The US economy seems to have arrived at the D-Day, where amidst weakening of domestic socio-economic indicators, its global hegemony is also at stake. Reaching its debt ceiling (USD 14.3t), beyond which it will not be able to borrow more, has severe implications for the holders of bills it will chose not to service in immediate future, or the expenses it will cut to avoid encountering another bottleneck in the medium term.
Taking a neoliberal stance, one would decipher that policy makers in the US face a tough challenge in terms of steering domestic or rather democratic interests to align them with its international objectives. If it considers its international interests dearer, then a definite softening of stance towards the ‘terrorist’ can be expected to make the tax payers share a sizeable chunk of their downsized meal. Or maybe the average US citizen does weigh security over his bread. Only time will tell.
The US debt road block and its consequences for Pakistan make for an interesting plot. Pakistan’s dependency on the US is historically all encompassing in many ways. Not touching upon the commonplace understanding of political dynamics, compensation of already incurred government expenditure on defense amounting to $300m (Rs26b) and military aid of $800m (Rs69b) stands exposed to the negative, notwithstanding several assurances received off late.
The economic impact will also be significant given the backdrop of lower confidence of international creditors in the US economy. A direct consequence of this would be re-profiling of debt stock leading to the weakening of the dollar and rising interest rates. While this would deepen the recession within the US, the demand and growth slowdown would imply lower inflows for Pakistan in terms of FDI, Portfolio Investment (FPI) and exports. Between FY10 and FY11, international investment from the US (FDI+FPI) declined by 47 per cent to $500m (Rs43b).On the other hand, exports crossed $4b, growing by 15 per cent YoY primarily on account of rising cotton prices although volumes had declined. If the outlook remains negative for FY12, then further slowdowns would not only strain foreign exchange reserves but also put pressure on the bourse through low investor confidence.
However, some positives will also be embedded in the US tragedy. Although the weakening of dollar may dent Pakistan’s exports, a stronger rupee may also imply a lowering of the country’s import bill which stood at $1.12b (Rs98b) against the US in FY11. Traditionally, Pakistan’s main import worry has been oil which touched a peak of $127/Bbl in FY11. FY12 may prove to be a year of much joy for fuel users as lower demand for oil in the US as well as the weakening of dollar can be expected to provide much needed respite in the $14b bill serviced in FY11. Moreover, if the dollar sustains its downward trajectory over FY12, then the translational impact of more than $2b on the FY11 stock of external debt may get neutralised. Also, with IMF repayment expected to start in Feb-12, some relaxation in domestic liquidity profile will prevail while paying the first tranche of more than $3b.
Stating the obvious, the terms of trade of Pakistan with other countries may not change given that most currencies such as yen and yuan might experience similar trends. However, on an ending note, the fragility of the world economy and globalisation get exposed as the frequency of wound revelation increases. The EU and the USA, once considered invincible, are unable to control reins as diseconomies of scale assiduously set in.
Fall of the Roman empire, anyone?
The writer is an economic researcher and freelance journalist
