The financial markets in the United States are in a turmoil of historic proportions, most serious since the Great Depression. The crisis triggered by sub-prime mortgage debts and the unprecedented state intervention to stem the deepening trouble in the financial markets are being viewed by many as the beginning of the end of the American financial capitalism, at least as we have known it until a few days ago.

To others, it represents ‘resilience found in the capitalist economic system to modify and adjust itself’ to the changed circumstances and realities.

This debate may continue in the weeks and months to come. In the meanwhile, the financial turbulence has sent global capital markets spiral downward over the weeks and created a liquidity crunch in the international financial markets. Also, it has fueled fears of a global economic slowdown in the short-term though the International Monetary Fund is hopeful of gradual recovery over 2009.

What are the implications of this turmoil for Pakistan? Would we remain unharmed?

Most economists and bankers don’t see any direct fallout of this turmoil on the economy.

“Pakistan largely remains isolated from what is going on in the US financial markets. It is not going to impact on us as it may the European markets that are closely linked to the American economy,” says a central banker in Lahore.

“Even foreign banks operating here have limited market exposure. Globally, they are stable, and remain unaffected by the turbulence in the American financial markets,” he says.

A Securities & Exchange Commission of Pakistan official, who requested anonymity, says a few rich individuals might have invested in the risky US derivatives market and taken the hit. But the nation’s financial system remained unaffected.

Some stock brokers say the State Bank might also have invested in derivatives market and suffered a loss of a few million dollars. But it could not be confirmed.

Usually, the bankers say, the central bank invests in securer US treasury bonds and not in risky derivatives market.

“We are already in crisis unrelated to global financial meltdown,” says a stock broker in Lahore. “The government needs to help different sectors of the economy before the situation is made worse by what is happening to the US economy,” he warned, refusing to give his name.

Others felt that the financial meltdown may slow down the much needed foreign capital inflows, and significantly affect the chances for Pakistan - already struggling with the widening trade gap and current account deficit as well as sliding rupee and dwindling foreign exchange reserves - to raise commercial debt from the international financial markets.

“True, we may not face any direct consequences of the crisis. But if the financial turmoil triggers an economic slowdown or recession in America, our exports to it are likely to suffer hugely,” says Faisal Bari who teaches economics at the Lahore University of Management Sciences.

Pakistan’s exports to the US accounts for almost a quarter of our foreign exchange earnings from merchandise.

The overall trade deficit ballooned to above $20 billion last year.

The global liquidity crunch means that Pakistan is likely to attract lesser foreign investment - direct and portfolio both - than it expects.

“In times of economic slowdown, companies tend to consolidate rather than expand. If the US economy slows down, it will affect growth in Europe and other parts of the world; it would prevent American and European corporations to expand and invest in countries like Pakistan,” argues Bari.

“Since large investment banks are in trouble, we do not see global funds returning to our capital market in the near term. It will weaken their appetite for risky investments in Pakistan, which is being viewed as politically and economically unstable,” says AKD Securities chief, Aqeel Karim Dheedi, in Karachi.

The US share in foreign direct investment amounts to just above 25 per cent of total FDI to Pakistan. Similarly, almost half of portfolio investment in our capital market comes from American find managers.

But the more worrisome is the fact that the liquidity crunch would make it difficult to tap the global investors and raise commercial debt and proceed with privatisation programme.

“If we try to raise debt from the global financial markets now, it will indicate our desperation for capital inflows. That will spike the cost of the debt because of risk premium associated with Pakistan,” argues a senior finance division official in Islamabad. “Same will be the case with the privatisation effort. It will also take the hit.”

“International credit rating agencies like Moody’s and Standards & Poor have already downgraded our sovereign debt outlook, reducing our ability to raise commercial debt from the global markets,” says he.

Pakistan may find itself in deep trouble if it fails to attract adequate foreign capital inflows to ease pressure on the precarious balance of payments situation, rein in its growing current account deficit of over eight per cent of its gross domestic product and shore up its depleting foreign exchange reserves that dropped to $8.8 billion last week from record high of $16.4 billon in October last year.

“Pakistan is one of those countries whose reliance on commercial external debt is very low. Yet we need to take immediate steps to restore balance of payment situation,” insists a financial analyst based in Karachi.

On the trade side, the impact of the slowing American economy is already being felt.

“Our hosiery yarn exports to the Far Eastern countries - which produce garments for the American consumers - are already declining sharply and inventories at the mills piling up,” says Adil Mahmood, a yarn exporter in Lahore.

“This decline in imports by the Far Eastern garment producers is indicative of slowing demand in the US,” he argues.

However, a former All Pakistan Textile Mills Association chairman Shafqat Elahi says the financial crisis could force most American consumers to turn to low cost, lower end textile products - which form larger part of Pakistan’s exports to the US.

“The demand for clothing may weaken a bit. But we can make up for that by convincing Washington to allow us greater market access. Market access is most important factor that can help textile exports in case of a recession in the US economy,” he says.

The American financial problems are also believed to be the major factor behind the weakening commodity markets.

The global prices of food have dropped substantially, maize by 40 per cent, rice by 30 per cent and wheat by 30-35 per cent - and oil by 40 per cent.

“If the American economy goes into recession for a longer period, the energy and food prices will weaken further,” says an investment banker.

“The downward spiral of commodity prices means easing of pressure on Pakistan’s deteriorating balance of payments situation,” he says.

Also, it will provide relief to consumers who are reeling under food price inflation of above 34 per cent in the first two months of the current year, up from 17 per cent for the previous year.

The headline inflation has gone up to over 24 per cent from 12 per cent during the same period.

“But oil and food prices also depend largely on speculative activity in the commodity markets as well as the gap between output and demand. The slowdown in the US will not determine their prices alone or in isolation from other factors,” says a wheat trader who asked not to be identified.

But the meltdown of the American financial system is also believed by the experts to have a few lessons for Pakistan to learn. “First, we immediately need to strength regulations of the markets to stave off any big crisis that we can’t afford to have. Second, the government should help the capital market to restore investor confidence in our economy,” says Lahore based broker.