(MDGs). By 2008 the first goal, which placed an emphasis on the
eradication of poverty and hunger was low on the priority list as most
developing countries now focused more on macroeconomic
stabilization. According to the Global Monitoring Report 2009, the
present crisis is the severest since the Great Depression. As reflected
by the Global Financial Monitoring Report 2009, the crisis is hitting
developing countries hard through trade and financial market
channels. These countries are also not able to fully provide the
necessary social safety nets in order to protect the vulnerable
segment of the population. The pace of global poverty reduction has
slowed as official aid and private capital flows have decreased.

In this project we discuss the impact of the financial crisis on the

socio-economy of Pakistan. Using a neo-classical framework we will
also provide the macro-micro impacts of a fall in exports, rise in
import price of food, and strong support by expatriates in the form of
rising remittances. Our results indicate an increase in both poverty
and inequality as a result of uncertain economic milieu.

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 TABLE OF CONTENTS

LIST OF ACRONYMS ..................................................

THESIS PPROVAL…………………………………………………………………………………………….1
LETTER OF AUTHORIZATION..…………………………………………………………………………….2
LETTER OF TRANSMITTAL………………..………………………………………………………………..3
ACKNOWLEDGEMENT LETTER……………………………………………………………………………4
ABSTRACT……..………………………………………………………………………………………………5
EXECUTIVE SUMMARY .....................................................................................................................7
BACKGROUND….……………………………………………………………………………………….....…8

CHAPTER 1
INTRODUCTION.................................................................................................................................. 10
1.1 INTRODUCTION TO PAKISTAN’S ECONOMIC ENOVIRONMENT.................................... 10
1.2 REAL SECTOR………….………………. ............................................................................ . 11
1.3 AGRICULTURE ...........................................................................................................………11
1.4 MANUFACTURING SECTOR ............................................................................................... 12
1.5 INFLATION............................................................................................................................. 13
1.6 MONITORY POLICY............................................................................................................ ..16
1.7 FISCAL POLICY……………………………..…………………………………………………..…..19
1.8 EXTERNAL SECTOR….……………………………………………………………………..……..20

CHAPTER 2
CONCEPTS OF OF FINANCIAL CRISIS ON BANKING SECTOR ................................................. 27
2.1 ECONOMIC ENVIRONMENT OF BANKING SECTOR........................................................ 27
2.2 CONFLICT CONDITION AND THE ECONOMY................................................................... 29
2.3 CONFLICT CONDITION AND THE POLITICAL INSTABILITY.............................................. 29
2.4 ECONOMIC GROWTH ................................................................................................ ……..32
2.5 POWERTY AND INEQUALITY ..................................................................................... …….35

CHAPTER 3
RESEARCH OBJECTIVE ANR RESEARCH ARTICLE ............................. ……………………………..37
3.1 RESEARCH OBJECTIVE .......................................................................................................37
3.2-3.9 ARTICLE REVIEW NO.1........................................................................................................ 38
3.10-3.14 ARTICLE REVIEW NO.2 .................................................................................................... 40
3.15 OUR METHODOLOGY. ........................................................................................................ 42

CHAPTER 4
CONCLUSIONS AND RECOMMENDATIONS................................ ……………………………………....44
4.1 CONCLUSIONS .......................................................................................................................44
4.2 RECOMMENDATIONS……………………………………………………………………………….44
4.3 REFERENCES………………………………………………………………………………...………45

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Executive Summary
Stabilization efforts since November 2008 together with a decline in international
commodity prices have succeeded in reducing external imbalances, rebuilding
foreign exchange reserves, and lowering inflation in Pakistan. However, the
macroeconomic situation remains fragile and the medium-term outlook uncertain.
Progress with the implementation of reforms has been uneven, with inadequate
measures taken to boost revenue mobilization and control public spending. The
volatile political and security environment has complicated policy-making and
made the implementation of stabilization measures challenging. Also, while the
acute phase of the global financial crisis seems to be ending, global recovery will
be gradual and take time. In the meantime, there are significant risks to exports,
remittances and external financing. The fiscal year 2009/10 looks difficult.
Economic activity significantly slowed down in 2008/09. The current account
deficit narrowed to 5.1 percent of GDP driven by a sharp contraction in imports
which exceeded that in exports, and growing workers’ remittances. While
remittances increased, financial inflows (such as FDI and portfolio investment)
dropped sharply—by over 37 percent—owing to macroeconomic instability,
deteriorating security situation and global recession. Despite these
developments, thanks to IMF disbursements, SBP foreign exchange reserves
rebounded to about US$9.1 billion (2.9 months of imports) by end-June 2009.

However, fiscal problems continued during 2008/09 and the fiscal deficit target
was exceeded by 0.9 percent of GDP, amounting to 5.2 percent of GDP. Overall
revenues fell substantially short of the target by one percentage point of GDP—
primarily owing to a drop in tax revenues as the economic slowdown reduced the
buoyancy of Pakistan’s two main tax bases (manufacturing and imports). FBR
tax revenues declined from 9.8 to 8.8 percent of GDP. At the same time, federal
government’s attempts to control spending were thwarted by high provincial
spending.

The first two months of 2009/10 suggest that fiscal instability will continue, and
the first quarter fiscal deficit target will likely be missed. Revenues have
continued underperforming: FBR tax collection during July-August 2009
increased only by 3.6 percent compared to 19.5 percent required to reach the
annual target. Also, provincial governments have continued spending at high
levels, and power subsidies have remained unaddressed by the federal
government.

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Failure to raise revenues going forward would further heighten Pakistan’s
vulnerability to shocks, and jeopardize country’s development efforts by limiting
resources available for planned investments in human and physical
infrastructure. There is a risk that Pakistan may repeat past mistakes. Pakistan’s
high economic growth in the earlier part of this decade was in part explained by
heavy reliance on external financing and on expansionary fiscal stance, while
revenues and savings remained stagnant.

This reliance on external financing left the economy vulnerable to external

shocks, which came in 2007/08 and, in the absence of corrective measures, led
to a balance of payments crisis. To reduce the economy’s vulnerability to shocks
and avoid the repeat of past mistakes, stepping up domestic revenue
mobilization would be critical.

BACKGROUND:
1. In November 2008, to avoid a default on foreign debt payments, the authorities
developed a homegrown stabilization program, which was supported by the IMF
through a Stand-By Arrangement (SBA). In 2007/08, the sharp rise in
international oil and food (specifically wheat) prices, in combination with policy
inaction and internal political turmoil, had led to rapidly expanding
macroeconomic imbalances in Pakistan. In the absence of adequate remedial
policy measures to address the imbalances—in particular not passing on the
international price increases to domestic consumers, but covering prices
increases through rising subsidies—the economy slid to a balance of payments
crisis. By mid-October 2008 the foreign exchange reserves of the State Bank of
Pakistan (SBP) had dropped to about three weeks of imports (US$3.3 billion),
nominal exchange rate had significantly depreciated, monetization of government
debt was in full swing and led to a rapid rise in inflation, and the EMBI Global
Bond spread of Pakistani sovereign bonds had climbed to above 2,000 bp. In
response, the stabilization program envisaged fiscal and monetary tightening to
bring down inflation and reduce the external current account deficit to sustainable
levels.
2. The volatile political and security environment has complicated policy-making
and made the implementation of the stabilization program challenging since its
launch. Political tensions between the two leading parties PPP and PML-N
intensified in the second half of 2008/09 and culminated in the “long march of
lawyers” in March 2009. Since then political volatility has somewhat subsided.
Terrorist attacks have, however, continued. The attack on the Sri Lankan cricket
team and bombing of a five star hotel in Peshawar were among them.
Furthermore, Pakistan engaged in a full-fledged war with militants in the
Federally Administered Tribal Areas (FATA) and portions of the Northwest
Frontier Province (NWFP) in May 2009, as an agreement to allow Sharia law
(Nizam-e-Adal regulation) in Swat in April 2009 quickly fell apart. Full scale
military operations have led to about 2.7 million internally displaced persons

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(IDPs). Taking care of IDPs as well as reconstructing the conflict-damaged areas
will be a challenge moving forward, and adding to the fiscal burden.
3. Frequent changes in the country’s economic management have also
continued, adding instability to policy-making. While the Finance Minister has
remained unchanged since November 2008, a new Governor took over SBP in
early 2009, the Finance Secretary was replaced in March 2009, and the
Chairman of the Bureau of Revenue of Revenue (FBR) in May 2009.

ECONOMIC PERFORMANCE UNDER THE STABILIZATION PROGRAM SO

FAR
4. The stabilization program has remained broadly on track, though at times with
substantial difficulty. The first program review was completed in March 2009, but
the completion of the second review was delayed by months and finally
concluded in August 2009.
5. The rapid decline in international commodity and oil prices during 2008/09 has
reduced the risks, facilitated improvement in the external position and the
achievement of program targets. Some of them were met, some missed in
2008/09. While the economy started stabilizing towards the end of the fiscal year,
overall economic performance has remained mixed. Table 1 summarizes the
medium-term macroeconomic framework the program is supporting.

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Chapter 1 INTRODUCTION

1.1 Introduction to Pakistan’s Economic Enovironment:

Pakistan’s economic environment is affected by intensification of war on terror
and deepening of the global financial crisis which penetrated into domestic
economy through the route of substantial decline in Pakistan’s exports and a
visible slowdown in foreign direct inflows. Although contraction in export receipts
is more than compensated by massive import compression emanating from
global crash of crude oil prices, the external sector vulnerabilities needs a review.
The global economic slowdown is making inroads into real economy through
contraction in demand in the export sector and as well as shrinkage of external
inflows. Pakistan’s economy continues to remain exposed to the vagaries of
international developments as well as internal security environment. The intensity
of the global financial crisis has further added to Pakistan’s predicament. Despite
support from the IMF and other bilateral and multilateral donors, Pakistan’s
external account remains exposed to a host of uncertainties.
The outlook for economic growth remained pessimistic as import demand
shriveled, tax collection declined, and inflows of foreign investment and
privatization dampened. The Economic Stabilization Program has already
ensured adjustment in petroleum prices to reduce the burden on the budget;
significant cuts in expenditures to reduce budgetary deficit and notwithstanding
slight downward adjustment in policy rate general stance of monetary policy
remained tight. These measures are paying dividend under precarious global and
domestic conditions.
Recent trends in most macroeconomic variables suggest that the disciplined
implementation of the macroeconomic stabilization program is started paying
some dividends. Improvement in fiscal discipline is complementing the still
relatively tight monetary policy to aggregate demand compression to a
meaningful level which has improved prospects of lower inflation in the last
quarter of the current fiscal year (April-June 2009). The demand compression is
also manifested from improvement in the cumulative Jul-March 2008-09 trade
deficit which is the first reduction in the last six years. The narrowing of trade
deficit and robust remittances has caused a reduction of almost $2 billion in the
current account deficit and even for the month of February 2009, we have
witnessed first surplus in monthly current account surplus since June 2007. The

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improvement allowed for a build-up of the country’s foreign exchange reserves
beyond $11 billion.
Pakistan economy still faces pressures from higher inflation driven by spike in
food prices, the acute power shortages, bewildering stock market, perceptible
contraction in the large-scale manufacturing and slowdown in services sector;
lower than anticipated inflows and growing absolute financing requirements.
Abatement of inflationary pressure remained oblivious and prices depicted
stubbornness. A brief review of the economic situation during the first nine
months or three quarters of the current fiscal year 2008-09 is given below:

1.2 Real Sector:

Notwithstanding the vulnerabilities, the economy is set to post economic growth
in the range of 2.5 percent to 3.5 percent which might be far lower than its
historical average, however, in the given 2 Review of Economic Situation July-
March 2008-09 international environment, it could be relatively satisfactory. The
industrial production has remained victim of acute energy shortages,
deterioration in law and order situation, and constricted access to finance by risk
averse banks. The real GDP growth outlook drew strength from positive outlook
of the agriculture sector where all indications are pointing at healthy growth. The
outlook is based upon anticipated high wheat crop and above target growth of
minor crops and reasonably good outturn by the livestock sub-sector.
The outlook for the services sector is mixed as finance & insurance sector and
fiscal spending on public administration are offset by falling profits in telecom
sector and negative fallout of weaker performance of the manufacturing sector
and import compression on wholesale and retail trade. Still the growth in the
services sector will drive the modest GDP growth. The large-scale manufacturing
sector is victim of energy shortages and demand compression in the export
sector. Notwithstanding the fact that resolution of interoperate circular debt
through floatation of PEPCO Term Finance Certificate (TFC) worth Rs.92 billion,
which is expected to address acute energy shortages to some extent, the growth
outlook for large-scale manufacturing will remain substantially negative. The
small scale manufacturing sector is historically resilient against domestic supply
shocks and still expected to post positive growth.

1.3 Agriculture:

The agriculture has been facing acute irrigation water shortages and the water
intensive kharif crops sugarcane and maize fell short of the target and depicted
negative growth of 18.5 percent and 7.5 percent in 2008-09. However, other two
major crops cotton and rice have registered positive growth of 7.3 percent and
13.5 percent, respectively. The combined weight of sugarcane and maize in
overall agriculture is 6.2 percent while that of cotton and rice is 13.0 percent.

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The Rabi season started with estimated water shortages of 31.6 percent,
however, widespread rainfall during December 2008 to February 2009 in most
parts of the country has positive impact on the outlook for the rabi crop. Wheat
with its 12.7 percent weight in overall agriculture is estimated to post 7.8 percent
growth over the last year. The area under cultivation of wheat crop has
surpassed the target of 8.6 million hectares by 5 percent, however, partly
because of input supply line disruptions and partly owing to recent untimely rain;
some slippages on yield side are expected. The provincial governments and
PASSCO has made arrangements for highest ever quantum of procurement at
6.5 million tons of wheat which is far higher than 3.9 million tons procured last
year.

1.4 Manufacturing Sector:

Large-scale manufacturing depicted negative growth of 5.73% during July-
February 2008-09 as against 5.27% positive growth in the comparable period of
last year. Main items showing positive growth included; fertilizer (24.29%), glass
sheets & plates (17.38%), cement (6.52%), chemicals (4.39%), leather products
(3.83%), paper & paper board (3.80%) and engineering products (2.54%). Major
items showing decline in production included automobiles (-38.22%), electronics
(-22.21%), petroleum products (-8.40%), food & beverages (-6.38%), rubber
products (-5.35%), and iron & steel products (-4.65%).

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There was negative growth all around in all major groups with one or two
exceptions. This implies that large-scale manufacturing sector is exhibiting signs
of moderation on the one hand and acute power shortages along with several
other factors like rising cost of doing business, demand compression in the
export sector, deteriorating law and order situation in the country. The negative
growth of 7.9 percent in the month of February 2009 may be looked into the
backdrop of positive growth rate of 3.5 percent in February 2008 which placed a
base effect. Going forward the negative growth may improve to some extent
because of lower base effect and some improvement in energy supplies. The
LSM growth is adversely impacted by a sharp reduction in demand from both
domestic and international factors [See Tabl-3]. The estimate for growth
contraction may end with yearly average of 5.5 percent.
Services sector has exhibited resilience to fluctuations in the economic activity.
The FDI inflows in the telecommunications, financial businesses and personal
services have reached a level of saturation in the first nine months (July-March)
of the current fiscal year. There are enough anecdotal evidence that financial
sector is set to provide substantial growth. Similarly, improved prospects in
transportation & storage sub-sectors on the back of relatively better production in
major crops, strong contribution by finance and insurance sector and augmented
administrative and defenses related spending will provide support to adequate
level of growth in the services sector. These prospects of the services sector
would be neutralized to some extent by negative growth in the LSM, imports
contraction, shrinking profits in the telecommunication sector. Leading indicators
pertaining to the major sector wholesale and retail trade points towards a
reasonable growth in this sub-sector. The wheat trade has always created
activities in the wholesale and retail trade (WRT) sub-sector. The estimated
growth of 4.2 percent is already almost half of last year’s actual 8.2 percent.

1.5 Inflation:

As inflationary pressures across the globe continue to dissipate, sparking

deflationary concerns in even some countries like Thailand and India which

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shared pain of galloping inflation with Pakistan a few months ago, Pakistan still
faces high double-digit inflation. Although all the price indices like the CPI
including core inflation, WPI and SPI have shown a downward trend in recent
months, the decline has been subject to stiff downward rigidity. The month on
month increase in food and nonfood inflation in the months of February and
March has been especially disappointing. The role of sugar and wheat has to
play its role in inflationary environment in Pakistan which could play crucial role in
determination of inflation in the final quarter of this fiscal year (April-June 2009).
The dirty work of extra-market forces kept fruits of falling inflation away from
Pakistan’s consumers. Notwithstanding difficult domestic environment, the
inflation rate as measured by the changes in Consumer Price Index (CPI)
showed an easing trend beginning in November 2008, reaching 19.1 percent in
March 2009 after reaching a record level of 25.5 percent in August 2008. While
the food group was the major source of inflation in Pakistan during the first nine
months of 2008-09, the nonfood component of the CPI has also been persistently
high, resulting in overall stubbornness of the inflation. The CPI inflation averaged
23 percent during July-March 2008-09 as against 9.5 percent in the comparable
period of last year. Given current trends and barring any adverse shocks, it is
expected that the average inflation for the year (2008-09) as measured by CPI
will be close to 20 percent. [SeeTable-4].

Food inflation is estimated at 28 percent during July-March 2008-09 as against 13.8

percent in the comparable period of last year. Although food inflation has eased during
the course of the current fiscal year, it remains painfully high and remained a major cause
of concern. This can be attributed to the stubbornness in prices of some key commodities
such as edible oil, pulses, rice, milk, sugar, poultry, meat, wheat, wheat flour, and fresh
vegetables.

Non-food inflation stood at 19.2 percent, against 6.3 percent in the corresponding period
of last year. Non-food inflation has remained persistently around 18-20 percent
throughout 2008-09 as the transport group, fuel and lighting group and house rent index
have remained high. For instance, the downward adjustment of petroleum prices in the
month of November is neutralized by frequent hikes in electricity and gas prices.

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Core inflation, which represents the rate of increase in cost of goods and services
excluding food and energy prices, also went up from 7.1 percent to 17.8 percent during
this period. After hovering around the 18.9 percent mark since November 2008, core
inflation came down slightly to 18.46 percent in March 2009. Notwithstanding all
monetary tightening during May 2007 to March 2009, core inflation had depicted its first
deceleration since May 2007 in December 2008 but hovered around 18.9 percent up until
February 2009.
The core inflation accounts for 51.01 percent weight in CPI index. This weight is broadly
distributed among house rent index (23.43%) and non-house rent index (27.58%). Federal
Bureau of Statistics compiles HRI index using an indirect method, incorporating
construction costs prevailing in 35-urban centers of the country, on the assumption that
rental values move in parallel with construction costs. Both labor and material costs are
taken into consideration in computing the construction cost; labor costs have a 40 percent
weight in the HRI and remaining is accounted for by the material cost. The proxy for
material cost is used from building material sub-index of WPI. The cost of construction
index is then compiled for the individual urban centers by taking a 24-month moving
geometric mean of the weighted labor and material costs.
As shown in figure-1, the non-HRI component witnessed a steep rise between February-
October 2008 but tapered off since November 2008. Non-HRI component is following
the international pattern of downward movement, though at a slower pace, however, HRI
component is very gradually showing signs of moderation. It is a major contributory
factor in upward movement of the Core inflation. A substantial decline in the core
inflation will only be visible on the basis of 24-months cycle. Abatement of
inflationary pressures in the case of non-HRI index is also slow and steady and
declined from its peak 20.9 percent in November 2008 to 18.2 percent in March
2009.
The Wholesale Price Index (WPI) has witnessed a remarkable fall during the
course of the current fiscal year mainly on account of low international oil prices.
The Wholesale Price Index (WPI) during the first nine months of 2008-09 has
increased by 23.4 percent, as against 12.6 percent in the comparable period of
last year. After touching a record 35.7 percent in August 2008, the WPI has fallen

13
drastically to 11.1 percent in March 2009, mainly on account of a huge decline in
international oil prices over the last six months. Both the food and non-food
components of the WPI have shown a reduction in their rates during this period.
The non-food component fell more steeply from 37.4 percent in August 2008 to
4.8 percent in March 2009. Food component has decelerated from 33.5 percent
in August 2008 to 19.5 percent in March 2009.

A regional comparison of inflation in Table-5 reveals rigidity of inflation in

Pakistan in comparison to other regional players. Barring Iran, all the countries
listed in Table-5 have shown notable deceleration in their inflation rates from July
2008 to March 2009. India, which measures its inflation by the weekly measured
WPI, is at historic lows whereas Thailand has seen deflation during March 2009
from a high of 9.2 percent in July 2008.Other countries like Philippines, Vietnam,
and Sri Lanka witnessed substantial deceleration in inflation since December
2008.
The Sensitive Price Indicator (SPI) has recorded an increase of 27.6 percent
during this period (Jul-March 2008-09) as against 13.0 percent in the same
period of last year. Going forward, the prices of edibles like sugar, milk fresh,
wheat, meets, onions will be crucial in determining the fate of the SPI in particular
and CPI in general.

1.6 Monetary Policy:

The SBP has kept its tight monetary policy stance in the period July 01, 2008-
April 20, 2009. The policy rate was adjusted upward in November 2008 to shave-
off some aggregate demand from the economy and kept constant in January
2009. However, noticing visible signs of demand compression enabled the SBP
to reduce 100 basis points on April 20, 2009. During July 01, 2008-April 18,
2009, money supply (M2) expanded by 1.6 percent against the target of
expansion of 8.0 percent for the year and last year expansion of 8.1 percent in
the comparable period of last year. The reserve money witnessed contraction of

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2.2 percent in this period as against expansion of 10.3 percent in the comparable
period of last year.
Net domestic assets (NDA) have increased by Rs.307 billion as compared to
increase of Rs.627.5 billion in last year. However, it is showing an increase of 7.6
percent in stock during this period, whereas, last year the growth in stock was
20.4 percent in the comparable period. Net foreign assets (NFA) have recorded a
contraction of Rs.263.9 billion against the contraction of Rs.356.4 billion in the
comparable of last year [See Table-6].

Government borrowing for budgetary support has recorded an increase of

Rs.240.5 billion as compared to Rs.336.0 billion in the comparable period of the
last year. The government has over performed against freezing the net borrowing
from SBP at Rs.257 billion in 2008-09 and the SBP financing has shown a net
increase of Rs.103.3 billion and financing from scheduled banks witnessed a net
increase of Rs.137.2 billion during July 01, 2008-April 18, 2009.
Credit to private sector witnessed a net increase of Rs.55.4 billion during July
01, 2008-April 18,2009 as compared to Rs.359.7 billion in the comparable period
of last year. The stocks still went up by 9.1 percent. SBP undertook aggressive
monetary tightening during the period, further increasing the policy rate by 300
bps in two rounds. On a cumulative basis, this means a 550 bps increase during
the last 18 months up to March 2009. However, the policy rate was decreased by
100 bps on April 20,2009. These policy measures were in response to carryover
of macroeconomic stresses of the preceding year and increase in real aggregate
demand. Monetary tightening has worked in the right direction.

15
Weighted average lending rate have witnessed slight decline from 15.5 percent
in October 2008 to 14.8 percent in February 2009. Weighted average deposit
rate on the other hand has increased from 6.2 percent in October 2008 to 7.0
percent in February 2009 which implies narrowing of the spread amidst intensive
deposit mobilization efforts on the part of the banks. The weighted average yields
on 6 months T-bill has declined by almost 250 basis points to 11.5 percent in
March 2009 as against 14 percent in November and December 2008 [See Fig-2].
Capital Market: The local bourse remained buoyant throughout the month of
March 2009, incited by encouraging developments on the political and economic
fronts. The KSE-100 index increased by 19.8 percent on a monthly basis and
attained a 3-month high of 7,015 points on March 30, 2009. The KSE-100 Index
has recovered 17 percent since end-December 2008. The KSE-100 index has
embarked on an unparalleled run and is up by 42.5 percent (as of March 31,
2009) since hitting a low of 4,815 points (on January 26, 2009) during the current
fiscal year. Similarly, the Aggregate Market Capitalization (AMC) registered a
healthy inflow of Rs.278 billion (or 15.6 percent) during March
2009 when compared with end-February 2009 and closed at Rs.2,057 billion. In
terms of USD, the market capitalization stood at $ 25.5 billion on March 31, 2009,
an increase of 14.5 percent against February 27, 2009. The recovery phase of
the premier stock exchange post floor removal has been hopeful and this
outstanding performance has made it one of the best performing markets of the
world in 2009. A plethora of positive news flows during the month helped the
index along its upward trajectory, which included the restoration of judiciary,
current account recording a surplus for February, release of second trance of
loan worth $840 million by the IMF, and inclusion of Pakistan into the
Management Solutions Consulting Inc (MSCI) Frontier Index. Furthermore, a
proposal from US to cut import taxes on textiles that would help boost textile
exports and good corporate announcements remained key driving force. Further
expectation of a discount rate cut in the monetary policy announced on April 20,
2009 also kept the market sentiments alive.

16
1.7 Fiscal Policy:
The government has decided in the economic stabilization program to adhere to
the fiscal deficit target reverently and during the first nine months (July-March)
the fiscal deficit hovered around 3.1 percent of the projected GDP for 2008-09
which is consistent with annual fiscal deficit target of 4.3 percent. The fiscal
improvement in the first nine months (July-March 2008-09) has largely based on
reduction of oil subsidies and a cut in development spending. All meaningful
efforts to expand revenues particularly by broadening the tax base will only work
in the medium-term.
The financing patterns of fiscal deficit remained dominated by the banking
system which financed 85 percent of the fiscal deficit and only 15 percent were
financed by the non-bank sources. The government remained well ahead of the
SBP financing limit allowed by the Economic Stabilization Program. The
government received Rs.141.1 billion in gross external inflows against outflow of
Rs.104.1 billion which means net availability of Rs.37 billion on account of to
finance the deficit remained negligible at Rs.12 billion only.
Tax Revenue collected by the Federal Board of Revenue (FBR) stood at Rs.
813.6 billion (net) during the first nine months (July-March) of the current fiscal
year (2008-09) as compared to Rs. 679.9 billion in July-March, 2007-08 —
posting a healthy increase of 19.7%. Direct taxes, which accounts for 37.6
percent of total tax collection of the FBR have registered a growth of 18.9
percent. Indirect taxes, on the other hand, exhibited a growth of 20.2 percent.
Within indirect taxes, sales tax which accounts for roughly 63.6 percent of
indirect taxes and 40.1 percent of total taxes grew by 24.3 percent (Rs. 321.5
billion). The custom duty collection is up by 3.4 percent and the collection of
federal excise duty (FED) has recorded a note worthy increase of 30.4 percent
(collected Rs. 80.6 billion) during the period under review [See Table-7]. The
collection of import related taxes grew by 4.6 percent whereas; taxes on
domestic production grew by 28.1 percent. Given these developments, the tax
revenue target of Rs.1250 billion seems herculean task without corrective
measures being taken in the last quarter.

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Despite a decline in fiscal deficit in the first nine months of 2008-09, the growth in
domestic debt accelerated reflecting non-availability of financing through
external sources. The stock of domestic debt grew by Rs.483.2 billion during
July-February 2008-09. This strong growth in the domestic debt reflects non-
realization of privatization proceeds and reduced availability of net external
financing due to increase in external debt repayments on maturing stock of
foreign currency bonds. The main contribution came from 22.3 percent rise in
floating debt but this rise is lower than 25.9 percent increase in floating debt in
the comparable period of last year. The stock of permanent debt went up Rs.25
billion in this period. Unfunded debt witnessed a moderate growth of 9.5 percent
in Jul-February FY 09.

1.8 External Sector:

The external sector has shown definite sign of improvement. The current and
trade account balance has improved but there is some slippages on account of
current transfers. However, buoyancy in remittances is more than off-set by
substantial declining trend in inflows through exchange companies. There is a
substantial decline of around $2 billion in services trade deficit during the first
nine months of the current fiscal year because of tapering off in the demand
pressures on the one hand and lower freight and insurance payments on the
other. However, the income account deficit widened by almost half a billion dollar
mainly owing to lower income receipts while payments remained more or less
stagnant around $4 billion. The financial account witnessed slackening of capital
inflows by staggering $2.5 billion mainly on account of lower FDI inflows, higher
portfolio outflows, lower disbursements of loan and higher amortization
payments. The worsening of external account in the period of July-October 2008-
09 is compensated by substantial improvement in the external account in the
period November-March 2008-09. The hemorrhage to the foreign exchange
reserves have been arrested in the later period and around $3 billion are added
to the SBP reserves inspire of $500 million Eurobond payment in February 2009.
Notwithstanding, improvement in the external sector outlookremain hostage to
expected inflows in the last quarter [See Table-8].

18
Exports started to face heat of global financial crisis since January 2009 and the
contraction of global demand has exacerbated export contraction. The exports
witnessed fractionally negative growth of 0.1 percent — declining from $ 13.432
billion last year to $ 13.414 billion in July-March 2008-09.However, exports fell by
25.9 percent in March 2009 over March 2008 which is really worrying thing for
the economy. However, non-textile exports has shown positive growth of 9.8
percent which is more than off-set by strong negative growth of 7.6 percent by
textile group. Even within non-textile the food group export grew by 4.5 percent
on the back of strong growth of 52.7 percent in rice exports. The quantitative fall
of amidst falling unit value prices in rice exports. we must consider the fact that
rice alone has contributed 114.7 percent of the additional amount mobilized from
exports and without rice the growth could have been negative 0.7 percent. It
implies that positive growth is mainly because of rice alone. This has again raises
questions regarding structure of exports and reinforces the need to resort to
diversification of exports. Although the international price of rice has fallen from
its peak level attained last year, the unit value of rice is still up by 83.4 percent. In
quantitative terms the exports of rice has witnessed 8 percent negative growth
[Table-9].

19
The textile industry which has remained the major driver of the export growth
once again depicted sluggish performance and it registered negative growth of
7.6 percent. This downward trend in the textile sector is contributed by both
significant fall in the unit value of almost all major textile items and supply
constraints reflected through negative growth even in quantity terms. The non-
textile exports grew by 9.8 percent on the back of strong performers like
chemicals and pharmaceutical (7.5%), engineering goods (39.5%), cement
(60.4%). These items have very low weight and thus their huge growth could not
impact overall quantum of the exports. The export of petroleum products felt the
pinch of falling petroleum prices and they declined by 23.0 percent.
The share of textile sector has declined from 57.9 percent last year to 53.7
percent this year and it is persistently posting negative growth for some time. On
the other hand non-traditional items are inching up their share by posting healthy
growth. We need to further explore areas where we can excel. The product and
market wise diversification is the need of the hour. Notwithstanding, good growth
in non-traditional sector, we still need to look into the structural problems of the
textile industry. The January-March quarter provide ample evidence of negative
fall out of the global economic crisis combined with domestic energy shortages.
Imports registered a negative growth of 6.6 percent in July-March 2009. The
imports stood at $ 26.1 billion as against $ 28.0 billion in the comparable period
of last year. The growth in imports reflects impact of substantial fall in oil and
food imports in monetary terms and these two items were responsible for 80
percent of additional imports bill last year. Import compression measures coupled
with massive fall in international oil prices have started paying dividends and
imports witnessed marked slowdown during the last three months. It is strange
that there is 11.7 percent fall in crude oil imports in quantitative terms but its
dollar value is down by 7.5 percent, whereas, the imports of petroleum products
are depicting positive growth both in quantitative and value terms. The unit value
of both petroleum crude and products witnessed positive growth on average
during the nine months of the current fiscal year [See Table-10].

20
Notwithstanding the recent dramatic fall in the prices of crude oil in the
international markets, the petroleum group imports are more or less stagnant on
average. The monthly import bill on account of petroleum has halved owing to
fifty percent loss in unit value of import in the month of March 2009.
The food and petroleum groups are still contributing positively though fractionally
to additional import bill during July-March 2008-09. This fractional addition is
more than neutralized by massive negative contributions from non-food and non-
oil imports. Other positive contributors to additional import bill are power
generating machines which have added $464.7 million, agricultural chemicals
other than fertilizer ($57 million), and electrical machines & appliances ($59
million). The non-food and non-oil imports showed negative growth of 10.5
percent which implies on drastic import compression.
Notwithstanding the fact that palm oil prices in the international markets have lost
one third of their last year’s value of March 2008 till March 2009, the unit value of
palm oil on average has declined by only 1.5 percent during the July-March
2008-09 while unit value of soybean oil is still showing positive growth 29.1%.
This clearly reflects the time lag involved in translating the benefit of lowering of
prices in the international market into the import bill. The consumer durables,
transport group and telecom sectors are responding positively to the import
compression measures. The current growth in imports is coming from only a
narrow range of products and corrective measures are needed accordingly in
these items. Pakistan needs more measures to cut on its petroleum imports

21
either through looking into alternative fuel sources or demand management. The
import of edibles also needs to be looked into carefully and may be given priority
for domestic substitution.
Trade Balance The merchandise trade deficit improved by 12.5 percent and
declined from $14.5 billion in July-March 2007-08 to $ 12.7 billion in July-March
2008-09. The substantial decrease (38.4 percent) in imports outstripped
otherwise significant decrease (25.9 percent) in export growth which caused the
trade deficit to improve by 12.5 percent. Workers’ Remittances totaled $ 5.7
billion in July-March 2008-09 as against $ 4.7 billion in the comparable period of
last year, depicting an increase of 19.2 percent. The remittances fell by 19.7
percent in October 2008 over October 2007 amidst difficult global environment
and uncertainties surrounding domestic economy, however, they recovered to
their normal high double digit growth since November 2008. Deep recession in
the US economy, which constitute close to one-third of Pakistan’s remittances
started taking its toll and witnessed negative growth of 1.6 percent. The trend will
be expected to continue in the months to come, however, overall outlook of
remittances from other source countries is positive [See Table-11].

Current Account Balance (CAB) shrank by 20.8 percent during July-March

2008-09. Current account deficit shrank to $ 7.6 billion as against $ 9.6 billion last
year. In the month of February 2009, the current account witnessed a surplus
which is a rare development in Pakistan economy. This is first monthly surplus
since June 2007. However, it turned to deficit of $172 million in March 2009.
Going forward, Pakistan is likely to show significant improvement against the
target of current account deficit [See Table-12]. Current account deficit
emanating from sluggishness in demand is not good for the economy. Pakistan
need investment driven current account deficit neutralized to some extent by
rising savings level.

22
Foreign direct investment (FDI) has reached $ 3042.1 million during July-
March 2008-09 as against $ 3305.9 million in the comparable period of last year,
thereby, depicting a decline of 8.0 percent. The communication group
spearheaded the FDI inflows with 26.5% stake in overall FDI and followed by
financial business (22.1%) and oil and gas exploration (18.3%). The power sector
after remaining oblivion for some period has witnessed a massive growth of 88.6
percent but its share remained below 3 percent in FDI [See Table-13].

Foreign Exchange Reserves declined substantially in the initial months of 2008-

09 dropping from $11.4 billion at end-June 2008 to a low of $6.4 billion by
November25, 2008. This depletion of reserves in the five months (July-November
2008) was much higher than fall in forex reserves for the entire fiscal year 2007-
08. The subsequent partial recovery since November 25, 2008 onward owed
essentially to the inflow of $ 3.1 billion from the IMF following Pakistan’s entry
into a macroeconomic stabilization program. The import coverage ratio declined

23
to an uncomfortable level of 9.1 weeks as of end-October 2008 from 16.8 weeks
of imports as of end-June 2008 but it improved to 19 weeks of imports by April
27, 2009 [See Fig-4].

Exchange rate after remaining stable for more than 4 years, lost significant
value against the US dollar and depreciated by 21% during March–December
2008. Most of the depreciation of rupee against dollar was recorded in post
November 2007 owing to combination of factors like political uncertainty, trade
related outflows and speculative activities. With successful signing of Standby
arrangements with the IMF, the rupee got back some of its lost value. With
substantial import compression and revival of external inflows from abroad in the
coming months of the fiscal year, the exchange rate will remain stable at around
Rs.80-82 per dollar. Pak rupee recovered some of its earlier losses against the
US dollar and registered a net depreciation of 13.5 percent for the period Jul-
February 2008-09 [See Fig-5].

24
The external debt &liabilities recovered in the third quarter and actually fell in
absolute as well as relative terms between end-December 2008 and end-March
2009, mainly because of lower than anticipated net disbursements and positive
translation impact of appreciation of dollar versus yen, SDR and euro. External
debt and liabilities (EDL) stood at US$ 49.7 billion or 30.7 percent of the
projected GDP for the 2008-09 at the end of March 2009 which is higher than
end-June 2008 stock of $46.3 billion or 27.6 percent of GDP. It implies that EDL
grew both in absolute and relative terms during July-December period but
witnessed some correction in the third quarter. Almost all categories of EDL
barring Paris Club, Eurobond and military, have witnessed increase; however,
highest increase in absolute term was recorded in debt stock owed to the IMF as
a result of inflow of $3.1 billion on account of Stand by Arrangements (SBA)
signed with the IMF in end-November 2008. On the liabilities side $500 million
are added by Bank of China.

Chapter 2: Concepts of Financial Crisis on Banking Sector

2.1 Pakistan’s banking sector remarkably resilient

despite challenging economic environment: (SBP’s
Financial Stability Review)

Pakistan’s banking sector has remained remarkably strong and resilient, despite
facing pressures emanating from weakening macroeconomic environment since
late 2007, according to the assessment of the State Bank of Pakistan’s Financial
Stability Review 2007‐08 released today.
The Report said that given its bank‐centric nature, the stability of the financial
system is derived essentially from the banking system. An assessment of the
performance of the banking sector from January 2007 to June 2008 shows that
Pakistan’s banking system has over the years nurtured itself such that it is able
to withstand some of the shocks it has faced in the last 18 months or so. “The
banking system is on strong footing and has long term potential – a feature which
has served to attract a substantial amount of FDI in the sector, with established
global financial institutions now active participants in the domestic financial
sector,” it said and added that it has been well‐governed and being in private
hands under professional management, has witnessed outstanding financial
performance during the last few years.
The Report states that with strong regulatory oversight, there has been a
significant enhancement of capital and risk‐weighted capital adequacy, supported
by high provisioning requirements which were tightened in 2007. Stringent loan
provisioning requirement has built sufficient reserves against the NPLs’ portfolio.
In contrast to the liberalized financial system in the west which took its toll in the
form of the current global financial crisis, there are stringent

25
regulations and adequate policies in place to help the banking system manage its
risks. It pointed out that aggregate financial soundness indicators have improved
since early 2000, and continue to exhibit strong performance. “Tighter rovisioning
requirements may have reduced profits, but have positioned banks well,” it said
and added ongoing consolidation and mergers have enabled a number of banks
to position themselves better.
“Having observed the experiences of the global economy, the way forward for the
financial sector is to maintain both the simplicity and transparency of product
structures and a gradual pace of financial liberalization to enable the financial
sector in expanding further in a more sound, healthy and efficient manner,” the
Report said, and added that effective regulation is the preferred route for central
banks responsible for safeguarding both monetary and financial stability.
The Report said solvency profile has improved, and given the pressures from the
macroeconomic environment, there is an indication of marginal deterioration in
asset quality, which banks are well‐equipped to handle. Stress tests conducted
on June‐2008 data indicate that the large banks are relatively robust, with the
medium and small‐sized banks positioning themselves in niche markets, it
added.
Capital adequacy of the banking system is strong, 12.1 percent at end‐June
2008, well above the internationally acceptable minimum requirement of 8.0
percent, it said and added 2 core capital constitutes about 80.0 percent of the
total capital, and Tier 1 to risk weighted assets ratio of the banking system is at
9.7 percent.
“This strong capital base is accompanied by adequate reserves on the back of
stringent provisioning requirements against classified assets – the net NPLs to
net loans ratio is reasonably well‐contained i.e. at 1.3 percent in June 2008,
comparable to international best standards,” the Report pointed out. Profitability
of the banking system continues to be impressive, largely emanating from the
persistent growth in high‐yield earning assets and expanded business volumes.
Before‐tax Return On Assets of the banking system remains strong at 2.3
percent in June 2008. The strengths built up over the years are now coming in
handy in managing the recent financial strains.
The Report mentioned that the demand for credit from both the government and
the private sector resulted in liquidity strains faced by some individual banks,
which also emanated from the combined impact of their weak deposit
mobilization and low interest rates offered on deposits. The Government’s and
public sector organizations’ excessive borrowings from the banking system
posed another challenge for the banking system. Notwithstanding, the liquidity
strains were temporary and the inter‐bank market is now functioning normally.
“Albeit going forward, the banking sector faces a significant challenge in
maintaining its deposit base and in attracting new deposits, given the three
rounds of increase in the rates of return on NSS instruments in the first few
months of FY09. This will in a way force them to enhance the quality and returns
on their liability products, and strengthen competition,” it pointed out.
The Report noted that the liquidity position of banks also had an impact on the
Non‐Banking Finance Companies (NBFCs), whose main source of funding

26
continues to be credit lines from banks. “A broader assessment of financial
stability indicates that the financial sector is too bank‐centric, and the outreach
and growth of the Non‐Bank Finance Companies and the Insurance sector have
languished in recent years,” it said and added NBFCs face direct competition
from banks and are not likely to grow significantly until their funding sources and
costs are streamlined. At the same time, growth in the insurance sector is weak,
and private pension funds have only recently started to gather some pace. The
insurance sector is unlikely to grow unless it gets an infusion of innovation and
efficiency. The interest from banks to associate themselves with insurance
companies and develop new products for cross‐selling may also revitalize the
sector. Private pension funds have an enormous potential as indicated by the
growth of such funds in other emerging markets, where they have become
important and in some cases, principal institutional investors and the main
providers of long‐term funds.
The Report asserted that an excessive dependence on the banking system to
meet the financing needs of the economy, as well as other participants of the
financial sector, is quite stark in comparison with other emerging economies,
where in general, the growth in other components of the financial sector, such as
capital markets, complements and supplements the financing capacity of the
banking sector.
While financial markets (money market and foreign exchange market) remained
resilient to the developments in the macroeconomic environment and functioned
well in maintaining financial stability, the imposition of the floor of 9,144 points on
the KSE‐100 index in August 2008 has adversely impacted investor sentiments
by effectively blocking the exit 3 mechanism generally taken for granted in a
market based system. Incidentally, there is no known precedent of placing a floor
on a market index, albeit temporary suspension of trading in equity market has
been implemented in some cases as an extreme measure, the Report added.
The Report gives a detailed assessment of the channels of transmission of the
second‐round impact of the ongoing global financial crisis on the domestic
economy and financial sector. The Report points out that despite several
achievements of the financial sector in recent years, financial depth and
penetration in Pakistan continues to be low, and SBP’s financial inclusion
strategy as well as the recently launched strategic plan for the Islamic Banking
Industry, are both aimed at extending the net of financial services.

2.2 Profile of Conflict Conditions and the Economy:

This section begins with a profile of the risks of conflict and political instability in
Pakistan and then provides an overview of growth performance and conditions
regarding poverty and inequality, the economic structure, demographic and
environmental conditions, and gender equity. Some of the indicators cited here
are descriptive rather than analytical and are included to provide context for the
performance analysis.

2.3 Conflict Conditions and the Political Instability:

27
Pakistan has faced a rising threat from extremist groups over the past several
years, including suicide bombings and other terrorist attacks (see Exhibit 2-1). It
has also been rocked by political turmoil, including the controversy over the
President Pervez Musharraf’s dismissal of judges in 2007, Musharraf’s
resignation as president, and the assassination of former prime minister and
presidential candidate Benazir Bhutto. Despite subsequent elections and
reinstatement of the judges, law and order has deteriorated, and attacks by
militant groups have continued to rise. According to some estimates, the
government fully controls less than 40 percent of the northwestern regions of the
country.5The situation has potentially dangerous implications, both domestically
and internationally, as Pakistan has become one of the most unstable nuclear
states in the world. 5 “Pakistan Conflict Map.” BBC News, available at
http://news.bbc.co.uk/2/hi/southasia/8046577.stm. Accessed 9/24/09 The risk of
instability is reflected in Pakistan’s scores on the Failed States Index (FSI).
Developed by the Fund for Peace and presented annually in Foreign Policy, the
index ranks countries according to their vulnerability to violent internal conflict
and societal deterioration on 12 social, economic, and political-military indicators.
Each indicator is rated from 1 (best) to 10 (worst), based on a combination of
media content analysis and quantitative data. A score of 90 or higher (out of a
maximum of 120) signals “critical” risk. For 2009, Pakistan received a score of
104.1, worse than in 2008 (Table 2-1). Pakistan now ranks as the 10th-most
unstable state in the world. By comparison, India’s FSI score is 77.8 and
Turkey’s is 78.2. 6 P AK I S T AN E CO NOMI C P E R F O RMAN C E AS S E
SSM E N T

The FSI indicators that worsened most between 2008 and 2009 relate to the
deterioration of public services and external intervention. The public services
indicator worsened, from 7.1 to 7.5, as violence in remote regions weakened the
ability of the government to deliver basic services and sometimes interrupted
humanitarian supplies of food and medicines. Jihadi groups have been providing
services in some areas,6 which raises concern about the social contract between
the people and the government. United Nations sources estimated that violence
displaced almost 850,000 families—nearly 6 million people—as of June 2009,
though 100,000 families returned home in the Swat, Buner, and Dir districts of
North-West Frontier Province in July 2009.7This illustrates the magnitude of
displacement from the government’s offensive in the Swat Valley and the
associated strain on public services. 6 “Pakistan: Political Impact of the
Earthquake,” International Crisis Group, Asia Briefing No. 46, March 15, 2006.7
Jason H. Campbell and Michael O’Hanlon, “Pakistan Index: Tracking Variables of
Reconstruction and Security,” Brookings Institute, October 5, 2009, p. 9.The
need for rebuilding and humanitarian relief in areas affected by conflict and
natural disaster, as well as development programs in conflict-risk areas—not
counting the more recent temporary support for the macroeconomic stabilization
program (see Economic Stabilization and Government Capacity, p. 21)— are
factors contributing to a high degree of external intervention in Pakistan. The FSI
rating of 9.5 for external intervention reflects the fact that Pakistan’s dependency

28
on international support has been a source of rising discontent with the
government.
Pakistan also scores in the critical range in other categories. The worst score is
for group grievances, at 9.6. The most obvious evidence of grievance is seen in
the scale and frequency of terrorist attacks, particularly since the truck bombing
at the Marriott Hotel in Islamabad in September 2008, which left 50 people dead.
Conflicts between the army and militants in Balochistan and the North-West
Frontier Province also worsened in 2008 and have continued in 2009. In the
Swat Valley in February 2009, the government attempted to placate Islamist
militants as part of a ceasefire by agreeing to implement sharia. But after
militants with links to the Taliban attempted to expand their power base, the army
took back the area by force, regaining control in June. By late September, courts
were back in session in an attempt to implement sharia and reform the corrupt
judicial system that encouraged popular support for the Taliban in the first
place.8 In August 2009, Pakistani Taliban leader Baitullah Mehsud was killed by
a U.S. drone attack; the Taliban have vowed to avenge his death through more
bomb attacks.9 Terrorist bombings continue, including attacks on a U. N. agency
and army headquarters in Islamabad in October.10These conflicts also
contributed to the very high score of 9.5 relating to concern about state control of
the security apparatus.
Two FSI indicators have improved significantly over the past year. First, the
score on delegitimization of the state dropped from 9.5 in 2008 to a still very high
9.1 in 2009, after Musharraf’s resignation in August 2008 and the election of Asif
Zardari a month later. Although presidents in Pakistan are not elected directly
and Zadari is controversial, his election nonetheless represented a shift to more
legitimate governance and signaled a major break from Musharraf’s increasingly
authoritarian rule.
The political transition was also accompanied by the lifting of restrictions on the
media and trade unions.11As a result the FSI score for human rights improved
from 9.5 in 2008 to 8.9 in 2009. In the turmoil leading up to the 2008 elections,
politically motivated violence such as Bhutto’s assassination increased
dramatically, leading Musharraf to tighten censorship of the press. These
controls were largely reversed after Musharraf’s resignation. Other events that
improved the human rights score include the return to civilian rule and
reinstatement of the judges sacked by Musharraf under emergency rule.
In addition to the drivers of conflict shown in Table 2-1, the Fund for Peace
conflict assessment also considers the state’s institutional capacity to cope with
pressure and maintain stability. This analysis scores five aspects of core
institutional capacity—leadership, military, police, judiciary, and civil service—on
a scale of 5 (worst) to 25 (best). For 2009, Pakistan received a score of 14.0 for
institutional capacity, compared to 16.0 for India and 18.0 for Turkey. Although
Pakistan has one of the strongest militaries in the region, the capacity of the
leadership scored low because of uncertainty about the transition to civilian
government. The score for police capacity was also low because of corruption

29
and human rights abuses. The civil service also lacks the capacity to address
many of the concerns and needs of the citizens, particularly in remote areas.
Continued investment in developing the capacity of the state to deliver services
and maintain the peace is therefore a high priority for achieving the inter-related
goals of political stability, internal security, and economic development. Although
immediate needs may require extensive support from international partners, the
national and local governments must uphold their obligations and build a stronger
social contract with the people. Otherwise, nonstarter actors will use weaknesses
in the social contract as opportunities to bolster their own legitimacy and support,
leading to further deterioration in security, which will hamper economic activity in
the affected areas. The focus on institution building in the government should be
coupled with strengthening of the capacity of responsible civil society
organizations to hold the government accountable for improving human rights,
physical security, and livelihoods.

2.4 Economic Growth:

Domestic conflict, terrorism, and political instability adversely affect the prospects
for economic growth by increasing investment risk, disrupting business
operations, diverting resources to security activities at the expense of productive
investment in physical and human capital, impairing the delivery of essential
public services in affected regions, and straining the government budget.12
Progress toward political and military stabilization in Pakistan is therefore
intimately tied to progress in revitalizing the economy, creating jobs for the
youthful workforce, and improving standards of living in all regions of the country.
But the relationship between conflict and growth also works in the opposite
direction, because weak economic performance, nationally or regionally,
accentuates the risk of violence and complicates efforts to achieve political
stability.
Despite major security problems in the western and northern parts of the country,
real GDP growth in Pakistan averaged nearly 6 percent per annum between
2004 and 2007 (Figure 2-1). This robust performance was driven by favorable
global economic and financial conditions, stable political conditions in Pakistan,
and reforms to improve the business environment. For FY 2007/2008 (prior to the
global economic contraction), the GDP growth rate of 6.1 percent nearly matched
the LMI-Asia median of 6.4 percent, though it was well below India’s growth rate
of 7.3 percent. The robust growth for much of this decade, along with a slight
deceleration in population growth (see Demography and Environment, p. 16)
boosted per capita GDP from $1,949 in 2003 to $2,624 in 2008, in terms of
purchasing power parity (PPP). This figure exceeds the LMI-Asia median of
$2,313 for 2007 and nearly matches India’s per capita GDP of $2,780 that year.
Turkey is far more affluent, with a per capita GDP (PPP) of $13,139 in 2008.

30
In 2008 the growth rate dropped to 2.0 percent as a result of rolling blackouts
from domestic energy shortages and tighter fiscal and monetary policies to
combat inflation and balance-of-payments problems (see Macroeconomic
Stability, p.21), compounded by contagion effects from the global financial and
economic crisis, which particularly affected textile and garment exports. Political
instability surrounding the change in government was another contributing factor,
along with escalating tension in Afghanistan, which resulted in Pakistan’s
becoming the frontline in the U.S. war on terror.
The IMF’s growth projection for 2009 for Pakistan was recently downgraded from
3.5 percent to just 2.0 percent. The fund anticipates that the growth rate will
accelerate in 2010 only to 3 percent, assuming increased development
expenditure and policy reform to improve energy supplies.14Even with the recent
growth slump, Pakistan’s economy has been more insulated from the global
shock than many countries that suffered contractions in GDP, including Turkey,
where the IMF projects a growth rate of negative 6.5 percent in 2009. Even so,
the IMF projects that Pakistan’s growth rate will remain below 5 percent for
several years. In contrast, India’s growth remained over 5 percent even in 2009,
a year of economic crisis.
Gross fixed investment, a building block for growth, amounted to 20 percent of
GDP in 2008 and averaged 18.8 percent over the past five years (Figure 2-2).
This is significantly below the LMI median of 24.3 percent of GDP and the
predicted value of 24.7 percent for a country with Pakistan’s structural
characteristics. It is also far less than India’s 35 percent, though not far from
Turkey’s 21.5 percent. About three-fourths of the investment was by the private
sector, the remainder being government capital expenditure,35 ). 15including
investment in infrastructure (see Infrastructure, p. Another building block of

31
growth, productivity of investment, can be gauged roughly by looking at the
incremental capital-output ratio (ICOR), which is the amount of investment per
dollar of extra GDP. A low ICOR value suggests that capital is efficient in creating
growth. The ICOR for Pakistan, averaged for the past five years, has been
remarkably low at 3.0, compared to the LMI median of 4.7 and the ICORs of 4.0
and 3.5 for India and Turkey, respectively. The low ICOR could be considered to
be associated with labor-intensive production resulting from relatively low labor
cost, but this logic cannot explain why Pakistan has a much better ratio than LMI
countries in general. An alternative explanation is that investors in Pakistan
demand a higher hurdle rate, so that risk considerations screen out investments
that are less efficient. In any case, the high rate of investment productivity
observed over the past five years, if sustained, would support a medium-term
growth rate of 6 percent without requiring a higher investment rate. But if the
ICOR reverts to a level more typical of LMI countries globally, then even 5
percent growth will require a higher level of investment relative to GDP.

To summarize, Pakistan registered strong growth in the five years to 2008, but
over the past two years the economy has been adversely affected by a
combination of poor domestic policies, worsening security conditions, and
contagion effects of the global crisis. Considering Pakistan’s internal security
problems and the high rate of population growth (see Demography and
Environment, p. 16), a slow and tepid recovery could complicate efforts to
achieve peace and 12 PAK I S T AN E CO NOMI C P E R F O RMAN C E AS S
E SSM E N T stability. The need for a rapid return to high growth underscores
the importance of strong reforms to reduce barriers to efficient investment and
growth in productivity.

32
2.5 Poverty and Inequality:
Widespread poverty and income inequality are multidimensional conditions
related to a lack of income, security, education, health, employment
opportunities, and voice in public affairs. Poverty takes on an added dimension in
Pakistan because of the vulnerability of the poor to conflict. Moreover, economic
hardship, inequality, and lack of opportunity can sharpen sectarian grievances
and fuel political instability and civil strife.During the first half of this decade, the
poverty headcount in Pakistan, using a national definition of the poverty line,
exhibited an impressive decline from 34.5 percent in 2001-02 to 22.3 percent in
2005-06 (latest year). For comparison, the predicted value of the poverty
headcount for a country with characteristics of Pakistan is 24 percent. Because
of the variance in national poverty lines, comparisons are often made using the
international benchmark of $1.25 per day in PPP.17On this basis, the poverty
rate in Pakistan was 22.6 percent in 2005, much lower than the figure of 41.6
percent in India. The corresponding headcount for Turkey is just 2.7 percent
(Figure 2-3).
Pakistan’s poverty data for 2005 reveal the expected inter-regional variations.
The World Bank calculates a poverty rate of 27 percent in rural areas, double the
urban rate of 13.1 percent; the poverty headcount is much higher in North-West
Frontier Province (38 percent) than in Balochistan (32 percent) and Punjab (29
percent), and especially Sindh (22 percent). 18 In assessing vulnerability, one
must also consider that almost 21 percent of households were near-poor in 2005,
with incomes no more than 25 percent above the poverty line. These households
are easily pushed back into poverty by income or price shocks.19 The sharp
increase in food and fuel prices in 2007-2008 is a prime example, as wheat
prices rose by 150 percent and palm oil prices by 200 percent. Recent official
poverty estimates suggest that the poverty rate jumped by 6 percentage points in
fiscal 2007-08,20 and the World Food Program (WFP) estimated that nearly half
of the population was food insecure by mid-2008.21 In the past year inflation has
come down (see Economic Stabilization and Government Capacity, p. 21), with
food inflation falling to 10.6 percent from 34.1 percent.22But this is still a high
rate of increase, warranting policy intervention to stabilize prices and ensure the
adequacy of food supplies.

33
Moving people out of poverty is the primary concern, but the World Development
Report 2006 emphasizes that the degree of income inequality influences both the
prospects for growth and the impact of growth on poverty reduction.23 It is
estimated that the impact of the same amount of growth on poverty reduction is
higher when the initial income inequality is lower. In Pakistan, the poorest 20
percent of households obtained 9 percent of total incomes in 2005, up from 6.6
percent in 2001-02. 24The income distribution was therefore more equitable than
in India, where the poorest quintile had an 8.1 percent income share, and in
Turkey, where the figure was 5.2 percent for the same period. The global median
for LMI countries was 6.1 percent.
Broader measures of human development, such as UNDP’s Human Poverty
Index, paint a less favorable picture. This index measures the extent of
deprivation in health and education as well as 25 On this index for 2009 (based
on data through 2007), Pakistan’s score of 33.4 ranked it 101 among 135
countries (with Afghanistan last). In comparison, India ranked 88th and Turkey
Turkey 40th (Figure 2-4). Pakistan’s deprivation rating was well above the
predicted value of 21.4 and the LMI median of 17.3. This poor performance was
driven primarily by the country’s high illiteracy rate (see Education, p.44)

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Overall, Pakistan has tackled income poverty reasonably well for its level of
income, though recent price shocks have set it back. The government has been
responding by establishing social protection schemes targeting the urban poor in
lieu of the previous emphasis on untargeted price interventions for basic goods
and services. The Benazir Income Support Program (BISP), launched in
September 2008, is the flagship initiative, providing monthly cash transfer grants
to poor families.26The effectiveness of the scheme remains to be seen, however,
in terms of coverage, leakage, and governance. Besides addressing these
problems, the government also has to pursue development programs addressing
inter-regional inequality and poverty, in the interest of national security.

Chapter 3: Research Objective and Research Article

3.1 Research Objective:

Our research objective is to find out the effect of global financial crises of the
world in Pakistan. There are many views that Pakistan was not affected like other
world. The financial institutions of the world were manly affected due to their soft
loaning policy. Their assumption was to facilitate the people life. But situation got
an unexpected trend. Peoples were facilitated but they were unable to pay off
their loans. In Pakistan the loaning policy was not soft enough that everyone

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could get loan against given terms and conditions. The factors were of political
instability or economic recession? It raised the question to be answered.

Article Review No.1

3.2 Introduction:
A bank is a financial organization licensed by a government. Its primary activities
include providing financial services to customers while enriching its investors.
Many financial activities were allowed over time. For example banks are
important players in financial markets and offer financial services such as
investment funds. (Michael Gavin and Ricardo Hausmann 2009)

3.3 Reason of the Banking Crisis:

Most of the banking crisis starts reasonably with the previous examination of the
financial institution that has been failed. We observed that most of failed bankrupt
institutions were not managed properly. After investigation we have found that
main reason of the many banks failures are bad decisions by the bankers like
Brings and BCCI.
(Michael Gavin and Ricardo Hausmann 2009)

3.4 Investment and Banking Crisis:

In banking industry is witnessing a huge transformation differentiation has always
been a challenge given the commoditization of products and services. However
customer derives their experiences based on the superiority and consistency of
interaction channels. So it is necessary to improve the customer experience in
current context and the road ahead. The significance of channels of interaction
has been studied in light of customer experience. The paper talks specifically
about how banks should go about developing their customer experience strategy
discussing the key enablers and top priorities to make the customer experience
pleasurable. (Michael Gavin and Ricardo Hausmann 2009)

3.5 Macroeconomics Feedback:

In macroeconomic feedback adverse expectations of a particular event make that
event more likely .For example, the decision to devalue is triggered when foreign
exchange reserves falls below a certain threshold. A higher domestic interest
rate, triggered by fears of devaluation or default, feeds back in an adverse way
on the economy’s prospects, by making a devaluation or default more likely
because it increases the economy’s foreign debt servicing or because higher
interest rates trigger a run on the banking system, a contraction of domestic
liquidity, and an outflow of reserves. In this case, shifting expectations are to

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some extent self-fulfilling, and there are several rational expectations equilibrium.
(Michael Gavin and Ricardo Hausmann 2009)

3.6 Bank Regulation and Supervision Framework:

Banking crisis starts after macroeconomics shocks. The current financial crisis
and the financial market events have spurred renewed interest and controversy
in debates regarding financial regulation and supervision. Banking Regulation
and Supervision includes discussions of the banking market structure and of
regulatory theory that both aim to circumscribe prudential concerns. Financial
instability has raised to the top of the policy agenda. This essay argues that in
order to improve the safeguards against financial instability, it may be desirable to
strengthen further the macro prudential orientation of current prudential
frameworks, a process that is already under way. The essay defines compares
and contrasts the macro- and micro prudential dimensions that inevitably coexist
in financial regulatory and supervisory arrangements, examines the nature of
financial instability against this background and draws conclusions about the
broad outline of desirable policy efforts. (Michael Gavin and Ricardo Hausmann
2009)

3.7 Fiscal and Debt Policy:

Fiscal and debt policy are an important source of financial system to avoid
creating large strains on the domestic banking system. (Michael Gavin and
Ricardo Hausmann 2009)

3.7A) Fiscal Policy:

Decisions by the President and Parliament usually relating to taxation and
government spending, with the goals of full employment, price stability, and
economic growth. By changing tax laws, the government can effectively modify
the amount of disposable income available to its taxpayers. For example, if taxes
were to increase, consumers would have less disposable income and in turn
would have less money to spend on goods and services. This difference in
disposable income would go to the government instead of going to consumers,
who would pass the money onto companies. Or, the government could choose to
increase government spending by directly purchasing goods and services from
private companies. This would increase the flow of money through the economy
and would eventually increase the disposable income available to consumers.
Unfortunately, this process takes time, as the money needs to wind its way
through the economy, creating a significant lag between the implementation of
fiscal policy and its effect on the economy. (Michael Gavin and Ricardo
Hausmann 2009)

3.7B) Debt Policy:

Debt policy assesses whether the debt management strategy is conducive to
minimizing budgetary risks and ensuring long-term debt sustainability. Basically

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Debt financing is the money that we borrow to run our business. (Michael Gavin
and Ricardo Hausmann 2009)

3.8 Macroeconomic Shocks:

Macroeconomic shocks affect the soundness of the banking system and how this
,in turn feeds back into macroeconomic environment. Recent confusion on the
international financial markets have shown very clearly that assessing the degree
to which banks are vulnerable to macroeconomics shocks is of utmost
importance to investors and policy makers. We propose to use framework that
takes feedback effects between the financial sector and the macroeconomics
environment into account. We find that monitory policy shocks and fiscal policy
shocks have a significant impact on the probability of distress in the banking
system. (Michael Gavin and Ricardo Hausmann 2009)

3.9 Monetary and Exchange Rate Policy:

Monetary policy and the framework in which it operates have profound effects on
economic outcomes over both the short and long term and are continually
analyzed. These effects depend on the exchange rate regime in place and hence
form a part of the analytical studies undertaken. The banking sector has
collapsed; the economy is in the midst of a deep recession; the exchange rate
has plunged; capital flows have been frozen; inflation is elevated; public debt has
risen; source of revenues have disappeared; social needs have increased; and
the unemployment insurance fund has been nearly depleted.
(Michael Gavin and Ricardo Hausmann 2009)

Article Review No.2

Financial Crisis in Financial Institutions

3.10) Causes of the Banking crisis:

The current financial crisis in the financial institutions today is not an issue of one
or two countries; it hit badly the institutions across the globe and ultimately turned
into global financial crisis. The crisis apparently started in the mid of 2007 by the
sub-prime credit crisis in USA led to destabilizing the financial markets of the
developed world and causing the fall down of prominent names in the banking
business which worsened by rising global energy and commodity prices. The
situation in developing countries is more sever where the commodity prices
roused strongly which is also pushed up inflation. It is expected by the analysts
that the credit lines from foreign banks to the banks in the developing countries
will squeeze. The continue crisis is inducing governments to introduce programs
to recapitalize banks, guarantee bank liabilities, and provide liquidity to the banks
otherwise the longer the crisis, the state and local governments may begin to
restrict new financing arrangements for their operations.(Mrs. Malik et all,2009)

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3.11) Previous History of the Crisis:

Going through the detail of previous financial crisis shows, the economists have
not learned the lesson from what happened several times i.e.; the south sea
bubble of 1720, the collapse of over end gurney in 1866, the Australian financial
crisis in 1893, the Wall Street crash of 1929-30, the black Monday of 1987 and
the meltdown of high-tech stocks, Gordon Boyce and Simon Ville in 2001-02.
The 1929 crisis affected the developed nations, Europe and America while the
1997 crisis which lasted two years was affected the emerging economies of Asia
Pacific. This shows the unreliable financial support on which companies rely. .
(Mrs. Malik et all,2009)

3.12) The Back Ground of Current Crisis:

The current financial crisis initiated in the United States started in the mid of 2007
with the downfall of US sub-prime mortgage industry at significant intensity
estimated initially $300-$600 billion went up to $1 trillion. In fact many of the sub-
prime mortgages actually never made it on the balance sheets of the lending
institutions that originated them and made attractive to foreign banks by high
investment grading. When sub-prime borrowers failed to repay their mortgages,
the originating institution needed to finance the foreclosure with their own money,
bringing the asset back on its balance sheet. This left many banks an unfeasible
situation, the out of hand timeframe. It may not be wrong if it is called a “Trust
Crisis”. Some believes that it was a series of events which caused the crisis
begins with the collapse of currencies in East Asia in 1997 and became edgy due
to the financial crisis in Russia in 1998. In USA the “dot-com” stocks collapse in
2001 and the final stroke of swift decline in housing prices and “rapid contraction
in credit fell into recession. .(Mrs. Malik et all,2009)

3.13) The Impact of the Crisis:

The recent financial crisis has been rushed across the public-private boundary
begins due to bad mortgages in 2007-08, starting with the US housing crisis has
now become a global phenomenon. The crisis shaken the world for last two
years, brought down the top names. In the last few months several major
financial institutions absorbed by other financial institution, receive government
bailout or completely bankrupt. The crisis impacted not only in the United States
but across Asia and Europe, stock exchanges crashed, collective losses of the
London, Paris and Frankfurt markets alone amounted to more than 350 billion
dollars. Exchange 100 index closed more than 323 points down in January 2008.
The crisis affected the capitalist economies and distressed the Socialist economy
like Russia where the stock market in 2008 was fallen by 50% and the Russian
central Bank was forced to buy rouble in massive amount to prevent the severe
falling against US Dollar and Euro. Mark-to market losses on mortgaged-backed
securities, collateralized debt obligations and related assets through March 2008

39
were approximately $945 billion which the financial loss in the history. (Mrs. Malik
et all,2009)

3.14) The Measures:

Major countries are coming up with measures such as provision of liquidity and
bailout packages for distressed banks showing little sign of abating in the
financial markets. (Mrs. Malik et all,2009)

3.15 Our Methodology:

After the study of factors which have lead to the down turn in Pakistan we build a
relationship of these factors with our variables that are poverty, unemployment,
wealth distribution.
Due to the recession in the whole world the industry and the financial institutions
were affected. This effect decreased the exports of the countries. Industries were
unable to produce more because there was no cash available to the industries to
produce more as there was no cash in banks and in financial institutions, by this
effect an ultimate downturn came in the stock markets of these global economies
and their investors lost everything. This was on behalf of the whole world.
Pakistan is an agrarian economy and was totally dependent on the imports from
other countries. Now other countries were already running short of cash and
resources to produce more, they increased the prices of the commodities which
they were exporting. Pakistan has to buy these commodities at a very high price
even their own produce of agriculture “the wheat” this created a demand for
basics of life as a whole. On other hand Pakistan’s political instability in 2007 and
2008 ignite the downturn more. Our exports started to decrease as there was no
trade on the side of imports, foreign reserves were utilized to fulfill the basics of
life. Now both imports and exports were out of reach. Pakistan became trade
deficit due to the negative pressure from imports and exports. The global
financial crises raised the import bill. All the reasons gave a very worse picture to
the employment in Pakistan. Our textile industries to sugar industry all were
unable to produce their own products. Banks started to merge rather to provide
the employments to the people as they were becoming insolvent to their central

40
banks. The effect on our industry was same as in whole world, which is lack of
cash and resources.
The complete picture leads to unemployment and unemployment to the poverty.
Investors of Pakistan invested in other countries and our economy got more
down turn. Stock market indexes came to a very low figure prior to the crises.
The mass-scale unemployment came to the economy.
Food crises came due to our own wrong decision of the export but it got more
worsen when we were in need of it. We imported it at greater price rather we
exported it. The reason was financial crises. People of rural areas who were
producing for their own could only survive in this condition. But the people who
were under the poverty line were largely affected by this curse as they were
having no land of their own.
Here comes another aspect of nourishment in the sense of food and poverty due
to the crises. The nourishment of the peoples especially female has been
affected indirectly. Due to poverty the female has to survive on the less available
food and cash for medicine. Infant child mortality did not have any improvement
and the goal of MGD was seemed to be farther. Mothers are unable to give time
to their children if we see as a whole. This factor has also leaded the child labor
in our industry because people have no money to educate their children.
The wealth distribution among the rich and poor seemed to be unjustified. People
who were rich became richer due to our false paradigm of trickledown effect
applied by the government. In other sense one can say that the time of trickle
down was not came and the recession took place and situation got more worsen.
Now the person living under $1.25 has been increased.

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Chapter 4 Conclusions and Recommendations

4.1 Conclusions:
Stabilization efforts together with a decline in international commodity prices
have succeeded in reducing external imbalances, rebuilding foreign exchange
reserves, and lowering inflation. However, owing to global economic recession,
there are significant risks to exports, remittances and external financing. Also,
there are significant risks to the fiscal framework. This highlights the need for a
rigorous implementation of reforms. Stringent implementation of the economic
program will be critical to success, and timely responses of fiscal and monetary
authorities to emerging risks will be essential to ensure it remains on track.
However, even though the stabilization program is home-grown, recent
developments and limited progress with a number of key reforms suggest that
the highest political level is not sufficiently convinced that the economic price of
inaction outweighs the political cost of implementation. The ongoing conflict and
geopolitical considerations as well as limited control over vested interests seem
to be reinforcing this.
A sharp spike in the international price of crude along with an
unprecedented jump in commodity prices were the two major external
culprits behind Pakistan’s macroeconomic imbalance. Oil has since
come down from a high of $147 a barrel to under $40 a barrel while
commodity prices have experienced a drastic trimming. The two put
together shall provide long-needed relief to Pakistan’s trade account
(and inflation).The other side of the coin is that the world economy is
slowing down like never before. Consider this: America buys nearly 30
percent of Pakistan’s exports. America is our only major trading
partner with which we have a trade surplus. American investors
account for nearly 30 percent of Foreign Direct Investment (FDI) into
Pakistan. And, America is slowing down like never before.
The Global Financial Crisis and the accompanying global credit crunch
had a minor direct impact on Pakistan. But, Pakistan’s economy
remains in the thickest of woods. For FY 2008-09, Pakistan needs a
colossal $13.4 billion foreign inflow of capital. Of the $13.4 billion,
IMF’s contribution is expected to be $4.7 billon and Pakistan still needs
to find other multilateral and bilateral donors to bridge the whopping
gap.

4.2 Recommendation:

We propose establishing a mechanism to enhance the credit of government

bonds, denominated in hard currencies, issued by affected economies. Among
the alternatives discussed to date is consideration of some form of guarantees,

42
issuance of a new type of "convertible government bonds," and measures based
on the concept of collateralized bond obligations.

We encourage APEC members to work toward a framework that will enable

multilateral steps to cushion the impact of currency instability on the private
sector. In time, it is possible that policies of APEC economies will become
sufficiently harmonized to make it feasible to consider the establishment of
multilateral currency swap mechanisms to deal with the problem of short-term
currency fluctuations.

ABAC recommends loan sales and use of alternative financing structures where
appropriate. To ensure the broadest use at the lowest cost to banks,
governments should consider the following steps:

1. establish a restructuring agency,

2. determine eligible loan pools,
3. perfect legal structures concerning the transfer of assets, servicing and
foreclosure rights in the events of defaults, and
4. remove tax and regulatory barriers and risks to these transactions.

ABAC believes that inflows of foreign equity capital should be encouraged to

recapitalize banks with inadequate capital bases. This proposal is not meant to
dilute economy-level economic control. Rather, the goal is to enhance the ability
of local banks to compete effectively in the increasingly open global financial
markets. In addition to access to capital, many other benefits also will ensue from
the participation of foreign banks, including improved risk management, higher
operating efficiency, record keeping improvements, and stability in bank deposits.

For economies currently in the midst of a foreign exchange crisis, ABAC

suggests a special exchange rate mechanism for debt service for qualified
companies as a short-term emergency measure to protect these companies
against further devaluation risk. These mechanisms could follow the examples in
Mexico and Chile during the 1980s.

Increased lending by developed economy export credit agencies (ECAs) can

bridge this gap until local financial markets are recapitalized, and ABAC
recommends that ECAs do so forcefully. As a mechanism for monitoring
progress on the eight economy-level proposals, Ministers of APEC economies
should incorporate reports on their plans to implement these proposals in their
Individual Action Plans (IAPs). While some of these proposals are aimed at
achieving long-term benefits, we believe it is urgent for action to begin on all of
the proposals so that affected economies and financial systems will move as
quickly as possible to a stable, healthy financial environment.

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4.3 References:

ADB (1999) Pakistan Rural Microfinance Project Interim Report, TA 2937-PAK,

April, Manila: Asian Development Bank. p.6.
Aga Khan Development Network (2008) Top Ranking for First Microfinance
Bank Pakistan in MIX Global 100 Report, Press release, Karachi, Pakistan,
January.
CGAP (2007) Country Level Effectiveness and Accountability Review with a
policy diagnostic, April.
Christen, R. P., Rosenberg, R., and Jayadeva, V. (2004) Financial institutions
with a double bottom line: implications for the future of microfinance. CGAP
Occasional Paper, July, pp. 2 3.
Finance Division (2007) Highlights of the Economy and Federal Budget 2006-
2007, Director General (Debt Office), Government of Pakistan.
Groen G.R. (2000) Pakistan, The Role of Central Banks in Microfinance in Asia
and the Pacific, Vol. 2, Country studies, Asian Development Bank. pp.187-188.
Human Development Report, (2006) Beyond scarcity: Power, poverty and the
global water crisis, published for United Nations Development Program (UNDP),
pp. 413-416.
Investors Relations Desk (2007) Update on Pakistan’s Economy, Debt Office,
Ministry of Finance, Islamabad, November 15, 2007, p. 1
Leghari, F. (2007) GCC investments in Pakistan and future trends, Gulf Research
Center, 03 January.
Matthews, J. (1994) Third World Traveler: Little World Bank, from the book “50
years is enough” edited by Kevin Danaher.
Mersland R., Storm R. Oystein. 2008. “Performance and trade-offs in
microfinance organizations: Does ownership matter?” J. of International
Development. Vol. 20, p.p. 598-612
Microfinance Gateway (2007) Pakistan’s Microfinance Sector at a Crossroad
(http://www.microfinancegateway.org/content/article/detail/41845)
MicroWatch (2006) A quarterly update on Microfinance in Pakistan, Issue 01,
October, p.1.
Morduch J. December 1999. “The Microfinance Promise”, J. of Economic
Literature, XXXVII, p.p. 1569-1614
Morduch J. April 1999. “The role of subsidies in microfinance: Evidence from the
Grameen Bank”, J. of Development Economics. Vol. 60 (1999), p.p 229-248
Oxford Policy Management (2006) Poverty & Social Impact Assessment:
Pakistan Microfinance policy, May, p.28, 76 and 107
Pakistan Economic Survey (2006-07) Reported by Ministry of Finance,
Government of Pakistan, p. 200.
Pakistan Financial Sector Assessment (2005) Financial Deepening: Role of
Islamic and Microfinance Institutions, Islamabad, p.99.

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Pakistan Microfinance Network (2006) Pakistan Microfinance Review, Shades of
Growth, p. 6-8. Pakistan times, (2007) Pakistan Economy Registers 7% Growth
Rate for 4th Consecutive Year, June 02, 2007. ISSN No. 1729-7915.
Sapovadia, V. K. (2003-2004) Microfinance: A tool to socio-economic
development, NICM Bulletin, p.3.
State Bank of Pakistan (2004) Implications of Liberalizing Trade and Investment
with India, published by Research and Economic Policy Department, Chapter 4,
p. 53.
State Bank of Pakistan(2007), Strategic Objectives of State Bank of Pakistan, p.19
The World Bank Group (2006) Pakistan at a Glance (2006), January 10, 2007.
Trickle up Economics (1997) Journal of Commerce, Inc.
Thapa, Ganesh B. 1999. Pakistan Rural Finance Sector and Microfinance for
Poverty Alleviation. Preliminary Study for Pakistan Rural Microfinance Project.
Asian Development Bank.
UNDP, (1999) Legal and Regulatory Framework for NGOs with a View to
Channelize Community Savings and Credit, Women in Urban Credit Project,
First Women Bank Ltd., Karachi.
World Bank (2003) Reaching the Rural Poor: A Renewed Strategy for Rural
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******The End******

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