16/02/2020
The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.
EVERY economic crisis has a typical transmission path or trajectory. The contagion starts with a disturbance in the external account caused by a large trade gap, a spike in debt repayments and/or ‘hot money’ heading for the exits. Its effects are immediately felt by the asset markets, where plunging forex reserves drag down both the local currency as well as market confidence. Usually in around six to nine months, the external shock is transmitted to the real sector of the economy, with the economic downturn forcing business closures and job losses.
In economies where the banking system is more integrated with global financial markets and open to foreign investment, such as Argentina or Turkey, banks are usually at the epicentre of the crisis early on, which exacerbates the effects of the shock. In economies like Pakistan where the banking system has, so far, been relatively insulated from foreign capital flows, banks typically face stress (depending on the severity of the crisis) towards the end of the cycle when recessionary conditions in the economy lead to mounting non-performing loans. This is all the more reason to insulate it from hot money flows, which the State Bank is encouraging.
The post-stabilisation cycle works in reverse. Complemented by an IMF programme, the defensive measures put in place by policymakers typically stabilise the external account first, followed closely by the asset markets. The real sector feels the effects of stabilisation last. Depending on the magnitude of the crisis, private investment and rehiring take at least one to two years to resume post-stabilisation, usually longer.
In this context, it is both illuminating as well as depressing to point out that in the previous major crisis episode in Pakistan back in 2008, it took 10 years before economic growth managed to cross the rate of GDP growth recorded one year prior to the start of that crisis
DAWN.COM
TODAY'S PAPER | FEBRUARY 16, 2020
State of the economy
Sakib SheraniOctober 11, 2019
Facebook Count
1010
Twitter Share
26
EVERY economic crisis has a typical transmission path or trajectory. The contagion starts with a disturbance in the external account caused by a large trade gap, a spike in debt repayments and/or ‘hot money’ heading for the exits. Its effects are immediately felt by the asset markets, where plunging forex reserves drag down both the local currency as well as market confidence. Usually in around six to nine months, the external shock is transmitted to the real sector of the economy, with the economic downturn forcing business closures and job losses.
In economies where the banking system is more integrated with global financial markets and open to foreign investment, such as Argentina or Turkey, banks are usually at the epicentre of the crisis early on, which exacerbates the effects of the shock. In economies like Pakistan where the banking system has, so far, been relatively insulated from foreign capital flows, banks typically face stress (depending on the severity of the crisis) towards the end of the cycle when recessionary conditions in the economy lead to mounting non-performing loans. This is all the more reason to insulate it from hot money flows, which the State Bank is encouraging.
The post-stabilisation cycle works in reverse. Complemented by an IMF programme, the defensive measures put in place by policymakers typically stabilise the external account first, followed closely by the asset markets. The real sector feels the effects of stabilisation last. Depending on the magnitude of the crisis, private investment and rehiring take at least one to two years to resume post-stabilisation, usually longer.
In this context, it is both illuminating as well as depressing to point out that in the previous major crisis episode in Pakistan back in 2008, it took 10 years before economic growth managed to cross the rate of GDP growth recorded one year prior to the start of that crisisDAWN.COM
TODAY'S PAPER | FEBRUARY 16, 2020
State of the economy
Sakib SheraniOctober 11, 2019
Facebook Count
1010
Twitter Share
26
EVERY economic crisis has a typical transmission path or trajectory. The contagion starts with a disturbance in the external account caused by a large trade gap, a spike in debt repayments and/or ‘hot money’ heading for the exits. Its effects are immediately felt by the asset markets, where plunging forex reserves drag down both the local currency as well as market confidence. Usually in around six to nine months, the external shock is transmitted to the real sector of the economy, with the economic downturn forcing business closures and job losses.
In economies where the banking system is more integrated with global financial markets and open to foreign investment, such as Argentina or Turkey, banks are usually at the epicentre of the crisis early on, which exacerbates the effects of the shock. In economies like Pakistan where the banking system has, so far, been relatively insulated from foreign capital flows, banks typically face stress (depending on the severity of the crisis) towards the end of the cycle when recessionary conditions in the economy lead to mounting non-performing loans. This is all the more reason to insulate it from hot money flows, which the State Bank is encouraging.
The post-stabilisation cycle works in reverse. Complemented by an IMF programme, the defensive measures put in place by policymakers typically stabilise the external account first, followed closely by the asset markets. The real sector feels the effects of stabilisation last. Depending on the magnitude of the crisis, private investment and rehiring take at least one to two years to resume post-stabilisation, usually longer.
In this context, it is both illuminating as well as depressing to point out that in the previous major crisis episode in Pakistan back in 2008, it took 10 years before economic growth managed to cross the rate of GDP growth recorded one year prior to the start of that crisisDAWN.COM
TODAY'S PAPER | FEBRUARY 16, 2020
State of the economy
Sakib SheraniOctober 11, 2019
Facebook Count
1010
Twitter Share
26
EVERY economic crisis has a typical transmission path or trajectory. The contagion starts with a disturbance in the external account caused by a large trade gap, a spike in debt repayments and/or ‘hot money’ heading for the exits. Its effects are immediately felt by the asset markets, where plunging forex reserves drag down both the local currency as well as market confidence. Usually in around six to nine months, the external shock is transmitted to the real sector of the economy, with the economic downturn forcing business closures and job losses.
In economies where the banking system is more integrated with global financial markets and open to foreign investment, such as Argentina or Turkey, banks are usually at the epicentre of the crisis early on, which exacerbates the effects of the shock. In economies like Pakistan where the banking system has, so far, been relatively insulated from foreign capital flows, banks typically face stress (depending on the severity of the crisis) towards the end of the cycle when recessionary conditions in the economy lead to mounting non-performing loans. This is all the more reason to insulate it from hot money flows, which the State Bank is encouraging.
The post-stabilisation cycle works in reverse. Complemented by an IMF programme, the defensive measures put in place by policymakers typically stabilise the external account first, followed closely by the asset markets. The real sector feels the effects of stabilisation last. Depending on the magnitude of the crisis, private investment and rehiring take at least one to two years to resume post-stabilisation, usually longer.
In this context, it is both illuminating as well as depressing to point out that in the previous major crisis episode in Pakistan back in 2008, it took 10 years before economic growth managed to cross the rate of GDP growth recorded one year prior to the start of that crisis
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