Four sources of current financial crisis.
By: Tarique Khan Javed
President, Overseas Pakistani Investors Forum.

There are four sources of current international and domestic financial crisis namely:
A) Depleting Oil reserves since 2004, after it was discovered that two biggest oil fields of Saudi Arabia producing 7 to 9 million barrel a day are drying up.
B) Sky rocketing food prices as lot of agriculture land used for food production was put in use to produce energy in the wake of high oil prices.
C)  USA trade deficit since 1954 and USD 10 trillion borrowing upto now to fill it. Much of the borrowing coming in the form of refinancing of houses.
D) Inflation of more than 60% in Pakistan since 2004 resulting from Budget deficit fueled by increase in oil prices in recent months.

Depleting OIL reserves:
A) In early 2004, a New York analyst first pointed out that, like USA and Europe Oil wells before; the peak production capacity of two major oil fields namely Khurres and Safania in Saudi Arabia has been reached and from now on wards there production will only decline. He asserted that the combined daily production capacity of these two fields of around 8 million barrels per day can not be replaced in the near future. He added that as the demand for oil is increasing in the wake of massive expansion of Chinese and Indian economies the price of Oil is likely to sky rocket to US 100 per barrel. This analysis was contested by Aramco officials saying that Co has been regularly discovering new oil and that the lost production from these wells will be replaced by new flows.

Events have proved the analyst right and Aramco officials wrong. Oil touched 150 mark as predicted. Its current decline in the wake of economic slow down may be temporary  and once again it may go upto 150 or even 200; after the World economy starts growing again and sure it will.

FOOD products as source of energy:
B) Brazil switched to sugar based energy as fuel for its cars and trucks taking away a huge portion of land which would otherwise be used for producing food grain. Production of Soya and other natural plants used for production of energy increased tremendously all over the world, denying space for food grain production. These actions first resulted in sharp increase in Sugar price followed by that of Wheat, Rice etc. As oil price come down the prices of these its are also coming down but here again this may be short respite from the general trend till other sources of energy like Coal in our case and Wind and Solar energy in the case of rest of the World provide alternative energy and dependence on agricultural products is reduced. This is likely to take a long and one of its precondition is continued high prices of Oil, to keep them economically viable.

USD 10,000 billion USA debt:
C) Between 1945 and 1953 USA was THE industrial power house of the world and thus had a favourable balance of trade with whole World except Austria. However starting 1954 it started experiencing trade deficits which continues upto today. Currently its deficit is USD 2 billion a day. Over the years this huge gap was filled by Foreign direct investment (FDIs) , sale of Treasury Bills and above all massive investment in the housing market, in the form of refinancing assets of Mortgage Agencies, like Federal Mortgage Agency.

It is feared that two to three trillion investment in the mortgage market has gone bad in the wake of rising Oil and Food prices and shifting of jobs abroad particularly to China. Americans suddenly find that they can not sustain the high standard of living they got used to. The huge financial obligation they took in the form of Housing, Student, Car, Furniture, Vacation and Credit Card Loans is beyond their capacity to repay. This has resulted in increasing defaults/repossessions and collapse of many Banks. Banks allover the world are in trouble because they were use to lending all there surplus funds in US housing market as it appeared to be large and secure investment avenue.

Sixty to seventy per cent inflation in Pakistan since 2004:
D) After a period of financial discipline during Oct 1999 and 2003, from 2004 on wards the previous government stated to print notes beyond economic growth rate leading to inflation. It is estimated that the cumulative inflation since 2004 is 65 to 70%. The eroded purchasing power has brought the poor sections of the society to starvation level. The problem was compounded by the increase in oil and food prices.

 During this period Government insisted on keeping the Rupees at 62 to 1USD rate. They succeeded in till recently due to positive follows of investments including that in Equity market.  This made our export less and less competitive while imports appeared cheap. This created a big trade gap and consumed the existing FX reserves. As the foreign investment started to flow out currency started to fall.

Interest rates started to go up in line with inflation and high borrowing cost put more burden on struggling industrial and consumer borrowers. Defaults increased leading to fall in Bank profits and appetite to lend.

Eventually deposit rates moved up making Stock returns unattractive compared to deposit rates. Thus the Stock market collapsed and suspended; locking investment for months. Real Estate market declined due to lack of liquidity and due to forced sale by investors who needed money to pay huge interest and margin calls for their positions in Stock market.