Wednesday, July 09, 2008

Dire situation in Pakistan: a TFT view

The editorial by Najam Sethi in this week’s Friday Times [July 4-10, 2008] indicates how dire the situation is in Pakistan. I quote here extensively [TFT can be read for only a minor fee, which I would encourage anyone interested in Pakistan to pay.]

“Drift in Islamabad: Najam Sethi's E d i t o r i a l

Many Pakistanis are worried about a perceptible sense of drift in Islamabad. The judges’ issue is hanging fire. Acute power shortages of up to 12 hours a day persist. Inflation is up to 30 per cent. And the war on terror is going nowhere, …

More alarmingly, the Pakistani economy which grew by 6.8 per cent a year from 2003-07, is sputtering in the face of post-election economic uncertainty and political instability. … Without continued high growth and poverty alleviation, significant sections of the politically volatile urban middle classes will slip through the net, creating a vast pool of angry unemployed or under-employed. With the government becoming increasingly immobilized in the face of rising Islamic and anti-American nationalism (the irony is that America remains Pakistan’s largest military and economic donor) and economic discontent, the country could slip into political anarchy and state-failure.

The budget deficit for 2007-08 was targeted at 4% of GDP but has actually turned out to be about 8%. The balance of payments deficit is also about 8% of GDP, the highest ever in our history. Forex reserves have fallen from a high of US$16.5 billion in October 2007 to about US$11 billion today, despite being recently bolstered by a combination of US support ($500 m), ADB ($200 m), and sale of private sector company shares to foreigners ($850 m). Inflation is soaring at 30%, … International credit rating agencies have downgraded Pakistan (it now ranks 87th in the list of countries with business prospects), citing both microeconomic imbalances and political instability. … The World Bank has canceled project aid of US$500 million and postponed disbursal of a similar amount. About US$1.25 billion in privatization deals is also on hold. …. Experts say that if targeted foreign resources fall by about US$4-5 billion this year as a result of all this, the rupee would have to be significantly devalued (it has already devalued by about 10 % in the last one month) and interest rates would have to rise further, a painful and politically explosive development.

In the face of these gradual slippages, the Karachi stock exchange has not been able to retain its resilience. The KSE index …. by June 20, it had fallen by nearly 4600 points or about 30%, implying a decline of Rs 1.3 trillion or US$20 billion in market capitalization, equivalent to 13% of GDP, …

First, we need a full fledged working government in Islamabad led by a permanent prime minister and finance minister. ….

Second, the government should stop dragging its feet on all the unpopular economic decisions that need to be taken to straighten out the fundamentals of the economy. This means abolishing general subsidies on fuel and food while creating specific ones for the poorest sections of society. It also means re-creating an economic environment that is friendly towards both domestic and international investors.

Third, the government must tackle the war on terror seriously without worrying about any popular backlash. The fact is that this war is now Pakistan’s war as much as it is America’s war and Pakistan cannot afford to post failure. ….

Mr Asif Zardari’s laid-back approach is creating public disquiet. Problems have mounted because difficult decisions were postponed and controversial solutions swept under the carpet. ….

July 4-10, 2008 - Vol. XX, No. 20

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