Food and Global Financial Crises: Policy Response of Pakistan


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The presentation explains how the food and global financial crises impacted Pakistan's socio-economy. A detailed impact assessment is followed by the policy response taken in the various spheres of the economy.

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  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • We then set out to see the impact of four simple policy experiments. A decline in exports, an increase in import price of food……..
  • As the exports fell by 10 percent we see that the GDP decreases by 2.3 percent. Real investment declines by.......
  • In this case the imported food inflation pushes the domestic consumer price of food basket in the vacinity of 17 percent.
  • Some increase of import price of food is mitigated by the rising remittances.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • Food and Global Financial Crises: Policy Response of Pakistan

    1. 1. Food and Financial Crises in Pakistan Impact Assessment and Policy Response Saira Ahmed Vaqar Z. Ahmed Cathal O’ Donoghue SDPI’s 12th Sustainable Development Conference 21—23 December 2009 1
    2. 2. Food & Financial Crises High food prices from 2007 through mid – 2008 had serious implications for food and nutrition security, macroeconomic stability, and political security. The unfolding global financial crisis and economic slowdown have now pushed food prices to lower levels. Yet the financial crunch has also decreased the availability of capital at a time when accelerated investment in agriculture is urgently needed. The food and financial crises will have strong and long- lasting effects on emerging economies and poor people. Joachim von Braun, IFPRI, December 2008 2
    3. 3. Unit Values of Imports - Pakistan ( 1990-91=100 ) 800 700 600 500 400 300 200 100 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09* Overall Food 3
    4. 4. 0 100,000 200,000 300,000 400,000 500,000 Jul-03 600,000 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Overall Food Jan-06 Apr-06 Jul-06 Oct-06 Wheat Jan-07 Apr-07 Jul-07 Oct-07 Sugar Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Food Import Payment (US $ Million) Apr-09 Jul-09 Oct-09 4
    5. 5. Increase in Consumer Price Index (%) 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Food Overall 5
    6. 6. Subsidies and Bank Financing of Deficit (Rs billion) The State Bank of Pakistan (SBP), in its Monetary Policy Statement for July- 600 December 2008, estimated that about one-third of inflation came from direct 500 and indirect impacts of higher commodity prices in 2008. To help 400 protect consumers from the impact of rising inflation, ADO Update observed, Pakistan Government provided large 300 subsidies for oil products, electricity, imported wheat, and fertiliser. 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 -100 Current Subsidies Deficit Financing (Bank) 6
    7. 7. 0 1000000 1500000 2000000 2500000 500000 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Total Nov-05 Jan-06 Mar-06 May-06 Jul-06 Food Sep-06 Nov-06 Jan-07 Mar-07 May-07 Textile Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Export Receipts (US $ Million) Jan-09 Mar-09 May-09 Jul-09 Sep-09 7
    8. 8. Net Inflow of Foreign Investment (US $ Million) 8000 7000 6000 5000 4000 3000 2000 1000 0 2002 2003 2004 2005 2006 2007 2008 2009 Total FDI 8
    9. 9. Remittances from Abroad (US $ Million) 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Overall Saudi Arabia USA Dubai 9
    10. 10. Despite high economic stress banking system and its policies were sound1 • Banking System was well capitalized – Capital adequacy ratio between 12 to 13 % around 2006-07 was well above the minimum threshold • Asset quality was good – NPLs to loans ratio (net) was at 1.9% as of end September 2008 • Risk absorption capacity of the banking system remained strong 10
    11. 11. Impact Assessment 11
    12. 12. Methodology-I Computable General Equilibrium Model for Pakistan3 – 34 Production Sectors • 12 agriculture • 16 industrial • 6 services sectors – Factors of Production • 10 Labour • Land (farm size) • Capital (livestock, other agriculture, informal and formal capital) 12
    13. 13. Methodology-II • Microsimulation Model – Income Generation Model – Wage Function – Self-employment Function – Occupational Choice Model – Nutrition Module – Tax-Benefit Engine 13
    14. 14. Data • Macroeconomic Data – Social Accounting Matrix (2001-02) • Dorosh et al. 2004 • Update under way for 2005-06 • Microeconomic Data • Household Integrated Economic Survey (2001-02) • Food Composition Table for Pakistan (Planning Commission) 14
    15. 15. Simulations • 10 percent decline in exports • 25 percent increase in import price of food • Simultaneous increase in import price of food and workers’ remittances from abroad • 20 percent increase in remittances 15
    16. 16. Simulation-A: 10 % fall in exports • Macro impact – Real investment decreases by 2.6 percent – Imports increase by 1.1 percent – Direct tax revenue declines by 1.6 percent • Impact on prices and wages – Wages for skilled labour decreases by 5.4 percent – Wages for farm labour decreases by 2.3 percent – Durable goods prices increase by 26 percent 16
    17. 17. Simulation-A: 10 % fall in exports • Poverty and Inequality impact – Poverty headcount ratio increases by 7.3 percent – Inequality increases by 1.7 percent 17
    18. 18. Simulation-B: 25% increase in food import price • Macro impact – Food consumption falls by 12.4 percent – Import of wheat declines by 39 percent – Import of other major crops decline by 34 percent – Exports of major crops decline by 20 percent • Impact on prices and wages – Consumer price for food group increases by 17 percent – Wages for farm labour increase by 25 percent 18
    19. 19. Simulation-B: 25% increase in food import price • Poverty and Inequality impact – Poverty headcount ratio increases by 7.6 percent – Inequality increases by 2.6 percent – Overall food consumption declines by 12.4 percent – Overall caloric – in take decreases by 3.6 percent 19
    20. 20. Simulation-C 25% increase in import price of food and 20% increase in remittances from abroad • Macro impact – Real investment increases by 9.2 percent – Imports of major crops declined by 31 percent – Exports of major crops decline by 20 percent • Impact on prices and wages – Consumer price for food group increases by 17.3 percent – Wages for farm labour increase by 26.3 percent 20
    21. 21. Simulation-C 25% increase in import price of food and 20% increase in remittances from abroad • Poverty and Inequality Impact – Poverty headcount ratio increases by 3.7 percent – Inequality increases by 0.4 percent 21
    22. 22. Simulation-D 20% increase in remittances from abroad • Macroeconomic Impacts – Real investment increases by 2.63 percent – Consumer prices decline for food, durables and services • Microeconomic Impacts – Food consumption increases by almost 1 percent 22
    23. 23. Pakistan’s Response to Food & Financial Crisis 23
    24. 24. Economic Priorities – Immediate stabilization measures – Address structural issues Stabilization  Recovery  Growth 24
    25. 25. Measures Required – Tight monetary policy – Prudent food supply management – Cutting down governmental expenditure – Targeted income support to vulnerable groups – Employment generation through skill development 25
    26. 26. Measures for Agriculture Sector1 • Steady stream ensured for agriculture credit • Outstanding credit position was 2.1 % higher at the end of June 2009 compared to June 2008 • SBP launched Crop Loan Insurance Scheme • The government agreed to share premium cost of subsistence farmers • SBP enhanced the indicative per acre credit limit – For major and minor crops, livestock, orchards, fishing and forestry by an average 70 percent 26
    27. 27. Measures for Export and Industrial Investment1 • Restoring 100% refinancing under EFS and LTFF • In order to promote real investment and to mitigate the impact of higher interest rate • Enhancing bank limit • Overall quantum of limits for banks under EFS for 2009 enhanced by 25 % of the amount outstanding as on 30th June 2008 • Reduced mark up – Under these schemes borrower now had to pay max of 7.5 % mark up against 14.4 % prevailing rate (weighted average) 27
    28. 28. Maintaining Financing Sector Stability1 • Liquidity support • Central Bank provided additional Rs 350 billion besides the regular injection of liquidity through open market operations • Enhanced support for small banks – Liquidity constraints emerged as a result of excessive public sector borrowings and deposit withdrawal • Encouraging growth in deposits • SBP imposed minimum deposit rate and exempted long tenor deposits from reserve ratios • Exchange rate stability – Steps to stabilize and curb excessive volatility in foreign exchange markets. 28
    29. 29. IMF Standby Arrangement • Programme initiated on November 24, 2008 • Programme facility: $7.6 billion • Interest rate of 3.5 to 4.5 percent • Average tenor of facility is 3.5 – 5 years 29
    30. 30. Major IMF Conditionalities • Reduce Fiscal Deficit to 4.2% of GDP by June, 2009 • Tax Revenue to increase by 13.5% of GDP during programme period • Elimination of subsidies (oil & electricity) • Limit SBP financing of budget deficit 30
    31. 31. Pro-Poor Expenditures • Social Safety Net • Benazir Income Support Programme (BISP)2 – Initiated with initial allocation of Rs.34 billion (US $ 425 million approximately) for the year 2008-09 which is the third largest allocation in the total budget and is 0.3% of the GDP for the year 2008-09. – A monthly payment of Rs.1000/ per family would increase the income of a family earning Rs.5000 by 20%. BISP will cover all four provinces including FATA, AJK, FANA & ICT. – Intends to cover 3.4 million families or 22.75 million people in 2009-10. In the next two years the government intends to double the allocation for BISP to cover 7 million families. – Effective targeting, implementation and monitoring is required 31
    32. 32. Pro-Poor Expenditures • Donor Support for the Social Protection • Pakistan Social Safety Nets Development Policy Credit (US $ 200 million) – Improving the targeting efficiency of the safety nets programme by establishing a national targeting system to implement the poverty scorecard method. • Third Pakistan Poverty Alleviation Fund Project (US $ 250 million) – Increasing inclusion of targeted poor in the community organizations and their enhanced participation in economic activities and skill enhancement. 32
    33. 33. Pro-Poor Expenditures • Zakat Disbursements • EOBI Disbursements – Guzara Allowance – Old age pension – Educational – Invalidity Stipends pension – Health Care – Old age grants – Social Welfare • Workers Welfare Rehabilitation Fund • Microfinance • Pakistan Bait-ul-Mal Disbursements • Food Support – Food Support Scheme Programme – Individual Financial Assistance – Vocational Training 33
    34. 34. 34
    35. 35. References • 1 Presentation by Dr. Shamshad Akhtar, Governor, State Bank of Pakistan on the “State of Pakistan Economy” to the Senate Committee on Finance, Revenue, Economic Affairs and Statistics (1st December 2008) • 2Economic Survey of Pakistan 2008-09 • 3Diagram link: 35
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