Saturday, August 23, 2008

After the General


After the General

Analysts and executives hope Musharraf's exit will lead Pakistan to focus on reviving its shaky economy

Umesh Pandey

With Pakistan's political climate in flux following Gen Pervez Musharraf's resignation from the presidency, the country's business community is seeking ways to revive an ailing economy that has been dragged down by months of political tensions.

Gen Musharraf's resignation on Monday helped pushed the Karachi stock market up, with the benchmark index rising 4.5% on the day following the announcement. The gain was seen as a vote of confidence in the country's future prospects after the market had lost as much as $30 billion in the past three months. At the peak of the political crisis, some investors had stoned the stock exchange building to show their displeasure.

The continued decline in the market had promoted the Securities and Exchange Commission of Pakistan to impose and then remove a 1% daily limit on price declines after stock trading volumes fell to their lowest in a decade.

Opinion remains divided on Gen Musharraf's legacy and impact on Pakistan's economy. Critics point out that he nearly took the country to the brink of a nuclear war in 1999 (during the Kargil conflict with India). Others say that the man who seized power in 2000 had helped push economic growth by bringing in experts from across the world to help spur the economy.

During his seven years of wielding substantial power, Gen Musharraf saw Pakistan's economy grow, but last year he sowed the seeds of his eventual political demise when he fired 60 judges including Supreme Court Chief Justice Iftikhar Muhammed Chaudhry, who remained defiant and challenged the leader at every step.

Gen Musharraf responded by calling an election but his rivals led by the Pakistan People's Party (PPP) come to power along with the party lead by Nawaz Sharif, the former prime minister whom Mr Gen Musharraf deposed.

In 2000, the year after Gen Musharraf seized power, Pakistan's economy began a period of steady growth at 6% annually, or 4% net of the country's population growth.

Gen Musharraf's policies of privatisation and low taxes, together with an influx of foreign aid after the Sept 11, 2001 events, had helped build Pakistan's economy. All this helped Pakistan's stock market to rise by 10 times between 2001 and 2007.

The buoyant economy started to lose steam after Gen Musharraf's grip on power started to loosen amid challenges by the ousted judges.

The country's foreign reserves have fallen by 40% since, and the sharp decline in the equity markets suggested the boom was ending.

Compounding the problems further was the fact that the country is a net importer of oil. Inflation which stood at 8% a year ago, is now at 24%, the highest in Pakistan's history. The stock market is down 33% since April and Pakistan's international credit spreads have widened from 4.1% to 7.4%, according to Bloomberg data.

Economic growth is slowing sharply, while the balance of payments deficit in the fiscal year to June was 9% of gross domestic product, double the previous year's shortfall.

But despite the turbulent times, the stock market and the pictures of joy that the end to the political stalemate, are showing a different picture.

''Clearly we see this as a positive,'' Bloomberg quoted Thomas Harr, a senior currency strategist in Singapore at Standard Chartered. ''There was political uncertainty and now you can say there's a little bit of clearance on that.''

Others agree saying that the country will try to get back on a complete democratic path after this transition phase.

''The government will focus on developmental issues. It will try to attract capital flows,'' said Farhan Rizvi, an economist at JS Global Capital Ltd in Karachi.

But all is not rosy as it seems, Moody's Investors Service this week said it still saw the situation in the country as fragile.

The ratings agency said the stresses that led to the downgrade of Pakistan to B2 from B1 in May 2008 were still present. The rapid depletion of reserves has now emerged as the most imminent risk facing its sovereign ratings and country ceiling, said Aninda Mitra, a senior analyst with Moody's Sovereign Risk Unit.

''Accordingly if, in coming months, Moody's concludes that a deterioration in Pakistan's credit fundamentals is becoming irreversible, then negative rating actions may follow,'' said Mr Mitra.

He said that Gen Musharraf's resignation may help in limiting domestic political polarisation and policy uncertainty, adding that Pakistani authorities now had a narrow window of opportunity for strengthening policy implementation.

The business community, meanwhile, has declared that the government must now devote all its energies to fulfilling the pledges made to the people and give top priority to economic revival.

The resignation of Gen Musharraf was a ''wise decision'' in the prevailing situation to avoid further confrontation between different pillars of state, said Muhammad Ijaz Abbasi, president of the Islamabad Chamber of Commerce and Industry, quoted in the Daily Times newspaper.

The country was confronting serious challenges such as poverty, unemployment, inflation and an economic downturn, and these challenges call for urgent measures to put the country back on track of development and prosperity, he said.

Due to political uncertainty, foreign investors had been reluctant to invest in Pakistan while the country badly needed capital.

Standard & Poor's, another international ratings agency, said that Pakistan's pressing economic problems could take a back seat as officials were caught up in debating the succession to Gen Musharraf, and this could have credit rating implications.

Pakistan's escalating budget deficit and a large current account deficit drove S&P in May to cut the country's credit rating to B, with a negative outlook, which tells the market the rating could go lower.

''They have some very pressing economic policy issues to start dealing with,'' an S&P executive said. ''We don't have a sense that there is anything like a consensus within the government on how to get on top of this, and that's a precarious situation to be in.''

The single B credit rating for Pakistan's sovereign debt is toward the low end of S&P's scale _ deep into speculative-grade junk bond territory.

All this is not good news for foreign investors who have been pouring funds into the country.

As of July this year, net foreign investment inflows were up by 40% to $220 million compared with $157.5 million in July last year. Foreign direct investment was up by 76% to $340.7 million from $193.5 million.

There was an outflow of $120.2 million in July this year compared with outflow of $36 million in July last year.

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