Governments everywhere are assuring savers, investors and borrowers that, despite the global financial crisis, market players will be supported in meeting their commitments.

But for the eighth consecutive day, market reaction to the “bailout” plans announced by many governments continues to reflect low confidence in those promises that need strengthening through concrete action.

In Pakistan, the first such assurance was held out by the Governor SBP last week; politicians still haven’t worked out a strategy, although it is high time they did so. Only the PM’s Economic Advisor broadly repeated (a day after his appointment) what market observers have been proposing about cutting fiscal debt and imports, and re-building exchange reserves through the few unfavourable options available including borrowing from the IMF.

While SBP’s view that banks are “resilient” is reassuring, it may prove over optimistic unless steps are initiated quickly to ensure sustained liquidity of the financial system. Pakistan simply can’t afford any bank failure.

Blaming cash withdrawals for Eid shopping is not fair. Since July, bank deposits have fallen by Rs106 billion. Beginning of the season for textile mills to avail credit for buying cotton – an annual event – has just begun to squeeze market liquidity. This annual crunch begins in October and lasts well into February. This track record, and unbridled government borrowing indicated what was to follow.

There are reports of public sector entities shifting large deposits from private to public sector banks (to fund rising government debt), some banks occasionally not meeting their payment commitments, and cash shortages in a handful of branches that delayed payment to depositors. These incidents, thankfully isolated, are signs that require immediate remedial action.

It is therefore odd that SBP delayed cut the cash reserve requirement (CRR) although liquidity crunch in the market for a while was reflected in the overnight borrowing rates shooting up to 40 per cent per annum., even higher for some troubled NBFIs. The un-admitted reality is the pressure caused by government borrowing (Rs173 billion in July- August), which delayed the one per cent cut in CRR because it meant immediate return of about Rs30 billion to the banks.

Apparently, one miscalculation isn’t enough. That’s why we are yet to hear about a premium over LIBOR on foreign currency deposits that are easier to attract than the billions of dollars the ‘Friends of Pakistan’ aren’t yet willing to lend. SBP’s promise to meet the market’s foreign currency needs (although stabilising) can’t be stretched for long, given the fast depleting reserves. Whether Mr Tarin’s promise about raising $5 billion actually materialise, is anybody’s guess.

During a rapid economic slide, slow recovery of credit causes market ill-liquidity. Serious doubts about banks’ ability to repay deposits result in their withdrawal. On top thereof, rumours about freezing of foreign currency deposits and bank lockers, accelerated the flight of capital, which has been going on since late 2007 but hasn’t been checked tactfully. To worsen matters, government borrowing, that crossed all earlier records, added to the liquidity crunch.

Banks did lend unwisely but regulations permitted them to outsource risk marketing, create portfolios in highly loss-prone equities, allow borrowing up to Rs2 million through credit cards, and lend to individuals sums whose monthly instalments could be as high as half the borrower’s disposable income (i.e. after deducting tax, provident fund and existing liability payments), and that too on floating rates of mark-up whose impact defies estimation.

Markets wherein savers can easily retrieve their deposits, can be revived. Ill-liquid markets weaken saver/ investor confidence; reviving it takes a gigantic effort. It is tougher for markets that permit too many innovations about which the stakeholders lack sense i.e. financial literacy about the fallout from personal, housing and project borrowing (all long-term) on unpredictable floating mark-up rates.

With inflation unlikely to drop to the single digit in near future, cash flows of the industry and consumers will shrink reducing their debt servicing ability. This may slow the pace of loan recovery and may soon begin to strain banks’ ability for timely repayment of deposits. While the depositors will increasingly be forced to consume their savings to bear the increased cost of living, courtesy unbridled inflation that the government seems completely unable to check.

The ceremonial importance attached by both banks and regulators to matching asset-liability tenors, and the flawed practice of funding longer-term loans out of short-term deposits assuming that market liquidity will plug the mismatch-caused funding gaps, was a disaster in-the-making. With the entire financial sector under strain, that disaster could materialise without a firm collective commitment to prevent it.

Banks with weak loan portfolios will come under greater strain due to loose lending, of which we saw a lot in recent years because of a mad pursuit of profit tactlessly permitted by a weak regulatory regime, and virtually no regulation of the support sectors that help secure and ensure timely repayment. This is an undeniable flaw that will take its toll. Banks must be cautious in managing their weak loan portfolios. Merely pressurising borrowers won’t help; bankers must spend more time with the borrowers to help plan and implement recovery strategies and re-structure their facilities to ensure that not many loans go sour because of market-generated stress beyond borrowers’ survival capacity. Businesses must survive to flourish later on as, hopefully, things get better.

Bankers must remember that they face a mix of external and internal malaise, and its remedy doesn’t lie in killing the bird that lays the golden eggs. Business and industry must survive so that that millions aren’t made jobless for no fault of theirs. For a while, we must forget about making profit; the priority should be implementing a strategy to survive – the ability the world will watch before lending a helping hand.

Exporters must act responsibly by expediting quick recovery of export proceeds to rebuild exchange reserves and stem the rupee’s seemingly unstoppable slide. Unless they act, the depreciating rupee will compound their misery – cost of doing business will keep rising and place all foreign markets out of their reach. Let us not forget that higher exports are imperative for rebuilding the confidence of foreign investors.

Nearly 54 percent of exports go to the US and Europe – regions witnessing a sharp fall in consumer demand. Exporters must hurriedly locate new buyers in Far East Asia, which has suffered less from the global financial turmoil. This isn’t the time to give in but to explore all viable options.