Pakistan's economy takes a hit
By Syed Fazl-e-Haider
QUETTA, Pakistan - Pakistan, reeling under the anarchy and violence unleashed
by the death of former prime minister Benazir Bhutto last week, is starting to
count the cost of the killing to the fast-growing economy, with every activity
and sector of trade, commerce and industry facing an adverse impact.
The country now presents a bleak prospect for foreign investment following the
death of Bhutto in a suicide attack in Rawalpindi last week and faces increased
difficulties in meeting high growth, revenue and export targets. It has already
lost billions of rupees in revenues and exports on top of steep losses of
property and
public infrastructure in strikes observed after Bhutto's assassination.
Her violent death led to the complete suspension of trade and industrial
activity in Karachi, the country's business and financial hub. The suspension
of operations in all five of Karachi's industrial areas cost the economy over
10 billion rupees (US$161.8 million) in one day. The Karachi Stock Exchange was
closed for three days, a prelude to turmoil that is likely to remain for the
next two to three months.
Early estimates put the loss in revenues in the economy in the days following
the December 27 assassination at 50 billion rupees. According to one estimate,
the Federal Board of Revenue (FBR) would need 2.74 billion rupees in additional
receipts per day in the coming days to meet the 1.025 trillion rupee revenue
target set for the current fiscal year, which runs to July.
The FBR faces lost collection of income tax, federal excise duty and other
levies due to closure of banks and damaged economic activity. Further delay in
the clearance of transshipment goods and cancellation of export orders will
also cause revenue losses, which in turn could have a negative impact on
development projects.
The present crisis may help to derail economic reform initiated under the
administration of President Pervez Musharraf if political stability is not
restored. The perceived risk of Pakistan defaulting on its dollar-denominated
debt rose after Bhutto's death, with five-year credit default swaps, used to
insure against restructuring or defaulting debt, widening by around 100 basis
points on the news.
The country’s overall budget deficit reached 158.06 billion rupees during the
first quarter of the current fiscal year, or 39.60% of the whole fiscal year’s
target of 398 billion rupees. Further increases would definitely affect the
Public Sector Development Program (PSDP) spending.
Foreign investment outlook
The political instability has further increased foreign investors’ perceived
risk in Pakistan, even as many held back on spending plans as they awaited the
outcome of parliamentary elections originally scheduled for January 8 and now
postponed following the assassination. A range of concerns already included
security and law and order worries, even as the country's economy was growing
at a fast pace over the past five years under President Musharraf's liberal
economic policies.
Foreign direct investment (FDI) has increased to $3.8 billion from a mere $500
million and according to Pakistan’s central bank rose 67% to $1.87 billion in
the first half of the 2006-07 fiscal year, led by inflows into the
communications, energy, and banking and financial services sectors. During the
period, the banking and financial services sector attracted foreign investment
of $517 million, followed by the communications sector with $495 million and
oil and gas exploration with $315 million.
The strength of economic growth - the government forecasts growth of 7.2% in
the year ended June 2008, compared with 7% a year earlier - has outweighed for
foreign investors the political risks in the country. The benchmark Karachi
Stock Exchange 100 Index has gained for six straight years with a 40% increase
in 2007. It was trading at around the 13,590.70 mark on January 2, down from
more than 14,814 before the assassination.
Officials claim foreign money has flowed into the country attracted by the
availability of skilled manpower and low production costs of production and a
level-playing field for both foreign and local investors. Liquid foreign
exchange reserves have risen to $22.3 million during the week ended December
22. Total liquid foreign exchange reserves stood at over US$15.6 billion,
according to the central bank.
Standard & Poor’s Ratings Services rates Pakistan's sovereign foreign
currency B+ with a negative outlook, four notches below investment grade, the
same level as Moody’s Investors Service rating of B1 with a negative outlook.
Moody's believes the country's credit rating may hold steady if the country’s
economic policy framework does not change, while John Chambers, chairman of
S&P’s sovereign rating committee, argues that the sovereign foreign
currency will be lowered if the assassination ushers in a period of heightened
political instability.
Foreign direct investment and portfolio flows are likely to decline, negatively
affecting Pakistan’s external liquidity position, given its large current
account deficit of about 4.8% of gross domestic product. The country may
encounter increasing difficulty in refinancing its external and domestic debt
if lenders’ risk aversion toward Pakistan increases. In addition, fiscal
slippages may arise, pushing deficits beyond the government’s target of 4% of
GDP, jeopardizing the currently favorable debt trajectory.
Luis Costa, the head of emerging debt at Commerzbank in London, said: "This is
the worst possible scenario for foreign investment. In the first half of 2007,
we saw Pakistani assets outperforming, which brought in real money managers. We
will probably now see a reversal of this trend."
Bhutto’s assassination and concern over increased violence in a country that is
a key US ally in its ''war on terror'', combined with weak US economic data,
unsettled international markets, which fell on the day following the murder.
According to some analysts, the killing and the possibility of a civil war
breaking out in the country could raise geopolitical tensions, sustaining the
rise in oil prices, which could go above $100 per barrel. US military and
defence officials however believe that Pakistan's nuclear weapons remain
securely under the control of the Pakistani military.
Syed Fazl-e-Haider, sfazlehaider05@yahoo.com, is a Quetta-based
development analyst in Pakistan. He is the author of six books, including
The Economic Development of Balochistan, published in May 2004.
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