Economics students are familiar with the concept of running on banks. Suppose a bank in an area is fairly stable and operating properly. Taking advantage of a sudden accident, a competitor spreads the news that the bank may default. In such a case, those who have their deposits in the bank will want to withdraw their funds before the bank defaults. If a large number of people come to withdraw their money, the bank will not be able to return the money to them because the bank keeps a certain part of the deposits, the rest of the money has been lent out or invested. Is. Now, it will not be possible to get back the entire amount in a hurry from the loan that the bank has given to the people or the investment that has been made. Those who have taken a loan will not be able to pay it back before time and if money is taken hastily from investment, the full amount may never be recovered. So, in such a situation, the bank will necessarily default.
Past Practice
This practice was very common in the 19th century, and there were many similar incidents in the early 20th century, so modern central banks came into being to deal with it and the concept of bailouts was introduced. That is, if a bank goes towards default, the central bank of the country will save it from default by providing funds on its behalf. Central banks have on several occasions rescued commercial banks from default by providing bailout packages. For example, to deal with the economic crisis of 2007-08, the US Federal Reserve gave a package of 2500 billion dollars.
In Case of A Country or Nation
The case of nations is also similar. If news about a country is continuously spread with the emphasis that it is going to default, it will in fact default. When news of a country’s default circulates, your business partners will behave more cautiously, increasing the reluctance of lenders. Borrowers will want to repay the loan early, so the balance of payments that were supposed to deteriorate yesterday will begin to deteriorate today. The enemy will want to take advantage of this situation to hurt you more and you will start moving toward default faster.
Unfortunately, there is no bailout system in place between countries. There is no such institution that promises to come to your rescue in case of a payment crisis. Therefore, it is a more predictable scenario for a country to default than for a typical commercial bank.
When one’s conscious and unconscious efforts are also included in the desire to default, then it will be a miracle to escape. Unconscionable efforts are when you tweet false truths just to demean your opponent and share statistics that degrade your country’s economic condition. Conscious efforts are what our former finance minister was instructing the provincial ministers to do to ensure that Pakistan does not get the IMF program. When these efforts on their part are matched with the efforts of others, then the process of degradation becomes many times faster.
Expectations and perceptions are more powerful than reality in the world, and your expectations drive and change the economy ahead of reality. If a rumor is spread today that there will be a shortage of sugar in the market after ten days, then it will be scarce in just two days and not ten, because everyone will want to have it for themselves before it becomes expensive. Buy sugar. Likewise, news, rumors, and our insistence on default will cause us to default prematurely.
This does not necessarily mean that all the facts about the economic condition of the country are very good and all the bad things are rumors. The reality may be horrible, but what is important for us is what our role has been in all this. Have we increased the good name of the country or vice versa? If the news of default is true, you should try to reduce the chances of it by your role. If your household uses $10 worth of groceries per day, try to limit it to $2. If you intend to order a mobile phone from Japan, perfume from France, a blanket from Korea, or a television from China, pick up a local alternative so that you are not among those who increase the chances of default. If you don’t like a local substitute for imported goods in the name of the so-called status symbol and quality, Ishaq Dar will not be the only one responsible for the default, you will also be complicit.
Translated from the wall of Dr. Ateeq ur Rahman
Your point of view caught my eye and was very interesting. Thanks. I have a question for you.