“ECONOMIC AFFAIRS”

(“Understanding the Business Pages”)

BILAL ILAHI.

1day. Sept‟10.
For OE,LUMS & Banks
LUMS
1st Session. 9am-11.30
 BILAL ILAHI

Educational Qualification:
1977: Masters in Business Administration
(U.S.A).
1973: B Com. Punjab University (Hailey
College).
Work Experience:
2007-Present: Management Consultant &
Corporate Trainer.
1991-2005: Self-Employed. CEO, Granada
Textile Mills (19, 000 spindles ).
1988-1991: Self-Employed. CEO,
METROCON (Construction Firm).
1980-1988: Self-Employed. Owned and
managed motels/hotels in U.S.A.
1978-1980: Officer, BCCI.
Teaching Experience:
2002- Present: Taught MBA, EMBA , BBA
, classes at Beacon house Business School /
Curtin University Lahore, Government
College University Lahore, LUMS, ICBS as
part of their visiting faculty.
Corporate Training Experience:
2007-Present:
Conducted Seminars and Workshops for
Institute of Chartered Accountant‟s of
Pakistan, PSO, The Civil Services Academy,
MCB, Bank of Punjab, UBL, Bank Alfalah,
ABL, HBL, National Bank of Pakistan
NIBAF & NIPA.
Other:
Global Markets Analyst for CNBC Pakistan
TV, Business Plus TV and Dawn TV.
Contributed articles to The Business
Recorder and Dawn.
Editor mbazonepakistan.com
(e-magazine)
 Almost 90% of the financial pages are:
1.) MARKETS. Eg. Stock market, crude
oil, cotton, foreign exchange etc .
2.) MONETARY POLICY. E.g.. Interest
rates, Inflation, Central banks, S.B.P,etc.
3.) FISCAL POLICY. E.g.. Budget etc.
4.)INTERNATIONAL TRADE & W.T.O
E.g. Exports, Imports, Asean.
 Workshop Sequence :
1.FISCAL POLICY.
2.MONETARY POLICY.
3.MARKETS:
a.) Currencies. b.) Commodities
c.) Capital.
5. INTERNATIONAL TRADE.
MACRO-ECONOMIC POLICY
=
FISCAL POLICY
+
MONETARY POLICY.
 The objective of MACRO - ECONOMIC
policy is to have sustainable GDP
GROWTH while containing INFLATION
and achieving an acceptable rate of
UNEMPLOYMENT.
The fact that GDP rises or falls shows
that BUSINESS CYCLES are unavoidable
and MACRO-ECONOMIC policy can never
really conquer them.
GDP GROWTH. Country's annual output
and of good & services. Same as economic
growth.
UNEMPLOYMENT. The number of people
of working age without a job as a
percentage of the workforce.
INFLATION. Rising prices across the
board.
 GDP can be calculated by adding the total valueof a
countrys annual OUTPUT of goods & services.

GDP. = C + G + I + (X -M).

Consumption Imports.
(Consumer) Government Exports
spending

Business
Investment
GDP UNEMPLOYMENT
purchasing power INFLATION
 There is a trade off between
INFLATION and UNEMPLOYMENT.
The lower the UNEMPLOYMENT
RATE the higher is the INFLATION
RATE.
 Governments have to choose between
the two evils.
 Too much GDP growth will cause
an increased rate of inflation called
overheating in the economy. (e.g.
concern in China today) which can
lead to a quick recession and a hard
landing.
 FISCAL POLICY
 One of 2 parts of Macroeconomic
policy.
 FISCAL POLICY comprises
TAXATION and PUBLIC SPENDING.
It is used to influence the level of
DEMAND in a economy with the
goals of UNEMPLOYMENT as low as
possible without excess INFLATION.
FISCAL POLICY is targeted on
long - term goals.
MONETARY POLICY is used for
short-term adjustments.
 PAKISTANS ECONOMY
Per capita GDP : $ 1,085 (07-08)
Conversion @ Rs.61 !
GDP : $ 160 bn.
Black economy , FBR estimate 35%.
Huge potential for additional taxes.
•PUBLIC SPENDING includes
spending by federal, provincial,
local governments and some
government backed institutions
(e.g.. WAPDA)
•Government should borrow only to
invest in infrastructure and not to
finance current PUBLIC
SPENDING. (The “golden rule”)
BUDGET. An annual procedure to
decide how much PUBLIC SPENDING
there should be in the year ahead.
And what mix of TAXATION and govt
borrowing should finance it ?
These are the question‟s which the
budget seeks to answer.
BUDGETARY DEFICIT. The amount of
deficit divided by GDP.
E.g. 4.2% (revised) for 08-09 in
Pakistan. Actual = 5.3%
 Budgetary deficit leads to higher
government bank borrowing which leads
to the “crowding out affect” which lead to
higher interest rates which leads to
slower GDP growth.
Fiscal Deficit is one of the main
cause of high inflation rate in
Pakistan. Reasons behind Fiscal
Deficit:
1.Low Tax / GDP ratio. Low tax base.
2.Defense expenditure.
3.Wasteful government expenditure.
4.Protection and favorable treatment
to special interest groups.
 National Security ?
Where does Pakistan stand ?
The Big Issues……
Energy security
Food security
Water security
These 3 are connected !!
 MONETARY POLICY
•One of the two tools of MACRO-
ECONOMIC POLICY and the side-
kick of FISCAL POLICY.
• Objective of both FISCAL &
MONETARY POLICY is to have an
economy with GDP growth, relatively
full employment and stable prices.
•The function of a Central Bank is to
control INFLATION and
UNEPLOYMENT while managing
sustainable GDP GROWTH.
•ECONOMIC SPEED LIMIT or
POTENTIAL RATE OF GROWTH or
TREND RATE OF GROWTH is the
same thing.
“The pace at which the economy can
grow without fuelling inflation” ie.
without getting “overheated”.
For inflation to fall the economy has
to grow below its TREND RATE OF
(GDP) GROWTH

Higher TREND RATE possible if

„productivity‟( US under Clinton)
and / or „labor supply‟ e.g. China
was adding 10 million workers a
year to its workforce.
• Monetary Policy is the process
by which the Central Bank
manages the money supply to
achieve specific goals e.g.
Controlling inflation maintaining an
exchange rate achieving full
employment & GDP growth .
•Monetary Policy can involve :
1)Changing money supply by OMO.

2)Setting reserve requirements for

banks.

3)Trading in foreign exchange.

4)Setting discount rate.

• GDP growth Unemployment
Inflation Interest Rates Inflation
 Central Banks:
U.S.A - THE FEDERAL RESERVE (THE FED)
U.K. - THE BANK OF ENGLAND (B.O.E)
E.U. - THE EUROPEAN CENTRAL BANK
. (E.C.B)
JAPAN- THE BANK OF JAPAN (B.O.J)
INDIA- THE RESERVE BANK OF INDIA (R.B.I)
PAKISTAN- THE STATE BANK OF PAKISTAN .
•Foreign exchange reserves (also called Forex
reserves) in a strict sense are only the foreign
currency deposits held by central banks.
However, the term foreign exchange reserves
commonly includes foreign exchange, gold, SDRs
and IMF reserve position. Same as official reserves.
These are assets of the central banks which are held
in different reserve currencies such as the dollar,
euro, yen and pound, and which are used to back its
liabilities, e.g. the local currency issued.
Before the end of the gold standard, gold was the
preferred reserve.
• FOREIGN EXCHANGE RESERVES.
INFLOWS : EXPORT PROCEEDS
. REMITTANCES .. …
…. (INWARDS)
. FDI
. FPI
. FOREIGN AID
. FOREIGN BANK LOANS
. I.M.F. LOANS
. OUTFLOWS: IMPORTS
. REMITTANCES … … ….
…. (OUTWARDS)
. FDI
. FPI
. PAYMENTS ( Dividends ,
… loans.)
 As Forex Reserves go up it leads to
appreciation of the countries currency.
 •FOREIGN EXCHANGE
RESERVES IN ASIA. (Nov 2009)
China $ 2,400. bn.
Japan $ 1,074. bn.
Taiwan $ 348. bn.
South Korea $ 270. bn.
India $ 287. bn.
Hong Kong $ 256. bn.
Malaysia $ 97. bn.
Pakistan $ 13. bn.
•Reserve Currencies:
U.S $
EURO
POUND STERLING
YEN
SWISS FRANC
• Global Central Bank Reserves.
24% of total reserves of major
central banks are in gold.
63% of currency reserves are $.
27% // // Euros.
Is it now in the interest of foreign
governments ( e.g. China ) that
the U.S. economy should be
vulnerable or be at risk ? ?
MARKETS
“Markets are at the centre of every
successful economy”
Joseph Stiglitz.
. Noble Prize winning economist.
 MARKETS
ECONOMICS

SUPPLY & DEMAND

MARKETS PHYSICAL or VIRTUAL

A price clearing mechanism

PRICE

PROFIT or LOSS

REALLOCATION OF
RESOURCES IN THE
ECONOMY
 MARKETS

OIL. (IPE, NYMEX)

COMMODOTIES
COTTON. (NY ,KCE)
GLOBAL CURRENCIES COPPER.(LME)

HARD CURRENCIES-$ Y
LOCAL CAPITAL
OTHER-prs, Inr

STOCK MARKET.(KSE, NYSE)

LABOUR REAL ESTATE BOND MARKET. (KSE)
CURRENCIES
US$
Euro
Yuan (China)
FOREIGN EXCHANGE MARKET.
One of the largest in the world----
$3.2 trillion of currency changes
hands every day.
Doubled in last 4 years.
BALANCE OF PAYMENTS.
Can affect the value of a currency &
exchange rates with little relation to
what it should be worth.
BALANCE OF PAYMENTS.
Current Account:
1) Exports – Imports. (Bal of Trade)
2) Interest, dividends, foreign aid.
Capital account:
1)Long-term capital flows. eg. FDI.
2)Short-term capital flows eg.FPI.
Speculators & funds moved around
by MNC‟s can lead to sharp
movements in exchange rates.
A country can sustain a „current account
deficit‟ for years without suffering
because of its comparison to GDP.( not
over 5% for USA).
Also deficit may be caused by import of
technology and capital goods which may
improve productivity and help control
inflation.
3 main drivers of currency movements:
1.Valuation.i.e. the PPP theory.
2. Momentum also Trending.
3.Carry Trade. e.g. „portfolio flows‟. FPI
now far bigger than „trade flows‟
Purchasing Power Parity (PPP).
Method of calculating the correct value
of a currency as opposed to the current
value. Goods and services should cost
the same in all countries.
PPP indicates the approximate exchange
rate to use when expressing prices in
different countries in a common
currency.
 PPP helpful in comparing living
standards. Purchasing power of each
currency relative to the $.
Currencies should be worth based on
fundamental measures of value. Does
not happen in real life !
Momentum. Also „trending‟.
Market sentiment.
 Carry Trade.
Risk Appetite (“flight from safety”)
Leveraging
Carry Trade
Funding Currency (eg Yen or $)
Portfolio Flows (eg into New Zealand)
Target Currency ( New Zealand $)
Unwinding Carry Trade.
Risk Appetite (“risk averse”)
Leveraging
Carry Trade
Funding Currency (eg Yen or $)
Portfolio Flows (eg out of N‟Zealand)
Target Currency (New Zealand $)
Funding Currency; low yielding
currency.
Target Currency; high yielding
currency.
“The longer and bigger the Carry
Trade, the larger the asset bubble and
bigger the bubble crash.
The value of the Yen in following 5
years was linked to “risk appetite”
and consequent demand and value of
“funding” and “target currency”.
2004. NZ$ = 44 Yen (Jap).
2007 3rd Qtr. NZ$ = 96 Yen.
2009, 1st Qtr. NZ$ = 44 Yen.
U.S. $
•The pre-eminent global currency.

•The IMF counts 13 countries using

$ as their currency eg. Ecuador.

•$ 350 bn. are held outside of USA.

Half of all notes in circulation.

•$ is 86% of one side of all currency

deals.
•THE U.S. Economy (GDP)= $ 14 tr.
•GDP growth (- 2.5%) in 2009.
•Consumer spending is 70% of GDP.
•University of Michigan's Consumer
Confidence Index is a key indicator.
•Stimulus via tax credits as a result of
the recent $787bn stimulus plan
•THE FED, “The Federal Reserve”, is
the central bank of the USA.

•The FOMC carries out O.M.O. (open

market operations) to control liquidity
and inflation and sets Interest Rates.

•Federal Funds Rates =0%-0.25%

•Interest rates in turn affect value
of $.

•U.S. Monetary policy (e.g. change

in interest rate) takes 6-9 months to
take affect.
•Worldwide currency markets are
focused on the meeting of FOMC
( every 1 ½ month).
-Is the INTEREST RATE on the US
$ going up or not ?

-What will the “beige book” say?

•Interest Rates affect the US$ Eg.
U.S. GDP
Unemployment
Inflation
Interest Rates
U.S.$.
•$ remains the medium of exchange
for most commodities eg Oil, Wheat,
Cotton, Gold etc

•Currency most used to set prices for

commodities eg. Wheat, copper etc .

•Most exports worldwide are invoiced

in US $.
• Central banks difficulty in reducing
the US $ in their RESERVES :
Majority of the countries export to
US therefore regular flow of $.
80% of Pakistan's exports are
invoiced in $ but only 25% exports
are for the US.
•Sub-prime mortgage problem.
Caused by a bubble i.e. when the
price of an asset rises far higher than
can be explained by fundamentals.
As house prices go up home-owners
spend more… the wealth effect.
Consumers are 70% of the economy.
Residential construction 5% of GDP.
 Credit squeeze as banks refuse to
lend to each other after downturn in
US housing sector.
US mortgage debt is $12 tr.
Sub-prime mortgages $2.3 tr.
Downward pressure on US housing
market & GDP growth
EURO
•Euro is the currency of the EURO
ZONE (15 countries) and not the
entire E.U.(28 Countries).
•E.C.B. is the central Bank of E.U.
ECB is the guardian of the Euro.
•Interest rates are set by the ECB‟s
Governing Council.
•ECB‟s medium-term inflation target
is 2% (“Growth and stability
pact” of EU for the Eurozone).
•Under the pact budgetary deficit
cannot exceed 3% of GDP.
•ECB‟s interest rate is 1%.
YUAN (China)
•$ 5.3 tr. Chinese economy. Only 5%
of global GDP. But 1/3 of total
increase in global GDP in 2006.
•Leaders now want to shift the
economy.
From exports and fixed investment
to consumer led economy.
CHINESE YUAN
UNDERVALUED.
• Record-breaking “trade surpluses”
with the U.S. which should have
caused the Yuan to appreciate.
•From 1994 to 2005 --------
“ Fixed peg” @ 8.28 Yuan / $
allowing the currency to fluctuate
only in a narrow band.
How was the“ FIXED PEG” of 8.28Y/$
employed successfully.??
1. EXPORTS GDP YUAN EXPORTS
GDP
2. P.B.O.C (China‟s Central Bank) buys U.S $,
…sells Yuan.
3. $ YUAN (8.28Y/$) EXPORTS
4. Above action releases too much liquidity
(YUAN) in the economy.
5. MONEY SUPPLY INFLATION

6. P.B.O.C. does O.M.O to suck in excess

money supply / liquidity .It sells Government
Securities and buys Yuan. Repeated action
pushes interest rates up !!

MONEY SUPPLY INTEREST RATES

INFLATION
7. High Interest rates cause businesses to slow
down.
8. Exports GDP
9. Subsidies on interest rates by the government
& The Communist Party for export industries.
10. INTEREST RATES EXPORTS GDP .
------- and the cycle continues ! ! !
• On 21 July,05 Landmark .The
death of the Yuan-$ peg.
• The yuan climbed 21% against the
dollar from 2005 to 2008, when
China adopted a managed-float
currency system under which the
Yuan's value was linked to a basket
of currencies.
• But the Yuan has been kept almost
unchanged against the dollar since
the outbreak of the global crisis to
help Chinese exporters, which has
prompted much criticism from
abroad.
• Is it now in China‟s interest to see
the U.S. economy weaken.?
AND the U.S.$ to weaken ? ?
• USA wants more Yuan appreciation
•Concerns of the U.S. and other
countries.
•But also aid China in its effort to
tackle domestic inflation and asset
bubbles, and to encourage increased
domestic consumption. Such a move
"is in its own interests
COMMODITIES.
CRUDE OIL
COTTON
PALM OIL
IRON ORE
GOLD
CRUDE OIL
•The share of CRUDE OIL in
Pakistan‟s total imports is 23 %.
We import 82 % of our needs.
•Pakistan‟s CRUDE OIL import is
the prime cause of our TRADE
DEFICIT.
 Energy Equation
Energy =
Crude oil
+Natural gas
+Coal
+Nuclear
+Renewable energy
(hydro electric + wind + solar +

hydrogen fuel cell)

+Alternative fuels
(ethanol + bio diesel + bio
• Crude oil Uses
–Refined into gasoline or petrol
–Refining by-products are LPG,
kerosene etc.
–Non-fuel by-products are
lubricants, asphalts etc
–End products are 4000 plus e.g.
plastics, synthetic fibers,
chemicals, fertilizers …. etc.
 Types of Oil

There are 161 different

internationally traded crude oils.
They have different characteristics
quality and market penetration.
 Cont…
• West Texas Intermediate WTI (USA).
API gravity 39.6 (light crude) Sulphur
content 0.24% (sweet)
A very high quality oil. Excellent for
refining, a larger portion of gasoline

• New York Light Sweet.

Underlying commodity is WTI.
 Contd

Brent (UK-North Sea)

API gravity 38.3 degrees (light
crude)
Sulphur content 0.37% (sweet)
Less sweet than WTI ideal for
making gasoline and middle
distillates.
 Cont…

Prices for other crude oils are set at

differential to them.
Other oils are Saharan blend
(Algeria), Minas (Indonesia),
Bonny Light (Nigeria) Arab light
(Saudi-Arabia), Fatah (Dubai),
Mexico‟s Isthmus, Venezuela‟s
Tia juana
 Measurement of Oil

1 Barrel = 159 liters

 RESERVES
PRODUCTION
CONSUMPTION
 Reserves

• Total Endowment 2 trillion barrels approx.

• Drilled to date 850 billion barrels

• Reserves (proven) + 950 billion barrels

• Located and found =1,800 billion barrels

 Cont…

• 66 % of reserves are in Muslim

countries while USA has 3% only.
Saudi-Arabia and Iran have 25 %
and 10% respectively.
 Production & Consumption
•In 2009 the world est. consumption
83 million barrels per day. ( bpd)
For 2007 was 86 million bpd.

•USA consumes 25 % of worlds

production,60% of which is imported.

•IEA energy policy advisor to G-8.

 Price
• Internationally the price of oil is
set in US dollars per barrel, by the
forces of demand and supply.

• The most important futures oil

market is NYMEX (New York
Mercantile Exchange).
 Demand Factors
Oil demand is dependent on:
1.Global economic growth.
2.Changes in technology ie. solar
power.
3. $ falling. Makes oil more
attractive for holders of appreciating
currencies like Euro. Hence demand
goes up.
 Demand Factors. contd..
• USA summer driving season
(memorial day to labor day)

• US north east winter season

• China

• India
 USA.
US summer driving season.
US Northeast winter season.
 China.
2nd largest crude oil importer.

India.
Based on its expanding
economy
 Supply Factors
Supply interruption of more than
5% for over 6 months creates a
crisis in the oil markets.
40% of worlds supply comes from
OPEC. Daily ceiling of 27 mn. bpd.
 Supply Factors
• Saudi Arabia.
• Iraq, Iran, Nigeria.
• OPEC.
• Venezuela.
• Choke points
• Hurricane season.
• Tanker capacity & Refinery capacity.
• Strategic reserves of USA, Japan &
India.
OPEC‟s “Cushion of spare supply” in
2010 expected to reach 7.7 m. bpd or 8%
of global demand….which is good.
The size of the OPEC cushion has been an
important driver of crude prices.
The cushions diminishing size will stoke
fears that OPEC will have too little spare
supply to bring to the market. This earlier
contributed to a record surge in WTI to
$147 in 2008.
 Supply Factors
• Saudi Arabia.
• Iraq, Iran, Nigeria.
• OPEC.
• Venezuela.
• Choke points
• Hurricane season.
• Tanker capacity & Refinery capacity.
• Strategic reserves of USA, Japan and India.
 CHOKE POINTS
Oil consumption occurs mainly in the
industrialized west

0il production takes place largely in

the middle east.

Huge oil volume traded internationally

By pipe line 40% - transcontinental
By tankers 60% - intercontinental
(3500 tankers)
Choke point is a geographical
feature. Same as a bottle neck.
They are narrow and theoretically
can be blocked. Threat comes from
hostile governments, terrorist
groups, and piracy
Effects of closing of choke points
are increased costs because of
transit time increase and tankers
capacity tie up.
 Straits of Hormuz

• It has two 1-mile-wide channels for

marine traffic separated by a 2-mile-
wide buffer zone.
• Only sea passage to the open ocean
for the petroleum exporting Persian
Gulf States.
• Some 40 percent of the world's oil
supply passes through the strait.
•US receives 12% of its oil and
Western Europe 25% and Japan get
66% of their oil respectively.

•15% of the world's commerce is

routed through Hormuz.
 Supply Factors
• Saudia Arabia.
• Iraq , Iran, Nigeria.
• OPEC
• Venezuela
• Choke points
• Hurricane season
• Tanker capacity & Refinery capacity
• Strategic reserves of USA, Japan & India
 Hurricane season
In oil markets hurricane season
refers to hurricanes in Gulf of Mexico.
US Gulf oil production (offshore oil) is
25% of total US production and 15%
of its total natural gas production.
Just before the arrival of a hurricane
off-shore facilities have to close
down.
 Important Hurricanes
Hurricane Katrina
Formed August 23, 2005
Dissipated August 31, 2005
Highest 175 mph (280 km/h) (1-
winds
minute sustained)
Lowest pressure 902 mbar (hPa; 26.65 inHg)
Fatalities ≥1,836 total
Damages $81.2 billion (2005 USD)
$84 billion (2006 USD)
(Costliest Atlantic hurricane in history)
Areas Bahamas, South Florida, Cuba, Louisiana
affected (especially Greater New Orleans), Mississippi,
Alabama, Florida Panhandle, most of eastern
North America
 Supply Factors
• Saudi Arabia
• Iraq, Iran,Nigeria
• OPEC
• Venezuela
• Choke points
• Hurricane season
• Tanker capacity & Refinery capacity
• Strategic reserves of USA, Japan and India.
 COTTON
• 5 largest PRODUCERS :
China , USA , India , Pakistan ,
Uzbek.
• 5 largest EXPORTERS :
USA ,Fr Africa ,Uzbek ,Australia,
India.
Rate 1 maund (37/ 32 Kg)
= RS.3,250. (Pakistan - KCE).

1 bale of Cotton = 4.05 maunds.

1 Lot = 100 bales.
•1b =$0.60. (U.S.A – New York
Cotton Exchange.)

•Pakistan production 11.5 mn. bales.

India 31 mn. bales (6 mn.surplus).
India yield higher because of certified
BT seed.
Pakistan only 10% certified BT seed.

•COTLOOK. For global estimates.

Demand Factors :
1.)Global consumption 98 million
bales. Subject to global demand. Eg.
purchasing power in EU &USA.
2.)Pakistan‟s demand 16 million bales
based on 10 million spindles.
3.) Polyester, nylon, acrylic, etc.
(substitutes)
Supply Factors :
1.) USA , Pakistan , India, China
etc crop. Acreage and Yield.
Pakistan‟s 11.5 mn. bales.

2.) Supply of man-made fibers

e.g. Polyester, Acrilyc.
 PALM OIL
Rate: $ 666 per ton.
Demand Factors:
1.Global demand for food.
2. Global demand for energy.
Used for edible oil, bio-diesel etc.
 Supply Factors:
1.) Malaysia is a major producer. 16
mn tons. Requires lots of land.

2.) Soya oil is a close substitute

(Brazil).
Palm oil falls as Ringgit gains.
Just as Crude oil falls with $ gaining
 IRON ORE
The main raw material to produce steel is
iron ore.
Steel represents 95% of the metal that is
used every year.
Iron ore prices filter down into steel prices
and into the prices of cars, scooters, washing
machines, refrigerators etc.
Iron ore price critical to global inflation.
 GOLD
Rate 1 0z. =$ 1,050.
10 grams = Rs 26,900.Pakistan. 24-ct.

Market : London Bullion Market.

Demand Factors:-
1. Safe haven…US.$ or Gold.
2. Low US interest rate, low $,gold up.
3. Hedge against oil-led inflation.
4. Indian wedding season.
THE RELATIONSHIP OF GOLD & U.S. $

US GDP Purchasing Power

UNEMPLOYMENT INFLATION
INTEREST RATE US$ GOLD

US GDP Purchasing Power

UNEMPLOYMENT INFLATION
INTEREST RATE US$ GOLD
Typically Gold moves in line with
Crude Oil and Crude Oil moves
opposite $.
In the short-term Gold prices will be
linked to Crude Oil and the $.
 CAPITAL MARKETS

DOW JONES (DJIA) USA

NASDAQ USA S&P
USA FTSE UK
CAC France
DAX Germany
NIKKEI Japan
KSE Pakistan
BSE India
• CAPITAL MARKET includes
institutions that channelize
supply & demand for long term
capital e.g. Stock Exchange,
Banks, Insurance cos.

• CAPITAL MARKET for long

term capital versus MONEY
MARKET for short term
•STOCK EXCHANGE. A market in
which shares are bought and sold.
They facilitate saving and investment.

•Primary markets e.g. IPO,s versus

Secondary markets.

•BOND MARKET. Locally TFC‟s.

•KSE market cap.$70 bn.Bombay $1 tr.

 Joseph Stiglitz
“The stock market does not always
reflect the broader economic reality”

“Economic science has shown that it

is virtually impossible systematically
to make money by beating the
market”
DOW JONES. An index of industrial
US stocks.
S&P 500. A more broad-based index.
NASDAQ. A technology heavy index.
Experts believe the US financial
markets cannot bottom out until the
drop in home prices slows down. This
is the worst post-war housing
recession.
“Bubble … Asset prices unrelated to
underlying values”.

“Bubbles are based on a certain

irrational exuberance”.

Bubbles can appear in any market

anywhere in the world.
KSE 100 index .
May 98 - 800
Jan 04 - 4800
Mar 05 -10,300
Apr 07 -12,000
Market Capitalization.

Nov 2002. Rs. 525 bn

Sep 2003. Rs. 1 tr
Feb. 2004 Rs. 1.2 tr
June.2005 Rs. 2 tr.
. Sept 2007 Rs. 4.2 tr.
• Volume Leaders Eg. BOP, LUCKY
CEMENT, HUBCO, MCB
•“Technical action” of the stock versus
“Fundamental action”.
•Mutual Funds. To reduce risk.
•SECP is the govt. watchdog.
Protect investors.

•Trust is the cornerstone of the

capital markets. Eg in USA , DJIA
fell twice as much at the time of
financial scandals of 2003 than it did
on 9/11.
•If you take any 20 years period ,
Wall Street has delivered positive
real returns….higher than
government bonds.
Only 3 other countries match this.
•Nikkei 225 in Dec 1980 38,915.
. Oct 2007 17,000
. Oct 2008 7,162
Is there a relationship between GDP
growth and returns in the stock market?
COMMODITIES MARKETS ,
CURRENCY MARKETS ,CAPITAL
MARKETS and other markets are
constantly reacting within
themselves & with each other e.g.

1.) Palm oil and Soya oil ,as

substitutes ( within commodities
markets )
2.) Crude oil and palm oil .When
crude goes above $70,bio-diesel
story begins. ( within commodities
markets)

3.) “Yen-carry trade” .Yen , NZ$ , NZ

stock market, Shanghai stock mkt.
(currencies markets and capital
markets )
4.) Crude Oil and US$. (commodities
markets & currency markets)

5.) US $ and Gold. Inverse

relationship. Both safe havens.
(currency markets and commodity
markets.)
6.) “Sub-prime mortgage” crisis in
the USA will cause repossession of
record number of homes and a
slump in the real estate market .This
could put a brake on US economic
growth. Downward pressure on the
US $. ( Real estate market and
currencies).
INTERNATIONAL TRADE
&
W.T.O.
 DEFINITIONS

INTERNATIONAL TRADE. Measured

by the volume of imports & exports
which has grown 17 times between
1950 & 2000 when output
(GDP)increased only 6 times.
EXPORTS. Sales abroad.

IMPORTS. Purchase of foreign

goods and services.
 GDP can be calculated by adding the total valueof a
countrys annual OUTPUT of goods & services.

GDP. = C + G + I + (X -M).

Consumption Imports.
(Consumer) Government Exports
spending

Business
Investment
There are a few cases of rapid
development in modern history that
have not relied on exports as an
engine of growth. ie. GDP growth.

2008 world trade to grow at 8%

while global GDP at4.5%.
PROTECTIONISM. To protect a
countries economy from foreign
competition.

FREE TRADE is the opposite of

Protectionism.
TARIFF. Tax on goods produced
abroad. E.g. Custom duty by CBR.
SUBSIDY. Money paid by government
to keep prices below what they would
be in a free market. A form of
protectionism.
QUOTA. A limit on the number of
goods that can be imported . Also
protectionism
W.T.O. Promotes trade by lowering
of tariffs, subsidies and quotas. Sets
and enforces the rules of
international trade.
Formed 1995. H.Q. Geneva.
Membership of 153 countries.
Pakistan is a member of the WTO.
(automatically because of GATT )
Current issues facing WTO:
1.Trading in farm products which
is the agenda of the under-
developed countries.
2. Trading in services & industrial
products is the agenda of the
developed countries.
NON-TARIFF BARRIERS. Eg. Pak
cement export to India. Opposed by
WTO.

DUMPING. Selling goods in export

market for less then the cost of
producing it. Opposed by WTO.

ANTI-DUMPING DUTY. As per WTO.

Imposed by NTC in Pakistan
FREE TRADE AGREEMENT. Eg.
between Pakistan and Sri Lanka.

FREE TRADE AREA. E.g. ASEAN,

EU , NAFTA, GCC, etc.
SAFTA. In initial stages. Ratified by
member countries in 2006.

Developing countries ie. India,

Pakistan and Sri Lanka to reach
zero duty regime by 2012. LCD‟s
like Nepal, B‟Desh, by 2015.

Even without SAFTA for Pakistan

India a market of over 1.1 bn.
A LOOK AT PAKISTANS EXPORTS!
An important component of our GDP
& the most important contributor to
our FOREX RESERVES.
Pakistan‟s EXPORTS are $19.22 bn.
in 07-08.
If Pakistan hopes to sustain 7%+
GDP growth rate we must have 14%
growth rate in exports.
PAKISTAN EXPORTS- COUNTRY WISE BREAK-UP.

Country Exports
FY2006
1. U.S.A $ 3.69bn
2. UAE $ 1.3bn
3. UK $ 899m
4. Hong Kong $ 719
5. Afghanistan $ 831m
6. Germany $ 682m
7. Italy $ 521m
8. China $ 412m
9. Spain $ 379m
10. France $ 365m
TOTAL $9.80 bn.
•Exports to China negligible . A huge
market for citrus fruits ($0.5 bn.),
processed foods and processed
herbal medicines.
China‟s Imports will grow!!

•Lack of “geographical
diversification.”
PAKISTANS EXPORTS- PRODUCT WISE BREAK-UP.
1. Textiles. 62.00 %
2. Agro Products. 10.30 %
3. Leather 7.40 %
4. Chemical & Pharma. 4.00 %
5. Sports Goods. 2.70 %
6. Carpets & Rugs 2.50 %
7. Surgical Instruments. 1.60 %
8. Engineering goods 1.60 %
9. Other. 7.90 %
TOTAL 100.00 %
WORLD BANKS CLASSIFICATION OF EXPORTS
WORLD
CATEGORY. PAKISTAN PRODUTS. % GROWTH
RATE

1)RESOURCE COPPER, etc. 5 N.A

BASED
RAW COTTON,
12 N.A
2) AGRICULTRE WHEAT,SUGAR,FRUITS.
3)LOW TECH TEXTILES,CARPETS, SPORTS 77 10%
MANUFACTURES LEATHER, SURGICAL
4)MEDIUM TECH AUTOMOBILES, AUTOPARTS
MANUFACTURES PHARMA, CHEMICALS 3 20%
5)HIGH TECH BIO-TECH, HI-TECH
SOFTWARE& ELECTRONICS 3 20%
MANUFACTURES
TEXTILE SECTOR ANALYSIS (MICHAEL PORTER)
1RAW COTTON. COMMODITY - COST LEADERSHIP
2 GINNED COTTON . // //
3 YARN . // //
4 FABRIC. // //
5 PROCESSING. // //
6 GARMENTS. NON-COMMODITY - DIFFERETIATION
STRATERGY
 Most of our exports in category 1-5. Unlike B‟Desh.
Commodities.Low value added. Require economies of scale to
bring down per unit cost .Difficult to„differentiate‟and „brand.‟
•World Banks advice – climb up the
ladder from low-tech manufactures to
medium and hi-tech, to increase its
share of world trade.
•Auto-parts (med-tech) Philippines $
800 mn. India $600 mn. Pakistan $10
mn.(‟03)
•Pakistan only 2% of world textile
exports. „Competitive Advantage‟ ?

•Textiles trade now called “Rag trade.”

Only 5% global growth.

•Lack of “product diversification.”

 FOREX
COUNTRY POP EXPORT RESEVES
(In mn.) In bn

PAKISTAN 164 $19 $ 11

INDIA 1125 $175 $ 256
B,DESH 150 $14 $ 2009
THAILAND 60 $ 178 $
MALAYSIA 26 $195 $ 87
SINGAPORE 4 $283 $
JAPAN 127 $776 $ 1,000
CHINA 1,317 $1,465 $1,953
U.S.A 301 $1,377 $ 69
HONGKONG 7 $362 $ 135
 Diversity of exports in S.E. Asia
( geographic & products ) where
export growth has been 20 % +.
THAILAND- cars (med-tech
manufactures) & rice (agricultural) TO
rich countries like Japan &USA and
poor countries like Laos.
Why has Pakistan lagged behind ?
1.)Exports was never a central pillar
of our development strategy.
2.) Domestic markets after 1947
were heavily „protected‟. Exports
were not as profitable.
 PAKISTAN‟S IMPORTS

CRUDE OIL (includes oil & products)

PALM OIL.
TOTAL IMPORTS = $ 39.96 bn.
Pakistan’s developing scenario………

Pak Rupee depreciates to Rs.80 / $.

(Reason, Pakistan's falling Foreign
Exchange Reserves.)

Pakistan's Foreign Exchange

Reserves fall to $ 11 billion. (Reason,
crude oil rose to $ 147 / barrel. Our oil
imports are 23% of our imports.)
Crude Oil rose up to $147 / barrel.
(Reason, $ falling against the Euro)

Crude Oil falls to $60 / barrel

(Reason, $ rising. US & Global
economy slowing.)

US economy slowdown. (Reason,

falling housing market caused by the
sub-prime mortgage crisis)
Federal Reserve lowers interest rates.
( Reason, slowdown in US economy)

…….. ? ?

Question. So when and how will the

Pak Rupee begin to recover ? What are
the possible scenarios ?
THANK YOU !!!

……Increase your competitive

advantage……. Start reading the
business pages for 10 minutes
every day . Starting tomorrow ! !
…………………………………………………
b_ilahi@yahoo.com