Pakistan sits on the brink

The rupee is in a tailspin, the Karachi Stock Exchange is in a steady decline and food and fuel prices are soaring, contributing to power shortages, rising unemployment and an unprecedented trade deficit. By any measure, the Pakistani economy is in deep trouble. Violence by militants in the country's northwest may have captured the headlines, but some economists are now predicting fiscal instability will cause more turmoil here than the pro-Taliban extremists.

"The economic problems here are really serious," said Abid Hasan, a leading Pakistani economist. "But what's really worrisome is how little is being done in response." Both internal and external factors are to blame. Rising oil prices have pushed up the cost of fuel imports by 71.4 per cent in the past fiscal year, according to figures recently released by Pakistan's Federal Bureau of Statistics. Historically a wheat exporter, Pakistan spent US$800 million (Dh2.9 billion) to import wheat during the last fiscal year. Much of the country's crop was smuggled to the country's neighbour, Afghanistan, where so much farming land is dedicated to growing a $3bn poppy crop that severe food shortages caused such a brisk smuggling trade that the Pakistani army had to seal the border on occasions.

Expanding imports of food and fuel have ballooned Pakistan's trade deficit this year to $20.7bn, more than a 50 per cent increase on the last fiscal year, according to figures from the statistics bureau. "Pakistan's economy is experiencing serious balance of payment and fiscal deficit challenges," said Robert Floyd, the World Bank's country programme co-ordinator for Pakistan. "Expanding and improving existing social assistance programmes that directly target poor households is necessary to protect vulnerable sections of the population in the face of the dramatic increase in global oil and food prices."

Continuing political instability in Islamabad has also weakened investor confidence in Pakistan, putting downwards pressure on the stock exchange, which recently recorded its lowest day of trading in terms of volume since 1998. Many businessmen complain that the government, elected in February, is too preoccupied with political infighting to cope with the country's mounting economic issues. A coalition of textile exporters even took out an advertisement in major newspapers, begging the government: "We seek your help", and warning that their powerful industry stood "at a juncture of collapse, causing massive unemployment".

Senior government officials blame mismanagement by the former military-led regime for the current predicament. Many accuse Shaukut Aziz, the former prime minister and a former executive at Citibank, of allegedly cooking the books to paint a rosy outlook on Pakistan's economy, when there were actually deep structural faults. Pervez Musharraf, the president for eight years, also repeatedly postponed making tough decisions on large projects that would have generated energy, according to former government insiders. Some of the projects, like a massive hydroelectric dam proposed for the northwest, would have provided much-needed electricity, but would have been politically risky for Mr Musharraf, threatening to alienate vital coalition partners, the officials said.

The result is that Pakistan now faces a huge electricity shortfall. Rural parts of the country suffer partial blackouts of up to 12 hours a day, and even the nation's capital grinds along without traffic lights. Recently in southern Punjab and the port city of Karachi, traders and businessmen burned tyres and marched in the streets to protest power cuts. Even the most optimistic officials say there will be no end to the cuts before late next year, and many industrial leaders question how Islamabad will come up with the cash for the large power projects necessary, given its mounting deficit and weakening currency. The power cuts also reduce the country's industrial output, further tilting the trade balance.

The economic uncertainty has put pressure on the rupee, which had traded at about 60 rupees to the US dollar for the past five years. Earlier this month, the currency sunk past 70 rupees to the dollar, a 14 per cent decline in just two months. That drop has made fuel and food imports even more expensive, adding to people's woes. Meanwhile, state-regulated prices for petrol, diesel and compressed natural gas have been steadily creeping up, amid pressure from the International Monetary Fund and the World Bank to ease subsidies - which the Pakistan government has long supported but can no longer afford - across the board.

"Such untargeted subsidies all too often result in inflation that hurts poor people even more," said Mr Floyd. "The World Bank is working with the government of Pakistan... to figure out ways of identifying and targeting the poor... to cope directly with the food and energy crisis." But among Pakistanis, government measures have been deeply unpopular. "Govt Now Drops the Gas Bomb on People", reported The News, one of the country's leading newspapers, on July 1 when the government raised fuel prices by 31 per cent. "Price Hike Goes out of Control", read Dawn, another leading paper.

Top economists here say even larger price rises could be on the cards if the rupee continues to fall and foreign exchange reserves keep dropping. Some worry that another 30 per cent rise in fuel prices could spark major unrest. The economic turmoil is already hurting many Pakistanis, especially in rural areas where most people live on less than $2 a day. On a sweltering afternoon in the frontier city of Quetta, Abdul Majid toiled over a clay oven at his roadside bakery. He said he had been forced to double his prices in the past two months and that, as a result, most customers simply have bought half as much of his bread. "Where we used to go through two 100kg bags of flour a day, now we just go through one," he said. "If this gets any worse, I don't know how we will survive."

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