RESSESION

Recession refer as a period of general economic decline, part of the usual business cycle. It is a difficult time for the economy of any affected country, when there is less trade and industrial activity than usual and more people are unemployed.

Recession can be defined as significant decline in general economic activity extending over a period of time. Recession results in jobs being cut, revenues dropped and governments taking back subsidiaries. We are not exactly in a recession right now, the way inflation is booming and cost-of-living increasing; our economy may get into slumber soon. Recession also refers towards a stage of the business cycle in which economic activity is in slow decline. Recession usually follows a boom, and precedes a depression. It is characterized by rising unemployment and falling levels of output and investment.

CAUSES OF RESSESION

Currency Crisis:

A currency crisis, which is also called a balance-of-payments crisis, occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. It is a type of financial crisis and is often associated with a real economic crisis.

Inflation

Inflation is a very dominant role in recession occurrence. The term inflation can be defined as, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation can also be described as a decline in the real value of money a loss of purchasing power.

Speculation (Rumor)

Speculation, in a financial context, is making an investment that increases the overall risk in a portfolio. The opposite of speculation is hedging, which is making investments that decrease the overall risk in a portfolio. Stock exchanges are in rumor therefore people are losing their confidence to invest.

War

War is also a reason for recession, currently it is going in Pakistan, Afghanistan, Iraq, Palestine and some other countries. Effect on the economy depends on the amount of damage and the weapons used,

farmlands may become infertile and certain regions may be uninhabitable due to radiation contamination. In other cases, a victory and little damage to industrial capacity at home might pull the country out of a depression as happened to the most of the countries in World War II.

HISTORY OF RESSESIONThere is no commonly accepted definition of a global recession. Economists of International Monitory Fund (IMF) estimate that global recessions seem to occur over a cycle lasting between 8 and 10 years. World have gone through the past three global recessions of the last three decades, where we found that global per capita output growth was zero or negative. Investment input also declined and we observed the downturn in stock markets in last three decades.

According to economists, since 1854, the world has encountered 32 cycles of development and retrenchment, with an average of 17 months of contraction and 38 months of expansion. However, since 1980 there have been only eight periods of negative economic growth over one fiscal quarter or more, and three periods considered recessions:

January-July 1980 and July 1981-November 1982: 2 years total July 1990-March 1991: 8 months November 2001-November 2002: 12 months

From 1991 to 2000, the U.S. experienced 37 quarters of economic expansion, the longest period of expansion on record.

The 2001 recession did not involve two consecutive quarters of decline, it was preceded by two quarters of alternating decline and weak growth.

Recession 2008

In 2008, the possibility of an economic crisis was suggested by several important indicators of economic downturn worldwide. These included high oil prices, which led to both high food prices (due to a dependence of food production on petroleum) and global inflation; a substantial credit crisis leading to the bankruptcy of several large and well established investment banks; increased unemployment; and the possibility of a global recession developed.

Markets are currently indicating a roughly 20 percent chance of a global recession in 2008. The forecast is based on a range of asset prices that historically have shown close correlation with the global economic cycle. The forecast is based on a range of asset prices that historically have shown close correlation with the global economic cycle.

ECONOMY OF PAKISTAN

The economy of Pakistan is the 27th largest in the world in terms of purchasing power parity

(PPP), and 44th largest in terms of nominal GDP. Pakistan has a semi-industrialized economy

which mainly encompasses textiles, chemicals, food processing, agriculture and other industries.

Growth poles of Pakistan's economy are situated along the Indus River diversified economies of

Karachi and Punjab's urban centers coexist with lesser developed areas in other parts of the

country.The economy has suffered in the past from decades of internal political disputes, a fast

growing population, mixed levels of foreign investment and high defense spending. Foreign

exchange reserves are bolstered by steady worker remittances, but a growing current account

deficit – driven by a widening trade gap as import growth outstrips export expansion – could

draw down reserves and dampen GDP growth in the medium term.

Due to inflation and economic crisis worldwide, Pakistan's economy reached a state of Balance

of Payment crisis. "The International Monetary Fund bailed out Pakistan in November 2008 to

avert a balance of payments crisis and in July last year increased the loan to $11.3 billion from

an initial $7.6 billion."

During the mid-2000s, Pakistan experienced a period of tremendous growth, averaging 7%

yearly GDP growth between 2003–07. Due to its large population of 186 million, it was included

in 2005 by the Goldman Sachs Global Economics Group as one of the "Next Eleven (N-11)" – a

group of countries with economies that “might have the kind of potential for global impact that

the BRICs projections highlighted, essentially an ability to match the G7 in size”.

By October 2007, Pakistan raised back its Foreign Reserves to a handsome $16.4 billion.

Exceptional policies kept Pakistan's trade deficit controlled at $13 billion, exports boomed to $18

billion, revenue generation increased to become $13 billion and attracted foreign investment of

$8.4 billion.

Since the beginning of 2008, Pakistan's economic outlook has taken stagnation. Security

concerns stemming from the nation's role in the War on Terror have created great instability and

led to a decline in FDI from a height of approximately $8 bn to $3.5bn for the current fiscal year.

Concurrently, the insurgency has forced massive capital flight from Pakistan to the Gulf.

Combined with high global commodity prices, the dual impact has shocked Pakistan's economy,

with gaping trade deficits, high inflation and a crash in the value of the Rupee, which has fallen

from 60–1 USD to over 80-1 USD in a few months. For the first time in years, it may have to

seek external funding as Balance of Payments support. Consequently, S&P lowered Pakistan’s

foreign currency debt rating to CCC-plus from B, just several notches above a level that would

indicate default. Pakistan’s local currency debt rating was lowered to B-minus from BB-minus.

Credit agency Moody’s Investors Service cut its outlook on Pakistan’s debt to negative from

stable due to political uncertainty, though it maintained the country’s rating at B2.The cost of

protection against a default in Pakistan’s sovereign debt trades at 1,800 basis points, according to

its five-year credit default swap, a level that indicates investors believe the country is already in

or will soon be in default.

In recent years, the country has seen rapid growth in industries (such as apparel, textiles, and

cement) and services (such as telecommunications, transportation, advertising, and finance).

Recession in Pakistan

In 2008, the possibility of an economic crisis was suggested by several important indicators of economic downturn in Pakistan. These included high oil prices, which led to both high food prices (due to a dependence of food production on petroleum) and inflation; a substantial credit crisis leading to the bankruptcy of several large and well established investment banks; increased unemployment; and the possibility of a recession developed in country.

In Pakistan the central bank's foreign currency reserves, when counting forward liabilities is said to only amount to as little as $3 billion, sufficient for a single month of imports. Corruption and mismanagement have combined with high oil prices to damage Pakistan's economy. Pakistan's rupee has lost more than 21 per cent of its value in 2008 and inflation is at 25 per cent. The government has failed to defer payments for Saudi oil or raise favorable loans. President Asif Ali Zardari claimed Pakistan needed a bailout worth $100 billion which he was expected to ask for at a meeting in Abu Dhabi in November. Ratings agency Standard and Poor's rates Pakistan's sovereign debt at CCC +, only a few ratings above the default level, warning the country may be unable to cover about $3 billion in upcoming debt payments.

Given below are 10 signs that usually indicate that a recession is knocking.

1. The Rate Of Joblessness Assumes Disturbing Proportions.

Usually, the rate of jobless people remains steady every month. But if there is a constant, steep rise in that number, then this could be a sign of recession.

2. Large Companies Start Giving Depressing Profit Figures.

When many companies across all sectors start giving out depressing sales and profit figures, then alarm bells should start ringing.

3. Borrowers Start Defaulting.

When borrowers are unable to pay back their loans on homes, vehicles, businesses and credit cards, then this could be another indication of a falling economy.

Here in the United States, even lenders such as banks and credit unions have started defaulting on their financial obligations, due to the sheer number of borrowers who are in no position to repay loans they have taken out.

4. Credit Card Purchases Shoot Up.

In spite of depressing news, if the number and volume of credit card purchases suddenly shoots up, it means that people no longer have cash to pay for their daily needs - and are now resorting to the last method to pay their bills.

When people start paying their mortgage payments through their credit cards, thereby risking high interest payments, then this is a sign of financial desperation.

5. Prices Of Essential Commodities Shoots Up.

When prices of food, fuel and other utilities shoot up - and the government seems helpless to do anything - then it could be said that inflation is fanning the flames of a possible recession.

6. Companies Stop Filling Vacancies.

When companies decide to keep their job openings vacant instead of hiring new staff, then this again is another sign that a recession has afflicted the economy.

Many companies might also offer voluntary retirement programs in order to reduce their workforces and cut expenses.

7. Prices Of Property And Stocks Come Down Drastically, But Nobody Buys Them.

When repossessed homes and stock prices come down in value, but nobody has the funds to buy them, then it can be truly said that the economy has been hit by a recession.

8. The Country's GDP Goes Down.

When a country's GDP, or Gross Domestic Production, registers a continuous downward fall, then this could be another sign that the economy is in recession.

9. Savings Are Used For Day-To-Day Expenses.

When people start terminating their fixed-term deposits, such as CDs and IRA’s, and sell off other assets to meet their day-to-day expenses, then this could indicate that a recession has started doing some serious financial damage.

10. You Start Worrying About All Of The Above.

When you start feeling the pinch and start worrying about your own future on the above points, then this will indicate that the recession has now reached your door.

Impact of global recession on Pakistan

The global financial crisis and the recession that followed were the two worst economic crises that

the world had witnessed since the great depression of the 1930s. The direct impact of the global

financial crisis on developing countries including Pakistan has been limited due to non-integration of

the domestic financial sector with the global financial sector (IMF, March 2009). However, the crisis

has set in motion global recession which has not spared the Low Income Countries. The average

annual global economic growth is expected to fall to mere 1.0 percent after averaging around 4.0

percent during 2003-07 (Martin, 2009). How the recession affects an economy depends, among other

things, on the state of the economic fundamentals of the country when the recession sets in.

The enormous wealth of literature on the impact of global financial crisis and the consequent global

recession has identified various channels through which the recession may influence economies.

These include remittance and migration, international trade, Foreign Direct Investment (FDI),

exchange rate, interest rate and foreign aid. So far no study is available that comprehensively

examines the impact of global recession on the economy of Pakistan. The objective of this paper is to

fill this gap by analyzing the social impact of the global recession on Pakistan, through the various

channels referred above.

The global recession, as we know, was preceded by a steep surge in commodity prices the world

over. Pakistan being a large importer of fuel oil and other commodities, such as vegetable oil and at

times wheat as well, ended up importing inflation. Commodity prices especially those of fuel oil

went through the roof in 2007, however the year being an election year in Pakistan, the then

government, in accord with political cycle theory, chose not to pass on the oil price hike to

consumers. Electricity, in Pakistan is primarily distributed by a public sector entity, Water and Power

Development Authority (WAPDA), while the price is determined by the government. A substantial

part of the electricity consumed is generated using furnace oil. With the increase in oil prices the cost

of production of electricity had also increased but the government again refrained from passing on

the increase to the consumers. The decision not to pass on the increase in cost of fuel and electricity

to the ultimate consumers obviously worsened the fiscal deficit.

Pakistan’s current account deficit had stood large even before the financial crisis unfolded, but a host

of factors had allowed the country to finance the deficit through inflows on the capital account. Aid

flows also slowed down for a while for geo-strategic reasons. These factors had an adverse impact on

the external account. Moreover, with the increase in international commodity prices, the trade deficit

also deteriorated sharply. The state of balance of payments suggested that the exchange rate, if left

completely to market forces, would depreciate. However the intervention of the monetary authority

in the foreign exchange market averted a significant fall in the value of domestic currency. The

intervention mechanism primarily used, which had been in vogue since November 2004, was to

provide foreign currency to the oil companies for the import of oil. Therefore as the oil prices

increased, the intervention increased as well. A sharp depreciation of the domestic currency was

avoided in Fiscal Year1 (FY hereafter) 2006-07, but at the cost of depletion of foreign reserves to

dangerously low levels.

We now turn to Pakistan’s key macroeconomic indicators immediately before and after the rise in

international commodity prices, i.e. FY 2006-07 and FY 2007-08 and then after going through

recession for a year (FY 2008-09).

Key Macroeconomic Indicators

(Percentage)

2006-07 2007-2008 2008-2009

Inflation (average) 7.8 12.0 20.8 GDP Growth 6.8 4.1 2.0 Large Scale Manufacturing 8.6 4.8 –8.2 Tax Revenue* 10.2 10.6 9.2 Fiscal Deficit* 4.3 7.6 5.2 External Account Deficit* 5.1 8.5 5.3

The account of the economy given above serves to show that at the onset of recession, economic

fundamentals of the country were poor ─ fiscal deficit as well as inflation was high and GDP

growth rate as well as foreign exchange reserves were low and on the decline. Given this

scenario, the country was in no position to offer the fiscal stimulus package ─ the typical

Keynesian recipe adopted by developed countries to cope with recession. Rather, to stay afloat

the country had to seek funds from the IMF. The Fund’s ‘conditionality’ demanded that the

country go into a fiscal tightening mode whereas coping with the recession called for a fiscal

expansion. Thus, the country simply did not have the instruments at hand with which to protect

the public from the adverse economic and social consequences of the global recession. This

scenario makes it easier to understand the economic and social impact of global recession.