Zardari looks to US for cash lifeline
By Syed Fazl-e-Haider
QUETTA, Pakistan - Newly elected President Asif Ali Zardari, tasked with
running a country slipping ever deeper into financial crisis, may be looking to
exploit the US perception of Pakistan as an important theater in the "war on
terror" to strengthen the country's economy.
Zardari, after taking oath as president on Tuesday, pledged to "tighten the
belt" but rejected the option of seeking an assistance package from the
International Monetary Fund (IMF).
Pakistan direly needs to secure external financing to bolster dwindling foreign
reserves and brake its sliding currency. In a joint press conference in
Islamabad with Afghan President Hamid
Karzai, a key US ally, Zardari focused on the "war on terror" as a top
Zardari may believe that only strong support of the US position can increase
flows of foreign exchange into Pakistan and promote foreign investment in the
President George W Bush, who has termed Pakistan a major theater in the global
"war on terror", telephoned Zardari after his election to president and pledged
full support in the event Pakistan takes the fight to the terrorists and
extremists in the country's border regions. In a speech to the US National
Defense University on Tuesday, Bush also sent a message to the new government
in Islamabad that in the "war on terror" it has no option but to continue to
play the role assigned to it after the September 11, 2001, World Trade Center
and other attacks in the US.
Zardari's government will have to continue to pursue the policies of the
administration of his predecessor president Pervez Musharraf in combating
militants in tribal areas and in the rest of the country. Critics said that
Zardari, by holding a joint press conference with Karzai, sent a signal to the
US that he would follow Musharraf's military policy more vigorously and with
Musharraf is accused by his opponents of using American funds to strengthen his
government, as Pakistan has been the top recipient of US military aid since
2002. In return for counter-terrorism operations, the US tolerated the
anti-democratic policies of Musharraf's administration during the past five
By 2005, it was the third-largest recipient of the Pentagon's Regional Defense
Counter-terrorism Fellowship Program, which is aimed at training foreign forces
in counter-terrorism techniques. The country got debt write-offs and witnessed
a continuous rise in investment from the US during past five years.
In 2006-07, the US led investments with US$1.54 billion, followed by Britain
with $1.14 billion. US and British total foreign investment (direct and
portfolio) in 2006-07 had increased by $1.78 billion from $888 million in the
year to June 2007.
Since Musharraf's departure, the spread on Pakistan's five-year credit default
swaps has widened by 200 basis points to 900/1,000 basis points, indicating an
increased concern that the country will default on its debt.
Even so, credit analysts believe that Pakistan, being a key US ally, may avoid
sovereign debt default as international financial institutions such as the IMF
will eventually help it meet obligations to creditors.
To the disappointment of investors and the business community, Zardari did not
present any roadmap for economic revival or solutions to the economic
challenges faced by the country. The economy does not seem to be a top priority
and the "war on terror" is likely to continue as the focus of the government.
Pakistan desperately needs dollar inflows to rescue its shrinking foreign
reserves, which are rapidly being depleted due to high payments for oil imports
and the flight of capital caused by the political uncertainty since the
assassination last December of Zardari's wife and former two-time prime
minister Benazir Bhutto.
Foreign exchange reserves fell to $8.89 billion as of September 3, down from
$9.13 billion on August 30. The central bank's reserves shrunk to $5.5 billion
from $5.76 billion. Inflation measured by the weekly Sensitive Price Index
(SPI) inflation hit 31.55% in the week ended September 4, compared with a year
earlier, according to the Federal Bureau of Statistics.
The surge in inflation occurred on the back of higher food prices coupled with
the higher domestic cost of oil. The government is unwilling to reduce oil
prices in the domestic market, even though they have tumbled to $105 per barrel
from $147 in the international market. The SPI data shows that the worst hit
are households with monthly incomes of 3,000 rupees (US$39).
A Karachi Stock Exchange (KSE) board meeting on Tuesday decided to maintain a
floor placed on the index on August 28 last month after heavy losses due to the
political uncertainty and deteriorating economic fundamentals. The decision to
maintain the floor, at 9,144 points, after the market hit 26-month lows
reflects that political uncertainty is not over even after Musharraf's exit and
The benchmark KSE 100-share index on Tuesday lost 0.18%, or 16.61 points, to
close at 9,279.62 on a low turnover of 7.62 million shares. Local analysts
believe that most potential investors will stay out of the market to avoid
further losses until some positive developments take place on the political
front. They see no immediate recovery, despite higher dividend and bonus shares
coming on the board each day.
The growing trade and current account deficits are exerting pressure on
macroeconomic indicators. The current account deficit is at 8.4% of gross
domestic product and the local currency has lost more than 20% against the US
dollar this year, further weighing on the stock markets.
The Pakistan economy has already paid a high price for the political
instability since last November when Musharraf deposed the Supreme Court chief
justice and other judges and imposed a state of emergency. The country then
faced political anarchy following Bhutto's assassination, which the
installation of a coalition government after February 18 elections did little
Nor did the new coalition government improve the economy, introducing no
The central bank has raised some hope of an economic revival by claiming funds
will be garnered from the sale of assets and holding talks with international
financial institutions to get their support.
The World Bank has assured its support for a $1 billion investment program,
while a $500 million program is being negotiated with the Asian Development
Bank. The government is also in talks with Saudi Arabia to defer oil payments
worth an estimated $5.9 billion. For the current fiscal year, oil imports may
cost as much as $14 billion, and some analysts see the sale of assets as the
last option for survival, as the government has not been able to raise the
Analysts believe the worsening economic situation may force the government to
seek IMF help, and an important IMF technical mission will reportedly visit
Islamabad this month to get first-hand knowledge about the economy.
The IMF may force the government to take unpopular measures, such as the
complete withdrawal of fuel subsidies, which could aggravate the domestic
economic situation, analysts say. The local business community instead believes
it would be better if Zardari used home-grown policies, arguing that political
stability is the only way to attract much-needed foreign investment and enhance
Musharraf's military policy in the tribal areas contributed immensely to his
unpopularity in Pakistan. If Zardari follows in Musharraf's footsteps, he will
bring more US aid money and investment at the expense of his and his party's
popularity, according to some analysts.
During the past five years, Pakistan received $1 billion annually as US
assistance related to the "war on terror". In turn, the military operations
conducted against terrorists in the tribal belt along the Afghanistan border
have carried considerable human and economic costs. More than 1,500 Pakistani
soldiers, police officers and intelligence personnel have been killed and
thousands others have suffered serious physical injuries in fighting the
Taliban and al-Qaeda in the tribal areas. The economic costs of infrastructure
destruction as a result of fighting are also mounting.
Taliban suicide bombings in cities including Lahore, Islamabad, Rawalpindi and
Karachi have added to the human and economic disaster. Budgetary allocations
for improving law and order have been increasing, but the worsening situation
following counter-terrorism operations in the tribal areas has been a major
factor in reducing the country's ability to attract foreign capital, according
Syed Fazl-e-Haider, [email protected], 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.