Pakistan facing Mexican-style financial crunch
Pakistan facing Mexican-style financial crunch
* Former WB vice-president points to nation’s current account deficit, ‘excessive’ speculative business activity and weak banking system
WASHINGTON: A former World Bank vice-president warned here that Pakistan was facing symptoms that preceded the Mexican financial crisis more than 10 years ago.
Shahid Javed Burki, who was in charge of the bank’s Latin American division when Mexico was hit by the crisis in 1994, cited the South Asian nation’s large current account deficit and what he called excessive speculative business activity and weak banking system.
“When I look at all these things that preceded the Mexican crisis, I can see all of them present in Pakistan today,” he told State Bank of Pakistan Governor Shamshad Akhtar at a Washington forum on Monday. “But I’m not saying it is likely to happen” in Pakistan, he said.
“So, essentially what I am saying to you is: It would be, I think, prudent on your part to worry about the worst case scenario,” Burki told the SBP chief, who is only three months into her job.
Akhtar, the first woman ever to head Pakistan’s central bank, replied that she was aware of the “downside risks” mentioned by Burki as well as the threat posed by inflationary pressures and escalating crude oil prices that could worsen the country’s trade deficit.
She said the country was already under a “monetary tightening phase” and that central bank and the national economic management team were monitoring the situation very closely. “Further escalation in oil prices could endanger the fragile balance that currently prevails between budget management and trade deficit. We have to walk a very tight rope,” she added.
Akhtar, a former senior official of the Asian Development Bank, said the overall medium term outlook for the Pakistani economy “is on track” based on an average economic growth of around 6.5 percent.
“I like to believe we do have the opportunity to make a difference along with my economic management team. The general view we have in the team is we would like to closely watch the situation almost on a week to week, and month to month basis and see what policy responses we can take,” she said.
Burki, citing what he called a “casino culture” prevailing in Pakistan which he said was fuelled by easy credit extended by banks, disputed an assessment by Akhtar that Pakistani banks were in a reasonably good shape. He said “one particular bank gave me some numbers which I find them horrifying in terms of their exposure to weak assets.” He hoped it was “not representative of the entire banking sector.”
Burki said after the forum that speculative business activity in Pakistan was “being financed by the banks which are doing it on the basis of not enough reflection on their long term health - which is what I saw in Mexico. “If these things go sour then it will be a very quick snowballing effect,” he said, adding that Pakistan’s relatively fixed exchange rate system was also under pressure.
Pakistan’s central bank has cut its year to June 2006 economic growth forecast to 6.0-6.6 percent, saying it was due to a sharp tail off in manufacturing and agriculture. Inflation is likely to remain at the projected 8.0 percent target, the bank said in December.
The 1994 economic crisis in Mexico was triggered by the sudden devaluation of the peso. A week or so of intense currency crisis was stabilised when US President Bill Clinton decided to grant Mexico a loan to bail the country out, to the tune of 50 billion dollars. AFP
* Former WB vice-president points to nation’s current account deficit, ‘excessive’ speculative business activity and weak banking system
WASHINGTON: A former World Bank vice-president warned here that Pakistan was facing symptoms that preceded the Mexican financial crisis more than 10 years ago.
Shahid Javed Burki, who was in charge of the bank’s Latin American division when Mexico was hit by the crisis in 1994, cited the South Asian nation’s large current account deficit and what he called excessive speculative business activity and weak banking system.
“When I look at all these things that preceded the Mexican crisis, I can see all of them present in Pakistan today,” he told State Bank of Pakistan Governor Shamshad Akhtar at a Washington forum on Monday. “But I’m not saying it is likely to happen” in Pakistan, he said.
“So, essentially what I am saying to you is: It would be, I think, prudent on your part to worry about the worst case scenario,” Burki told the SBP chief, who is only three months into her job.
Akhtar, the first woman ever to head Pakistan’s central bank, replied that she was aware of the “downside risks” mentioned by Burki as well as the threat posed by inflationary pressures and escalating crude oil prices that could worsen the country’s trade deficit.
She said the country was already under a “monetary tightening phase” and that central bank and the national economic management team were monitoring the situation very closely. “Further escalation in oil prices could endanger the fragile balance that currently prevails between budget management and trade deficit. We have to walk a very tight rope,” she added.
Akhtar, a former senior official of the Asian Development Bank, said the overall medium term outlook for the Pakistani economy “is on track” based on an average economic growth of around 6.5 percent.
“I like to believe we do have the opportunity to make a difference along with my economic management team. The general view we have in the team is we would like to closely watch the situation almost on a week to week, and month to month basis and see what policy responses we can take,” she said.
Burki, citing what he called a “casino culture” prevailing in Pakistan which he said was fuelled by easy credit extended by banks, disputed an assessment by Akhtar that Pakistani banks were in a reasonably good shape. He said “one particular bank gave me some numbers which I find them horrifying in terms of their exposure to weak assets.” He hoped it was “not representative of the entire banking sector.”
Burki said after the forum that speculative business activity in Pakistan was “being financed by the banks which are doing it on the basis of not enough reflection on their long term health - which is what I saw in Mexico. “If these things go sour then it will be a very quick snowballing effect,” he said, adding that Pakistan’s relatively fixed exchange rate system was also under pressure.
Pakistan’s central bank has cut its year to June 2006 economic growth forecast to 6.0-6.6 percent, saying it was due to a sharp tail off in manufacturing and agriculture. Inflation is likely to remain at the projected 8.0 percent target, the bank said in December.
The 1994 economic crisis in Mexico was triggered by the sudden devaluation of the peso. A week or so of intense currency crisis was stabilised when US President Bill Clinton decided to grant Mexico a loan to bail the country out, to the tune of 50 billion dollars. AFP
posted by India News Watch at 9:42 AM
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