Daily Times

Globalization has made the world encircled in a very small unit where action taken by one country can easily be felt by others due to connected deeds without limitation of borders. International affairs and precisely economic activities among the countries are very important these days to be understood to align with the changes coming rapidly. Great Depression of 1935 and Global Financial Crisis of 2008 are a few examples found in past which depicts that the most connected countries for global economic activities feel most of the heat of crisis as compared to least connected. Presently, BREXIT and trade war between China and United States of America are becoming dangerous for world economy while situation of oil rich countries are also very unpredictable where war between Iran and Saudia could have been triggered. In this scenario International Monetary Fund (IMF) issued a warning signal about global outlook and categorically stated that there is no room for policy mistake, foreseeing international trade disputes arising due to lack of business confidence among the countries. IMF termed this situation as “The Synchronized Global Economic Slow Down” where economic activities of related economies are shrinking to larger extent since global financial crisis of 2008 happened a decade ago in 2008.

Pakistan is already witnessing the slowdown of economy where inflation is on rising trend and GDP (Gross Domestic Product) or in simple words growth rate is decreasing. World Bank estimates Pakistan’s inflation figure to touch 13% in year 2020 and GDP to come down to 2.4%. According to Government of Pakistan, it is strategically balancing the economy by controlling twin deficit i.e. Current Account Deficit (CAD) and Trade Deficit which became the major factor for recent slowdown. Reportedly, twin deficit came down to a huge extent however it created twin costs i.e. Rupee devaluation and Interest rate hike which have become a stimulant for businesses to shut down. Apart from that, anti-money laundering (AML) drive and increasing tax net to satisfy FATF (Financial Action Task Force) and IMF making business conditions worst further. Both financial watchdogs are of the view that if Pakistan’s economy may become documented it will not only improve standards of financial transaction to track AML and Terrorist Financing but it will help Pakistan achieving Tax targets, making Pakistan self-reliant. On the positive side, IMF applauded Pakistan’s efforts toward achieving set targets by the fund whereas FATF gave extension till February 2020 for making more sophisticated efforts towards AML while praising intentions of present regime, very clearly.

IMF in its report on global outlook states that due to US China Trade war and other unpredictable situations around the globe, world economy is witnessing a slowdown about 0.8%. Central Banks of countries those feeling most of the heat of recent world economic crisis are easing monetary policies where interest rates are coming down even to negative. If such would not have done by these central banks, global economic outlook would have gone worse than these estimates. Manufacturing side of the world will remain in stress for further one and a half year not only due to the fact that larger manufacturing countries i.e. USA and China are at Trade war but a change in European Standards for Emission has slowed down the world largest manufacturing sector i.e. automobile sector. Emerging economies growth rate has also been revised down to 3.9% due to structural slowdown in China. However growth rate will regain its momentum to 4.6% in year 2020.

When the global trade activities are slowing down it is affecting the international commodity market where prices of products will witness a decreasing trend helping Pakistan which is an import based country so far

On Pakistan, IMF reports that unemployment ratio in present scenario can increase from 6.1% (2019) to 6.2% in 2020 however Current Account balance will come down to negative 2.6% in year 2020 from 4.6% (2019). IMF predicted GDP slow down further with an estimate of growth rate about 2.4% along with World Bank. However it recognized the efforts of government of Pakistan towards making structural reforms in economic system of the country as proposed by IMF i.e. controlling primary deficit, market based exchange rate and interest rate adjustable to inflation figures. This has improved Current Account imbalances as Trade Deficit has come down notably. According to Pakistan Bureau of Statistics (PBS) Pakistan’s merchandise trade deficit dropped by 34.85% during first quarter of the current fiscal year as compared to the same period of last year with exports increased 2.75% and imports down by 20.6%. It is also a fact that this figure has paid a huge price in terms of business slowdown by inflicting twin costs described above which resulted in cost of doing business increased considerably; eventually resulted in unemployment estimates to increase.

Now when there is a global slow down to hit the world economies as a storm, where Pakistan stands and what strategies it should make to avoid further downturn of the economy. First of all international image of the country should be well kept though it is nicely presented by Prime Minister Imran Khan at each forum. It also includes adherence to international regulations which attracts Foreign Direct Investments (FDI). FATF and IMF recently endorsed sincere efforts of present regime towards adherence to international commitments; that is a good sign. Successful visit of the Royal Couple to Pakistan has presented Pakistan’s positive image to the western world. Pakistan has also become important to control decades old regional conflicts which is inspiring USA towards Pakistan. On Eastern side of the world, relationship with China has become stronger ever and apparently stalled China Pakistan Economic Corridor (CPEC) has given a new life in a recent visit of PM Imran Khan to China.Both the countries agreed to speed up the project whereas formal regulations have been passed by a Presidential order to avoid any delay. Furthermore Free Trade Agreement with China (CPFTA2) will be commencing by December 2019 reported by Mr. Abdul Razak Dawood. This phase of CPEC is very important for boosting business activities in the country where Special Economic Zones to start which in return will help Pakistan for achieving its growth estimates and balance of payment crisis.

As when the global trade activities are slowing down it is affecting the international commodity market where prices of products will witness a decreasing trend helping Pakistan which is an import based country so far. Due to this slowdown in developed world, interest rates are decreasing considerably contrary to Pakistan; therefore inflows under FDI or bonds can also help Pakistan to address foreign reserve issues at lower cost of funds. Now, when it is realized that Pakistan can get benefit out of this global economic crisis if certain parameters may be addressed discussed above it is important for the financial czars of the government to ease out monetary policy with an objective to get business momentum during this international scenario. Twin costs are hampering business activities of Pakistan which were introduced to control CAD. Now when there will be a decreasing trend of commodity prices and interest rates in international markets a benefit can be passed on to Pakistani business people by lowering interest rate to an acceptable level whereas currency will be stable in a response to international trade during such scenario.Another important aspect is the documentation of economy and simplified tax regime so that tax collection may be increased which will help government in lowering the rate of indirect taxationresulting disposable income of individual to grow. It will help people save the money and documentation will led them to deposit this money in the banks which will further create credits i.e. loans to private/public sectors for economic activities.

(The writer is a Corporate Finance Specialist and a Chartered Banker (UK)