THE World Economic Forum’s second Financial Development Report 2009 provides some interesting facts about Pakistan and its falling financial development index ranking.

The total financial assets of the country increased from $156 billion or 122.8 per cent of GDP in 2006 to $199.2 billion or 138.3 per cent in 2007. The increase occurred mainly in equity securities which increased from $45.5 billion or 29.2 per cent of the total to $70.3 billion or 35.3 per cent of the total.

The public debt securities increased from $64.4 billion to $73.7 billion but their share in total declined from 41.3 to 37 per cent. Similarly, the total amount of bank deposits increased from Rs45.5 billion to Rs54.6 billion but their share in total financial assets declined from 29.1 to 27.4 per cent. Private debt securities remained static at $0.6 billion.

The report has assessed the financial systems of 55 countries as compared to 52 in the previous one on the basis of the financial development index (FDI) and ranked them according to their financial development.

The previous report ranked Pakistan as 34th in the group of 52 countries with the total score of 3.5 out of the seven. However, in the current report the ranking declined to 49th out of 55 countries with the score of 2.9 only. Explaining such a sharp drop, the report states that, ‘Pakistan experienced one of the most serious drop and fell 15 places down to 49th from 34th which probably reflects, political and economic instability confronted by the country and its resultant impact on financial system.’

This high degree of political and economic instability is evident from even weaker scores as compared to the overall rating in institutional performance (52) and business environments (50) and a very high risk of sovereign debt crisis (54) with implicit risk of default.

The deterioration also occurred in the ranking of financial sector liberalisation from 48th to 52nd and the corporate governance from 35th to 48th for which the country made efforts and achieved some results. The country’s position deteriorated in all the seven pillars used for measuring the financial development.

However, there is also a ray of hope. Despite the low level of financial stability (48th), the financial system provides some indications of strength. The stability of its banking system is relatively strong by contrast with 29th position.. The country has also a relative advantage in financial markets as seen particularly in its fairly developed equity market (27th).

The report provides no data regarding the foreign exchange and derivates markets and the development of bond market, probably due to almost underdeveloped/non-existent position of these markets. Other developing countries such as Brazil, Chile and Malaysia have also achieved strong scores, especially in financial stability but they have lagged behind in other fields and none of them qualified for the top-ten group.

The report says that the issue of financial stability is and will continue to be a priority for emerging markets. However, financial stability may imply a trade off with healthy risk taking or efficient capital allocation to the highest return investments as they become more cautious about the sequencing of financial sector liberalisation, financial deepening and financial development in general. Moreover, the banking stability may not be taken for granted as it is dependent on the other factors including the country’s overall political, economic and social situation.

According to the report, while the poor may benefit from financial development and new job opportunities so created, they tend to suffer disproportionately from financial crisis as they are less able to insulate themselves against shocks than wealthier people. Similarly, the poor in the rich countries are better off than the poor in the developing countries.

Moreover, rich countries have the better capacity to absorb shocks.. The impact of the crisis is reflected in sharp drop in average economic growth of developing countries to 1.6 down precipitously from an average of over eight per cent in 2006-07. The shock came on top of the effects of the 2007-08 spike in oil and food prices that left many countries vulnerable and pushed as many as additional 200 million people into poverty.

This report has been prepared in the back drop of the financial turmoil of 2008 which more or less affected almost all the countries in one way or the other. According to the report, these crises have revealed the extent of global interconnectedness, exposing an under-appreciated set of linkages between players as diverse as home-owners in the United States, asset-backed security traders in London, manufacturing firms in Asia and agricultural exporters in Latin America.

The world’s largest economies exhibited the largest fall in absolute scores as compared to the last year. While United Kingdom came in first from the second place last year and the United States came down third from the first position, both experienced a sharp drop in their overall scores that significantly decreased the margin with which they lead other countries in the index.

Financial instability weighed heavily on both but it was offset to some extent by the strength of some measures of financial intermediation. The data indicate that the size and global nature of these economies may have led to their greater exposure to the current financial turmoil.