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Saira AhmedVaqar Z. Ahmed

Cathal O’ Donoghue

SDPI’s 12th Sustainable Development Conference21—23 December 2009

Food and Financial Crises in PakistanImpact Assessment and Policy Response

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High food prices from 2007 through mid – 2008 had seriousimplications for food and nutrition security, macroeconomicstability, and political security. The unfolding globalfinancial crisis and economic slowdown have now pushedfood prices to lower levels. Yet the financial crunch has alsodecreased the availability of capital at a time whenaccelerated 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

Food & Financial Crises

Unit Values of Imports - Pakistan ( 1990-91=100 )

3

0

100

200

300

400

500

600

700

800

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09*

Overall Food

Food Import Payment (US $ Million)

4

0

100,000

200,000

300,000

400,000

500,000

600,000Ju

l-03

Oct

-03

Jan-

04

Apr

-04

Jul-0

4

Oct

-04

Jan-

05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Overall Food Wheat Sugar

Increase in Consumer Price Index (%)

5

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Food Overall

Subsidies and Bank Financing of Deficit (Rs billion)

6

-100

0

100

200

300

400

500

600

2001 2002 2003 2004 2005 2006 2007 2008 2009

Current Subsidies Deficit Financing (Bank)

The State Bank of Pakistan (SBP), in itsMonetary Policy Statement for July-December 2008, estimated that aboutone-third of inflation came from directand indirect impacts of highercommodity prices in 2008. To helpprotect consumers from the impact ofrising inflation, ADO Update observed,Pakistan Government provided largesubsidies for oil products, electricity,imported wheat, and fertiliser.

Export Receipts (US $ Million)

7

0

500000

1000000

1500000

2000000

2500000

Jul-0

3Se

p-03

Nov

-03

Jan-

04M

ar-0

4M

ay-0

4Ju

l-04

Sep-

04N

ov-0

4Ja

n-05

Mar

-05

May

-05

Jul-0

5Se

p-05

Nov

-05

Jan-

06M

ar-0

6M

ay-0

6Ju

l-06

Sep-

06N

ov-0

6Ja

n-07

Mar

-07

May

-07

Jul-0

7Se

p-07

Nov

-07

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep-

08N

ov-0

8Ja

n-09

Mar

-09

May

-09

Jul-0

9Se

p-09

Total Food Textile

Net Inflow of Foreign Investment (US $ Million)

8

0

1000

2000

3000

4000

5000

6000

7000

8000

2002 2003 2004 2005 2006 2007 2008 2009

Total FDI

Remittances from Abroad (US $ Million)

9

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2001 2002 2003 2004 2005 2006 2007 2008 2009

Overall Saudi Arabia USA Dubai

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

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Impact Assessment

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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

Methodology-II• Microsimulation Model

– Income Generation Model– Wage Function– Self-employment Function– Occupational Choice Model– Nutrition Module

– Tax-Benefit Engine

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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)

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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

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Simulation-A: 10 % fall in exports

16

• 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

Simulation-A: 10 % fall in exports

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• Poverty and Inequality impact

– Poverty headcount ratio increases by 7.3 percent

– Inequality increases by 1.7 percent

Simulation-B: 25% increase in food import price

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• 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

Simulation-B: 25% increase in food import price

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• 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

Simulation-C 25% increase in import price of food and 20%

increase in remittances from abroad

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• 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

Simulation-C 25% increase in import price of food and 20%

increase in remittances from abroad

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• Poverty and Inequality Impact

– Poverty headcount ratio increases by 3.7 percent

– Inequality increases by 0.4 percent

Simulation-D20% increase in remittances from abroad

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• 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

Pakistan’s Response to Food & Financial Crisis

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Economic Priorities

– Immediate stabilization measures

– Address structural issues

Stabilization Recovery Growth24

Measures Required– Tight monetary policy

– Prudent food supply management

– Cutting down governmental expenditure

– Targeted income support to vulnerable

groups

– Employment generation through skill

development25

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

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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)

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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.

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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

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Major IMF Conditionalities

• Reduce Fiscal Deficit to 4.2% of GDP by June, 2009

• Tax Revenue to increase by 13.5% of GDP during programmeperiod

• Elimination of subsidies (oil & electricity)

• Limit SBP financing of budget deficit

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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

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.

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Pro-Poor Expenditures

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• Zakat Disbursements– Guzara Allowance– Educational

Stipends– Health Care– Social Welfare

Rehabilitation

• EOBI Disbursements– Old age pension– Invalidity

pension– Old age grants

• Workers Welfare Fund

• Microfinance• Pakistan Bait-ul-Mal

Disbursements– Food Support

Programme– Individual

Financial Assistance

– Vocational Training

• Food Support Scheme

http://www.imtlucca.it/http://www.pc.gov.pk/http://www.teagasc.ie/

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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: http://www.fao.org/docrep/007/y5784e/y5784e03.gif

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