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Political turmoil to exacerbate Pakistan economy

world Updated: Mar 02, 2009 08:58 IST
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Political turmoil in Pakistan after a court banned the most popular opposition leader running for public office could make the stagnant economy even more dependent on US aid and IMF bailouts.

Thousands of supporters of Nawaz Sharif have rallied across the nuclear-armed country, with mobs setting cars ablaze and clashing with police in the biggest protests against the rule of President Asif Ali Zardari.

Analysts say Pakistan can ill afford a political crisis on top of extremist attacks that have killed more than 1,600 people in under two years, financial crisis and international pressure to prosecute those behind the Mumbai attacks.

As soon as the Supreme Court disqualified Sharif last Wednesday, panic selling wiped five percent off the Karachi Stock Exchange in the worst single-day performance in 32 months.

"The current political crisis will force us to depend even more on the International Monetary Fund (IMF) and accept all its conditions," economist Rauf Nizamani told AFP.

Buffeted by nationwide bombings, insurgency and global financial turmoil, Pakistan was hit last year by 25 percent inflation and saw 10 billion dollars wiped off its international reserves from October 2007 to October 2008.

The country's economic managers had no choice but approach the IMF to stave off a looming balance-of-payments crisis that could have seen the Muslim country of 160 million default on its foreign debts.

The IMF approved a stand-by loan of 7.6 billion dollars for cash-starved Pakistan and released its first tranche of 3.1 billion dollars in November.

This year's fiscal deficit target is 5.5 percent of gross domestic product (GDP), compared to last year's 7.4 percent.

Pakistan's current account deficit was 8.4 percent of GDP last year, which the authorities are trying to get down to 5.5 percent under IMF targets.

The authorities also aim to get inflation down to 20 percent by the end of this fiscal year in July.

In its first quarterly review, the IMF praised Pakistan and noted initial success in stabilising the economy, but it wants a reduction in the deficit and huge borrowings from the central bank.

"The present situation will lead to further political instability, weaken the government's position and increase its dependence on the United States and the IMF," said Yusuf Nazar, an independent economist.

US Senator John Kerry has called on the United States to triple non-military aid to Pakistan to 7.5 billion dollars over five years, warning that "time is running out" to help the civilian government survive.

The Atlantic Council think tank has estimated that Zardari's government has six to 12 months to enact successful security and economic policies or face the prospect of collapse.

Official figures put Pakistan's foreign direct investment (FDI) this year at 3.5 billion dollars compared to 5.2 billion dollars last year.

"The present situation has affected our stocks and will affect future foreign investments," said Nizamani.

Pakistan's economy heavily relies on remittances sent by the more than three million citizens who live abroad, mostly in Britain, the Gulf, North America and Saudi Arabia.

The country received remittances worth 4.28 billion dollars in the first seven months (July-January) of the current fiscal year.

"Pakistanis working overseas are our backbone and send seven billion dollars a year, more than the loans we receive from foreign countries.

"The current situation could stop them from sending money here, which would destroy us even further," Nazar said.

But one political analyst speculated that Zardari was sure of support from abroad which would keep at bay the worst of the potential fallout.

"My thinking is that Zardari went for that move after drawing confidence from the US and the IMF," said Jaffer Ahmed, director of the Pakistan Study Centre at the University of Karachi.