Impact of Liquidity Crunch on Pakistan's Economy

Abstract

After several years of strong and comparatively stable growth, Pakistan quickly slid into a severe economic crisis in 2008 (for reasons discussed later in the report). Real GDP growth has slowed from 7%-8% per year since 2004 to an estimated 3%-4% in 2008.

Its official rate of inflation rose from 8.8% in January to 23.9% in October. Over the last 10 months, the Pakistani rupee has depreciated by 23% against the U.S. dollar, leading to rising trade and current account deficits. Over the summer of 2008, apparent capital flight added downward pressure on the rupee, worsening Pakistan’s capital account deficit and accelerating the decline in the nation’s foreign exchange reserve holdings — leading to the possibility that Pakistan could default on its sovereign debt obligations.

Since his ascension to the presidency in September 2008, President Zardari has attempted to address Pakistan’s economic problems, with the support of his chief economic advisor, Shaukat Tarin. On September 19, 2008, acting finance minister Naveed Qamar released new economic policies designed to bring about macroeconomic stability and avoid seeking IMF assistance that included the elimination of fuel, electricity and food subsidies, and a reduction in the government deficit. On November 3, 2008, Tarin announced reforms of Pakistan’s tax system, including the politically sensitive taxation of large landowners, to reduce the incidence of tax evasion.