October 1, 2007	Monday	Ramazan 18, 1428

THE spill-over of credit crunch in the United States may start hurting developing countries like Pakistan, with officials, bankers and investors agreeing that the government needs to improve the country’s not so comfortable resource mobilisation position to avoid its negative effects.

Officials in Islamabad say that the credit crisis, which started as a result of widespread defaults of sub-prime mortgages in the United States, needs to be taken seriously by all the stakeholders but there is no short-term solution to escape from its adverse effects.

The State Bank governor Dr Shamshad Akhtar says that the turmoil in the global financial market is a wakeup call for financial centres to re-assess the legal and the regulatory framework.

Talking about the immediate impact, the Special Secretary to the Ministry of Finance Dr Ashfaque Hasan Khan told Dawn that the credit crunch in the United States had resulted in the outflow of $80 million from the stock market. He said out of $1 billion portfolio investment, the withdrawal of $80 million was not very significant but agreed that the matter needed to be taken seriously.

A serious credit crisis has forced American investors to withdraw their portfolio investment from various countries including Pakistan. Dr Khan said that financially vulnerable groups in the United States especially “Chindia” (Chinese and Indian investors) were now facing problems there in acquiring new loans.

Chief Economist of ABN Amro Bank Saqib Sherani told Dawn that Pakistan was dependent on external capital inflows to help offset its current account deficit that also provides 33 per cent financing in the portfolio investment. This credit crunch in the United States, he said, had also caused problems for Pakistan as $200 million had been withdrawn from the portfolio investment since August this year. “This investment is gradually coming back. But there will be a negative impact of the US credit crunch in the launching of euro bonds and Global Depository Receipts (GDRs)”.

He said Pakistan required foreign capital investment and project aid from the international donor agencies to finance 60 per cent of the fiscal deficit. “And to me it looks that this credit crunch will have negative impact on the issuance of euro bonds in 2008”, he said.

One of the short-term solutions, Mr Sherani said, was to have more reliance on Pakistan Investment Bonds (PIBs) and to improve country’s resource mobilisation position to face the situation.

Dr Ashfaque Hasan Khan said investment banks were re-considering the option of extending liberalised lending in America. “And we hope that here too Pakistani banks would stop liberalised lending and this is how we can avoid the increasing crunch that is being witnessed in the United States”, he added.

”So far the withdrawal of the US portfolio investment from Pakistan has not created any serious problem, but if that continues, it would not be good for our economy”, warned Dr Khan, who is also the Director General of the Debt Coordination Office.

Asked about the impact of the outflow of foreign money on the current account deficit, he said during July-August it had improved by $562 million and trade deficit was reduced by $200 million.The trade deficit was still high at about $7 billion and needed to be brought down. But as percentage to GDP, both the trade and current account deficits have gone down.
He said while the credit crunch in the United States was fast becoming a matter of concern even for the developing countries, the political uncertainty in Pakistan was equally a grave issue and should not go unnoticed.

”From March 9 to September 26, the country has seen an unprecedented political turmoil and our economy during this period continued to perform. But perhaps this cannot go on like that and ultimately the capacity to observe shocks will become vulnerable and this will not be good for our economy,” Dr Khan added.

Currently, he said foreign exchange reserves were at a comfortable level while the exchange rate was stable.
Responding to a question, he said the IMF had acknowledged that inflation was gradually coming down but the current account deficit remained a problem. Dr Khan said that the IMF had now launched a multilateral surveillance mechanism in order to promote global economic stability and an orderly unwinding of the imbalances currently seen in the shape of the credit crunch being experienced in the United States.

But analysts point out that the US credit crunch would have far reaching impact on.

But a financial analyst said that the time for easy access to foreign money may be over, as financial system needs protracted adjustment to return to a robust position.

Acting Managing Director of Karachi Stock Exchange Mohammed Yaqub Memon told Dawn that he did not see any serious impact on portfolio investment due to widespread default of sub-prime mortgages in the United States. “The reason is that we are also having considerable portfolio investment from Far East, Europe and the Middle East countries and we are not dependent on US investors only”, he said.

He said the real problem was coming from the growing political uncertainty due to which one could expect negative impact on the economy. Mr Memon regretted that Pakistan had been removed from the Financial Times Index.