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    South Asia
     Aug 12, 2008
All downhill for Pakistan's economy
By Syed Fazl-e-Haider

QUETTA, Pakistan - Pakistan President Pervez Musharraf, facing an impeachment move from the ruling coalition, may use the country's deteriorating economic position an excuse to dissolve the elected assemblies, using his power under constitutional provisions. The worsening law and order situation may also be used as a charge sheet against the government, according to local analysts.

Musharraf has already criticized the government, led by Prime Minister Yousuf Raza Gilani, for soaring inflation, the weakening of the rupee against the US dollar, rapid erosion of foreign exchange reserves, falling stock markets, dwindling foreign


investment and a worsening law and order situation.

Musharraf's political loyalists have also attacked the ruling coalition for its failure to provide any relief to the poor masses reeling under rising inflation, food shortages and frequent electricity blackouts. The government, in turn, pins the blame for the economic mess on the shoulders of the government of former prime minister Shaukat Aziz and Musharraf, who ruled the country for the past eight years.

Pakistan's economy is burdened by a widening trade deficit, rising inflation with soaring oil and food prices, and energy shortages. The trade gap in the year to June increased 52.95%, or US$7.18 billion, from $11.14 billion in the fiscal year 2006-07. In June, the trade gap widened to $1.97 billion, up by 1.76% from a trade shortfall of $1.94 billion recorded a month earlier. Imports rose 3.64% from a month earlier to $4.02 billion, a 44% gain on the year-ago period, while exports increased by 5.51% from May, and 33% from June 2007, to $2.05 billion.

Inflows of investment from overseas, which helped the former government meet the country's foreign exchange demand in recent years, are now declining, making it extremely difficult for the new economic managers to cover the severe trade deficit.

Six increases in oil prices over the past few months have helped to push prices of essential food items to an unprecedented level, hurting in particular low-income groups. The government, in seeming indifference to the plight of the country's poor, has so far taken no effective steps to control inflation.

The coalition government led by the Pakistan People's Party (PPP) is gradually withdrawing subsidies on gas, electricity and petroleum, adding to inflationary pressure. That is after the PPP, the party of former premier Benazir Bhutto, who was assassinated last December, had sought votes in the February 18 election on a slogan of providing food, clothing and houses to the poor.

The government has still not ensured the provision of subsidized flour, pulses, meat and ghee to the poor nor announced any subsidy on essential food items. Analysts warn that rising food prices can undermine gains from poverty reduction and human development that the country has achieved over the past five years as households struggling to meet the minimum standards of living might have to cut spending on health and children's education.

In June, the prices of food and beverages rose by 32.05% from a year earlier; house rent by 12.39%; fuel and lighting by 11.38%; transport and communications by 24.91% ; clearing laundry and personnel appearances by 17.74% and medicare by 14.16%, according to the Federal Bureau of Statistics (FBS). Last month witnessed the highest-ever increase in oil prices, which helped to drive up the retail price of every commodity.

According to the FBS, inflation measured by the Sensitive Price Index rose to an all-time high of 32.22% during the week ended July 25 over the corresponding week last year.

Increased demand for US dollars from oil importers and dealers has put the Pakistani rupee under pressure. Its value has dipped to a record low of 72 to the US dollar in the open market and local dealers believe it will remain under pressure in the coming days.

The country's central bank, meanwhile, is pursuing an aggressively tight monetary policy to curb import demand. The central bank has supported the rupee in an attempt to ensure exchange rate stability. The main measure it has taken is a temporary suspension of forward booking of foreign currency for all imports, removing the simplest way for importers to hedge against a weakening rupee. The bank has also made sweeping changes in foreign exchange regulations to protect the rupee against the US dollar by suspending forward cover facilities against imports and reducing advances.

Pakistan's foreign currency reserves, which stood at $14.08 billion on February 15, have dropped by more than $6 billion in the past eight months, falling below $11 billion on July 12. The rapid depletion of reserves is disturbing for the government as it increased external debt to $46 billion. The country's foreign debt has swelled by $10.5 billion in the past six years to the current $45.9 billion.

Last month, Pakistan stock markets witnessed a flight of $150 million in portfolio investment, highlighting investors' lack of confidence in the market, particularly due to continuing political uncertainty, local analysts say.

Investors have been reluctant to make fresh initiatives even at the attractively lower rates owing to prevailing political uncertainty, the law and order situation and security risks. Some analysts believe that the high economic growth of 7% achieved under the government of former prime minister Shaukat Aziz was the real key for attracting foreign as well as domestic investors during the past five years. The present government has fixed a growth target of 5.5% for the current fiscal year.

The financial year to June 30 closed with the benchmark KSE-100 index at 12,289 points and market capitalization at $55.3 billion, 17% down from $66.5 million a year earlier. According to the country's central bank, total outflow of foreign portfolio investments was $221 million as of June 27, 2008, as against net inflows of $978 million the previous year. The inflow of foreign funds stood at $39.8 million during the first half of fiscal year 2008.

The stock markets have recorded an average annual return of 48% in the five years to 2007. That trend has been reversed in the past few months, with the KSE 100 share index tumbling 30% in the three months from April 18 and losing 1,312 billion rupees in market capital.

Some analysts blame the present coalition government for not focusing on the economy and being distracted by resolving other issues, such as that of judges deposed by Musharraf before it took office. The impeachment move by the ruling coalition has now created an open fight between the presidency and parliament. The political uncertainty looks certain to further drive down the markets and increasingly erode investors' fragile confidence.

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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