Bet on domestic demand as exports dwindle

Although headlines about the state of global economies have predominantly focused on developments (or the lack there of) in the United States and European Union; the effects of slower economic growth and stagnating demand for exports on Asian economies has not been muted by any measure. Asian economies have been doubly impacted by the dismal state of investors confidence in advanced economies of the West. Firstly, a slowdown in consumption in the US and EU has taken the wind out of export growth. Since many Asian economies including Japan, Korea and Singapore are heavily dependent upon exports to these regions; their growth was also stymied as a consequence. Secondly, as cited by the IMFs October issue of the "Regional Economic Outlook: Asia and Pacific"; "increased uncertainty over the global outlook and greater risk aversion in financial markets spilled over to Asia in August and September 2011, with leveraged investors liquidating profitable positions in the region to cover their losses elsewhere". The report goes on to solemnly note that the losses which ensued in Asian financial markets were comparable to the massive declines witnessed hardly a year ago, in mid-2010. Some of the risks to Asian economies from the emerging EU financial crisis; liquidation of foreign investor positions, epatriation of liquidity by European banks and loss of market liquidity in key derivative markets, appear less relevant to Pakistans predicament. However, the work cut out for the country is increasingly similar to the path in front of other regional economies; albeit for different reasons. Elaborating on the impact of economic slowdown in the West, on the Asia-Pacific region, the report asserted that "the downward revision of about 3/4 percentage point to advanced economies growth in 2012 is estimated to have a first-round impact on growth in the region of between 1/4 and 1/2 percentage point, depending on the degree of exposure of individual economies to exports." In fact, the IMFs view on future economic prospects of the region has worsened since its April-issue of the same report; as it now warns Asian economic growth could fall by up to four percentage points, if growth in Europe falls by three and a half percent. From Pakistans perspective, spurring domestic demand, while an uphill task is by no means impossible. After all, investors revelled at the local bourses on the first day of this week; after the SBP made the weekend pleasant with a hefty cut in the discount rate. But sustainable measures to spur domestic demand without exacerbating the import bill, is easier said than done, especially in an environment where the government has little space on the fiscal front. As Pakistan and the IMF work towards the establishment of renewed links of cooperation, its advice to the government will likely include a "reprioritization of fiscal spending, in order to create fiscal space for critical infrastructure investment and social priority expenditure", besides the fiscal reforms that have so far been wanting.