Food and Global Financial Crises: Policy Response of Pakistan

Editor's Notes

• #3: The incidence of both lower incomes due to economic crisis and persistent high food prices has proved to be a devastating combination for the world’s most vulnerable populations.
• #4: The failure of economics is that why we didn’t see this coming. The global import prices were increasing since 2004 and yet we remained under the naiive assumption that somehow demand will create its own supply which we now know didn’t happen. In Pakistan the major increase had started in 2006 two year’s before the actually maturity of food prices which was in 2008.
• #5: With in the overall food import basket we see that wheat played an instrumental role in increasing the value of import bill in Pakistan. Please notice the sharp jump around September 2007 when Vietnam Argentina Egypt India and China restricted grain exports. By April 2008 the World Bank forecasted that 33 countries would soon face serious social unrest as the food crisis had reached “emergency proportions”. In the same month Kazakhistan, the world’s sixth largest wheat producer banned its exports of wheat and Indonesia, the world’s third largest rice producer declared that it will hold back surplus rice.
• #6: Now the impact of imported inflation on the domestic consumer prices was colossal. As u may notice that overall inflation shot up from under 5 percent in 2000 to over 20 percent in 2009 and food inflation almost touch 25 percent.
• #7: One of the key interventions by the government included a short term expansion in subsidies on wheat, electricity, oil and fertilizer. This as u may see not only increased the bank deficit financing between 2007 and 2008 but also added to inflationary expectations. As the bank financing of deficit crossed Rs. 650 billion the value of Pakistan ruppee was down by 27 percent vis a vis the USD.
• #8: During the time the country was still struggling to put forward prudent coping strategies for food and fuel crisis, incomes the global financial crisis. The overall exports after peaking at slightly above $20 billion in 2007-08 started to decline a much faster rate than anticipated. In the beginning we had strong conviction that a substantial portion of export demand for Pakistani products is income inelastic however as the expectations set in that the crisis may be prolonged montly export performance started to decline.
• #9: A similar situation was seen on the investment front with total and direct investment declining sharply after 2007. However despite the domestic and global uncertainity the flight of capital was less than expected as most of the FDI this time around was in longer term investments particularly in telecom and other services sectors.
• #10: The soft cushion came through in the form of rising remittances. Several reasons have been cited. First there was an increase in money sent from abroad in order to protect the families in Pakistan facing the downturn, in particular the urban poor. Second some of the Pakistanis initially laid of in persion gulf were coming back with their accumulated savings. However this is not to say that any documented reverse migration took place. Even the recent monthly data shows an increase in new deployments abroad.
• #11: The other encouraging features included a sound banking, insurance and finance sector in Pakistan which remained resiliant through the food, fuel and finanical crisis. The banking system was found to be well capitalized, with a good asset quality and strong risk aborption capacity.
• #12: There was an immediate need to see how the three crises had impacted the macroeconomic indicators, poverty and overall welfare in Pakistan. For doing so had to identify the data caveats and choose a quantitative methodology with an ability to see through the sectoral impacts.
• #13: We used what is commonly called the CGE modelling framework. A framework with the ability to capture the circular flow of income and the change in this circular flow if any of the exogenous variables are disturbed. The CGE model developed at the Planning Commission has 34 production sectors, 10 labour factors and 4 capital factors and around 16 household sectors.
• #14: The CGE model was combined with a microsimulation model which then exhibits how a change in overall GDP impacts the micro level indicators such as labour force participation, poverty and nutrional intake.
• #15: Two datasets were used in consistency with each other. These included the social accounting matrix for Pakistan, HIES and for the nutritional component we used the food composition table for pakistan.
• #16: We then set out to see the impact of four simple policy experiments. A decline in exports, an increase in import price of food……..
• #17: As the exports fell by 10 percent we see that the GDP decreases by 2.3 percent. Real investment declines by.......
• #19: In this case the imported food inflation pushes the domestic consumer price of food basket in the vacinity of 17 percent.
• #21: Some increase of import price of food is mitigated by the rising remittances.
• #23: If we see the isolated general equilibrium impact of an increase in remittances we see that real investment increases by 2.63 percent. Consumer prices decline and food consumption increases by almost 1 percent.
• #24: Pakistan’s response came in a much more difficult phase than the one witnessed by the rest of the world. The country was already constrained with rising domestic expenditure on security, law and order when suddenly u were asked to create additional fiscal space in order to protect the industry, jobs, and the consumption levels of the vulnerable group.
• #25: A two-pronged approach has been put forward. First we need to stabalize the economy through demand management policies (fiscal and monetary policy). Second we need to address structural issues such as institutional reforms and reduce cost of doing business in Pakistan. During the current phase of IMF standby arrangement, Pakistan has been able to achieve the broad targets. The way forward indicates that as soon as the macroeconomy is stabilized, the government needs to address the structure issues by injecting reforms that include fiscal discipline. Up till now several prudent measures have been adopted which include tightening of monetary policy (keeping interest rate high), cutting down unnecessary government expenditure (including subsidies), provided targeted cash support to poor and vulnerable groups, generate employment through skill development and careful management of food supply.
• #27: For the food crisis:At the very start of 2008 a steady stream of agriculture credit was ensured, which an enhanced indicative per acre credit limit as well as the launching of crop loan insurance scheme.
• #28: As the food and fuel crisis exacerbated, attention was required to keep the industry and exports alive. Consequently refinancing under Export Finance Scheme (EFS) and Long Term Financing Facility (LTFF) were restored, bank limit for export finance scheme enhanced and mark-up reduced.
• #29: Due to excessive public sector borrowing the system was facing liquidy constraints, hence the central bank intervened with an injection of additional Rs. 350 billion through open market operation. In order to encourage growth in deposits the bank expempted long tenor deposits from reserve ratios. At the same time as the bank financing of deficit was increasing, painful steps were required in order to stabalize exchange rate. This included a strict monitoring of exchange companies and banks involved in foreign transfers.
• #30: Given this precarious state of the macroeconomy, Pakistan signed an IMF standby agreement which delivered the first trance on November 24, 2008. The overall programme facility amounts to $7.6 billion with an interest rate ranging from 3.5 to 4.5 percent depending upon the market conditions. The programme lasts for a maximum of five years.
• #31: Given this precarious state of the macroeconomy, Pakistan signed an IMF standby agreement which delivered the first trance on November 24, 2008. The overall programme facility amounts to $7.6 billion with an interest rate ranging from 3.5 to 4.5 percent depending upon the market conditions. The programme lasts for a maximum of five years.
• #32: The natural economic revivalususally follows through in three stages: a) Macroeconomic Stabailization, b) Macroeconomic Recovery, and c) a sustained level of economic growth. However due attention is required at the micro level or in this case the household level in order to protect the vulnerable growth. The Government went ahead with certainly the biggest social safety net programme in the history of Pakistan. BISP initiated with $425 million intends to cover 22.75 million people which is around 14 percent of the population. This coverage will increased during the next two years to around 30 percent of the population. As with all social safety net programmes the challenge will be targeting, implementation and monitoring.
• #33: Besides this flagship programme, the efficiency and delivery of existing programmes is being improved with donor support. The world bank is actively following thru with pakistan poverty alleviation fund.
• #34: There are already on-going pro-poor expenditures that fall under both social safety and social protection. The view from the government is that efforts are underway to expand these services and ensure timely disbursements. There are reservations certainly as these are big programmes and I guess reforms is an on-going process which ususally involves painful adjustment process under existing economic trade-offs.