Thursday, September 4, 2008

World Economy Worst in Sixty Years

In a candid interview in late August with Guardian Weekend magazine, British Finance Minister Alistair Darling warns that the economic times faced by Britain and the rest of the world "are arguably the worst they've been in 60 years". To deepen the sense of gloom, he adds: "And I think it's going to be more profound and long-lasting than people thought."

While Mr. Darling's candor is rare for such a senior government official, what he revealed are off-the-record feelings shared by many top economic officials around the world. The dramatic impact of a severe, worldwide credit crunch, and sharp rise in the price of basic commodities, including food and fuel, are taking an unprecedented toll on the world economy. Economic growth has either stopped or slowed to a crawl, major stock markets have crashed, unemployment is on the rise, and the increasing world hunger and poverty are threatening global security and stability.

South Asia's economy is no exception. Economic growth and stock markets are down and unemployment and inflation are up. In Pakistan, the KSE-100 has lost 34.6% of its value this year, as investor confidence has been been hurt by political uncertainty and a long list of economic troubles, including skyrocketing inflation, disappearing foreign exchange reserves, declining rupee and a soaring deficit. Putting it in perspective, India's Sensex is down 48%, Shanghai has lost 44 percent, Russia is down 25 percent, and Brazil, 36 percent.

Since the takeover by the PPP-PML(N) coalition, there has been a sharp decline in Pakistan's economy. While Pakistan's GDP is expected to grow at 5% or higher this year, with Pakistan's annual population growth rate of 1.8%, it is important that the GDP growth continue to be at least 1.8% a year just to stay even. Summing up the current economic situation, the Economist magazine in its June 12 issue says as follows:" (The current) macroeconomic disarray will be familiar to the coalition government led by the Pakistan People's Party of Asif Zardari, and to Nawaz Sharif, whose party provides it “outside support”. Before Mr Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. But since then, as the IMF remarked in a report in January, there has been a transformation. Pakistan attracted over $5 billion in foreign direct investment in the 2006-07 fiscal year, ten times the figure of 2000-01. The government's debt fell from 68% of GDP in 2003-04 to less than 55% in 2006-07, and its foreign-exchange reserves reached $16.4 billion as recently as in October." Please read "Pakistani Economy Returning to the Bad Old Days".

The rapidly rising unemployment and skyrocketing inflation together have dramatically increased hunger and poverty among the most vulnerable in Pakistan. At 33%, the sum of unemployment rate and inflation, known as the misery index, stands at its highest level in Pakistan's history, and it is likely to increase social strife and hurt the chances of recovery.

While the worldwide economic slowdown and commodity inflation partly account for Pakistan's current economic meltdown, the biggest indigenous problem for Pakistan is the absence of any economic leadership. Pakistan has not even had a full-time finance minister for several months, since PML(N) withdrew from the coalition. With the expected election of Asif Ali Zardari as powerful president, and his hand-picked prime minister already installed, let us hope that the PPP will seriously begin to tackle the challenges of Taliban insurgency, deteriorating economy, and political instability.

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