KARACHI, May 6: State Bank Governor Dr Ishrat Husain said here on Friday that the EU countries needed to undertake structural reforms to remove rigidities in goods and labour markets. He said that they needed such reforms sooner than later for a more balanced expansion in global economy. Dr Husain made this observation while speaking at the international conference of the South Asian Federation of Accountants which he inaugurated here on Friday. The title of the conference was Transformation of Accounting Profession.

He said that agriculture and improved market access for developing countries remain critical to sustain global economic growth. Dr Husain also said that for the South Asian countries (primarily India, Pakistan, Bangladesh and Sri Lanka), the removal of textile quotas from January 1, 2005 will have serious consequences in the coming years. The SBP chief said that these consequences are likely to be highly differentiated “contingent upon the response capacity of each country to the changed market conditions.”

“The onus lies mainly on the governments and the exporters in these countries to capture increasing market share by enhancing productivity, improving quality, cutting costs and re-engineering logistics supply chain.”

“As cotton textiles are relatively labour intensive, a rising share in the world market will not only help expand their exports and foreign exchange earnings, but also help in mitigating the unemployment problem in the region.”

Dr Husain who spoke on the subject of globalization, regional integration and national development was of the opinion that the world economic growth of 5.1 per cent in 2004 would moderate to a more sustainable level of 4.3 per cent in 2005. “Growth has been strong in most emerging economies led by China. Inflationary pressures remained subdued and monetary tightening underway in most countries will keep pressures well contained.”

He said that this benign and favourable outlook “is likely to persist if the key risks are mitigated adequately.” The SBP governor identified three key risks to the global economy namely a further sharp increase in oil prices; continued fiscal and current account imbalances in the US and sluggish demand in EU and Japan.

“There is no doubt that the US is living beyond its means,” observed Dr Husain. “Unlike in the past, the financing of the US current account deficit is, at present, largely being provided by the central banks of Asian countries that have accumulated large reserves and have invested these reserves mainly in the US paper.”

“This has enhanced the overall risks to the global economic system,” warned Dr Husain adding that if Asian central banks made abrupt and simultaneous withdrawals of their forex reserves from the US financial instruments, it might lead to destabilization in the foreign exchange markets and a hard landing in the US. “The second order effects of a recessionary US economy on the rest of the world, particularly on the emerging markets are not likely to be pleasant,” he added.

“With regard to oil prices, non oil-producing emerging market countries will have to watch the movements in oil prices and they are likely to forego some buoyancy if the prices continued to remain tight in the foreseeable future.”