Asia Times: Coup fall-out hits Pakistan's economy



	October 15, 1999	atimes.com

India/Pakistan

Coup fall-out hits Pakistan's economy
By Abid Aslam

WASHINGTON - Pakistan's military coup has cast a pall over the cash-strapped country's economic prospects despite the vow of army chief Gen Pervez Musharraf to save the nation from ruin.

Musharraf seized power on Tuesday night in a bloodless putsch, described by army sources as ''spontaneous'', and threw into question the fate of badly-needed international lending programs. This increased worries that an acute foreign exchange shortage could send Pakistan into insolvency.

The South Asian nation's financial institutions and markets were closed on Wednesday and the central bank suspended all foreign exchange transactions amid reports that banks had been flooded by depositors seeking to withdraw foreign currency.

The United States and other wealthy nations urged the Pakistani military to ensure a rapid return to democratic rule and to draw up a credible economic plan. Key financial and trade agreements, meanwhile, were scuppered.

International Monetary Fund (IMF) managing director Michel Camdessus said Pakistan would receive no more financial aid until democracy was restored. ''We are in a situation which is not rare . . . where very serious political events occur and friendly countries decide to suspend their assistance,'' Camdessus said. ''Since the IMF cannot carry on alone, aid is suspended.''

The IMF approved a $1.56 billion loan package for Pakistan two years ago but disbursements were frozen last year following the country's nuclear tests. Fund payments resumed in January to help Pakistan avoid default on foreign debts, but a $280 million tranche was withheld in July because the Sharif government's economic reform agenda failed to satisfy the IMF. Tied to the IMF program were Pakistan's hopes of debt rescheduling.

The country recently finalized agreements with international banks to renew $877 million in commercial loans and earlier this year won Western governments' consent to roll over $3.3 billion in bilateral loans. The measures were part of a three-year $19 billion package that followed the partial lifting of sanctions against Pakistan. This was the main element in government forecasts of capital inflows of $2.8 billion in the fiscal year which started in July.

The deals, however, had not been ratified before Tuesday's coup and domestic and foreign bankers fear they could fall apart in the absence of an elected government. Remittances, investment and bank deposits were falling short of official projections even before the coup, bankers said.

World Bank spokesman Paul Mitchell said the agency would hold off making decisions on its loans to Pakistan pending key policy announcements expected this week. At stake are $1.3 billion in outstanding disbursements for 24 ongoing Bank-financed projects. ''These loans are not suspended but there's no current government to disburse to,'' Mitchell told IPS.

The coup also dealt a blow to hard-won trade deals. In London, British Foreign Secretary Robin Cook said a trade agreement between Pakistan and the European Union had been put on ice. The accord would have allowed certain Pakistani exports into Europe at reduced tariff rates. A European Commission spokesman added that a meeting between Pakistani and EU officials scheduled for next week had been cancelled.

Officials and market analysts said it would take time for the military - or any successor government - to convince the international community that Pakistan was committed to, and could implement, economic policies acceptable to overseas lenders and donors.

With Pakistan's financial system closed on Wednesday, initial market reaction was muffled and currency traders were preoccupied with the outcome of a policy meeting at the Bank of Japan. However, India's stock markets and currency were hit after the military there was put on high alert. The Indian markets stabilized after Defense Minister George Fernandes said nothing unusual had been observed on the border between the nuclear-armed neighbors.

All the same, market analysts were telling clients to reduce their Indian currency and equity holdings in anticipation of increased volatility in the region, said Michael Kurtz, Asian strategist at New York-based IDEAglobal, which advises currency traders, hedge funds and equities investors. While Tuesday's coup ''shouldn't surprise anybody'', Kurtz told IPS, ''we are flagging it as a significant risk''.

In the eyes of the market ''the modern Pakistan military is more overtly affiliated with Islamism, rather than being a professional service'', Kurtz said. ''This could be a much more provocative military government than we might have had back in the 1980s [when the US and Pakistan were allies against the Soviet Union's involvement in neighboring Afghanistan].''

US-Pakistani ties hit a particularly low level this year following US intervention against Pakistan's involvement in fighting around Kargil, in Indian-held Kashmir. Sharif's decision in July to order a withdrawal from the mountainous battlefield was seen by Pakistani corps commanders as bowing to US pressure and could affect the military's next political steps, Kurtz feared.

''That was the major bone of contention between Nawaz Sharif and the army and the fear now is that they'll bring in some sort of new administration that is more likely to reanimate their ambitions in Kashmir and that is more likely to be anti-Western because of resentment against the US solution in Kashmir,'' he said.

Financial analysts are also wary of India's right-wing Bharata Janata Party-led government which won re-election with an increased parliamentary majority. Initial Indian reaction to Tuesday's putsch has been measured but ''if the BJP becomes more overtly Hindu-nationalist, this could feed into Pakistani Islamism and fuel volatility over the medium-term'', Kurtz said.

While creditors and investors question the viability of Pakistan's economy, some trading partners appear bullish about doing business with the military. The Ukrainian arms firm Malyshev said on Wednesday that it expects to complete delivery of tanks to the Pakistani army next month under a $650 million bilateral agreement signed in 1996. Malyshev hopes now to clinch new deals with Pakistan.

(Inter Press Service)

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