Pak Economy: Foreign exchange debacle and the energy crunch

RAIS AHMAD KHAN

ARTICLE (July 01 2008): The world is experiencing an economic crisis, which has no precedent in history for its multi-faceted complication. There are so many factors responsible for the situation that it is impossible to pinpoint any particular one as the root-cause, but four features stand out as the prime suspects:

1) Falling value of US dollar and several other currencies,

2) The rising cost of energy,

3) High economic growth in China and India, and

4) Growing world population (fast approaching 7 billion mark).

These factors give rise to others in a cause and effect sequence, which, taken together, form a jigsaw puzzle, baffling the keenest minds. Trying to analyse and find a cure for them is beyond the scope of the present study, but some points are well-worth pondering.

Take the falling value of US dollar first. USD in the period following WWII, has gained the status of most of the world countries’ currency of intervention, and USA as the globe’s sole Superpower has an outreach surpassing all others. Most commodities traded internationally are priced in US dollars, and nearly every foreign or local currency conversion into another currency is through the medium of US dollars, either physically, or as a mathematical formula of reckoning.

This universality of the greenback affords it a position no other currency can match, and willy-nilly, nearly every country outside the ECU has to deal with it in bilateral or multilateral transactions. Therefore the slightest movement, up or down, in the value of the greenback has repercussions far beyond the geographical limits of USA.

Again, the US economy being the largest in the world, any boom or bust there affects most of countries trading with, or dependent upon, USA. That explains the turmoil in the world commodities, prices, shortages, and budgetary constraints hurting almost all countries at present. The food shortages are also a corollary of this, and some other factors, to be discussed later.

Next comes the energy crunch, spearheaded by the soaring prices of oil – set to hit $150 per barrel pretty soon. Considering that only a short-while ago, oil was priced at around $60 per barrel, its price having more than doubled in less than one year, and still rising, is the cause of ruin or at least, disruption, of economies of most of the developed or developing world. The drain on foreign exchange of oil importing countries has emptied the coffers and depleted resources of countries, with few exceptions. For example, Pakistan stands to lose some $20 billion in extra payments a year just to pay for import of oil and oil products and derivatives.

USA being the foremost oil consuming economy suffers from a double whammy, as the dwindling purchasing power of US dollar contributes to further rise in oil prices, denominated in the greenback.

The problem is further complicated by huge hedge funds and sovereign wealth funds sloshing around the world, looking for safe havens, as the customary holdings in greenback are a constant source of loss in value, with diminishing returns as well. So they park their liquid funds in acquiring sizeable chunks of commodities, particularly oil, causing a world-wide shortage and spiralling prices.

As a result, liquidity has shifted to Oil producing region, ie, Middle East, which has a very sparse population, and little capacity to absorb all that windfall growth in liquid funds, within their own territories. Perforce they have to invest outside their own domains to earn a decent income in secure and risk free bonds. In case they have an appetite for risky speculation, they go for a most volatile commodity, which for the past one year, happens to be oil.

They do this through the sovereign wealth funds, running into trillions of dollars.. Thus a vicious circle is formed. This splurge of limitless liquidity has had a devastating effect on the oil market, as well as all other commodities and every kind of economic activity, which has rocked, and continues to shake the world.

Every extra dollar in oil price has a multiplier effect on these wealth funds, and consequently on oil price itself. Of course it must be understood that sovereign wealth funds are not the sole players in this game. These funds have been a late comer. There are older and more established players in the field who have pounced upon the bonanza, and are making hay. Those are the familiar hedge funds.

This vicious circle, like a hydra-headed monster, feeds on itself and magnifies many times over, beyond the control or collective genius of the hapless humanity. The turmoil and topsy-turvy movements on the exchanges around the globe bear testimony to the havoc caused by these factors.

Even oil producers, who are the direct beneficiaries of the oil price spiral, are not immune to the instability created by these factors, as their own imports from the helpless oil consuming countries are inflated due to high cost of energy. The high rate of inflation in oil producing countries, paradoxically, is something that was unthinkable only a short time back.

All these contortions and disruptions cause enormous dislocation and grief among the poor countries of Asia, Africa and South America. The figures of street crimes, social malaise, suicides, acts of arson, looting, and above all, rise of terrorism, speak volumes. All these are compounded by yet another factor, to which we come now, the demographic bomb.

World population at the turn of the 19th century was less than a billion. Despite all the wars, famines, plagues, pestilence, diseases, deaths and destruction during the 20th century, the figure shot up to above 6 billion at the end of that century, and in a short period since, it has now reached or about to reach 7 billion.

By all knowledgeable estimates, the end of the current century may witness another doubling of this figure, and that brings out the many problems that are now afflicting, or are about to descend on the humanity at large.

Food shortages, living space, dwindling resources (top of them being water and clean air) to say nothing of housing, education, medical care, employment opportunities and all the rest, are problems that haunt the planners as horrendous nightmares.

This uncontrolled population explosion in poor countries like India (despite all its economic growth), Pakistan, Bangladesh, Indonesia, or African countries in sub-Saharan region is causing problems that the world has not yet found an answer for.

Add to this some religious or ethnic inhibitions, and you get a heady brew, of titanic proportions of problems beyond ingenuity to solve. That does sound like a prelude to the end of the world as we know it, even if we do not count the multitude of other problems created or exacerbated by geo-politics and grab for power by some quarters.

Next comes the question – what is to be done, or more pointedly, what can be done? Difficult to answer as an absolute cure or total elimination of the problems, but there are some possibilities that can ameliorate the plight, and must be addressed immediately.

The first and foremost one requires all scientists and planners to devise ways and means to increase production, and at the same time arrange an equitable distribution of food, water and other resources among the inhabitants of the planet earth fairly.

Secondly, wiser counsels must prevail to restrain the pig-headed schemes of certain warmongers, the military/industrial complex, the cartels and the mafia controlling major assets and resources, and others of their ilk.

Thirdly, and most important, the gap between the rich and poor, the ‘haves’ and ‘have nots’ must be narrowed speedily and eliminated entirely, if at all humanly possible. It pre-supposes equal sharing of opportunities and resources, and transfer of knowledge and skills from the developed world to the least developed and developing societies. Health care and education must also be given the top priority.

These are not mere clichés and political slogans. They have to be acted upon if humanity has to survive, because the rich cannot escape disaster if it strikes the globe. All residents, big and small, rich or poor, will suffer, probably the rich more so than others, because they have more to lose. So it is in the rich nations’ own interest to provide succour to the poor.

 Source: Business Recorder

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