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    South Asia
     Sep 12, 2008
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 priority.

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 country.

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 more loyalty.

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 years.

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 Zardari's election.

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 to resolve.

Nor did the new coalition government improve the economy, introducing no well-calculated measures.

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 required funds.

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 foreign reserves.

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 to economists.

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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