Business Monitor :::: Pakistan

Political Crisis, Inflation,
Power Crisis Hurt Pakistan Economy

By Nancy-Amelia Collins
Political turmoil in Pakistan, rising inflation and power shortages could derail the country's strong economic performance of the past five years. VOA's Nancy-Amelia Collins reports from Islamabad.

Men push a hand cart loaded with sacks of flour at a market in Lahore, Pakistan, 31 Dec 2007.

Pakistan has cut its economic growth forecast as its political crisis deepens following last month's assassination of former Prime Minister Benazir Bhutto.

The central bank now expects the economy to grow by seven percent or less in the current fiscal year, instead of the earlier forecast of 7.2 percent.

Ms. Bhutto's assassination while campaigning for national elections sparked riots that forced thousands of businesses to shut until calm returned.

The government estimates the riots caused nearly $2 billion in property damage and lost revenue. Those losses may add to problems some economists say already confronted the country - rising inflation, fiscal and trade deficits, and power shortages.

Faisal Bari, a professor of economics at Lahore's University of Management Sciences, says some of those issues should have been dealt with earlier.

"I think these years that we've had, we'll have to pay for some of the things that we did over the years or didn't do, as in we didn't do the reforms that were required in areas like power, in areas like judiciary, and other areas, property rights, etc.," said Bari.

Ms. Bhutto's death followed months of political turmoil. For much of last year, thousands of people protested against the increasingly unpopular President Pervez Musharraf, and the country also battled rising violence from Islamic militants.

Pakistan People's Party activists shout anti-government slogans during a protest to condemn the assassination of former premier Benazir Bhutto in Islamabad, 02 Jan 2008.

For the past several years, Pakistan's economy has shown robust growth of around seven percent annually. Economists say it was fueled by aid from Washington to help fight terrorism, remittances from Pakistanis working overseas and foreign investment in the country.

Economist Qaisar Bengali says the strong performance was not sustainable, partly because on the consumer side of things, it was the result of easier bank credit. That made it possible for more people to borrow to buy big items such as cars. Bengali says when consumer financing is removed, bank profits decline, automobile sector growth declines, and gross domestic product growth declines.

"And this pattern of consumer-financed growth led to very sharp rise in imports," said Bengali. "Our trade deficit is completely out of control now. It has also created a very high inflation rate. So growth cannot be managed in a way that you have very good numbers for three, four, five years and then those numbers turn into a liability."

The trade deficit, which economists say runs above $10 billion, contributes to higher interest rates, as the nation borrows to cover the deficit.

Bengali says the government's fiscal deficit, expected to be above the earlier forecast of four percent, also adds to the problems.

"The government's current expenditure is running very high, it's a major contributor to inflation," said Bengali. "The government constantly borrows more money from the central bank than it has budgeted for. In the first five months of this fiscal year, they borrowed the entire amount that they were supposed to borrow for the whole year, and they've continued to borrow since then."

The central bank expects inflation to be near seven percent for the year that ends in June, compared with its target rate of 6.5 percent.

Energy problems factor into the economic woes. Bari says the government has not reformed the energy sector to increase private investment in new electricity plants.

As a result, many parts of the country are without power six hours each day.

"The harder reforms that we were supposed to do when going was good were not done and I think the incoming government is going to pay for that in this year and probably the next one," said Bari.

After Ms. Bhutto's death, the government postponed national elections to February 18, instead holding them this week as planned. Some economists say that even if the elections go off without a hitch, and the country's political scene calms down, the economy will provide plenty of challenges to the new government.

Foreign Minister Makhdoom Shah Mahmood Qureshi launched the Economic Diplomacy Initiative by holding a meeting with the heads of Chinese companies engaged in business/projects in Pakistan here at the Foreign Office on Monday.

The focus of the meeting was on undertaking increased investments and projects in Pakistan and pre-visit preparations for the forthcoming visit of President Asif Ali Zardari to China. The foreign minister, while acknowledging the significant role played by the Chinese companies in Pakistan's national development, underscored the importance of corporate sector in further improving the economic and commercial content of the Pakistan-China fraternal relationship.

He said that Pakistan and China had developed a comprehensive architecture for economic and project cooperation in various fields like trade, power generation, financial and banking sector, and exploration of natural resources.

Foreign Minister Qureshi emphasized the need to translate this framework into on-ground project implementation on fast-track basis.He described the Government's vision to broaden economic cooperation with China to bring it at par with the excellent political and security relations that existed between the two countries.

The foreign minister said that during his forthcoming visit to China, the president will hold meetings with the heads of Chinese companies and financial institutions. He also assured the Chinese companies of the fullest cooperation and facilitation by the government to promote their businesses in Pakistan.

Pakistan Economy in 2008

Economy - overview: Pakistan, an impoverished and underdeveloped country, has suffered from decades of internal political disputes, low levels of foreign investment, and a costly, ongoing confrontation with neighboring India.

However, IMF-approved government policies, bolstered by generous foreign assistance and renewed access to global markets since 2001, have generated solid macroeconomic recovery the last five years.

The government has made substantial macroeconomic reforms since 2000, most notably privatizing the banking sector.

Poverty levels have decreased by 10% since 2001, and Islamabad has steadily raised development spending in recent years.

Including a 52% real increase in the budget allocation for development in FY07, a necessary step toward reversing the broad underdevelopment of its social sector.

The fiscal deficit - the result of chronically low tax collection and increased spending, including reconstruction costs from the October 2005 earthquake - appears manageable for now. GDP growth, spurred by gains in the industrial and service sectors, remained in the 6-8% range in 2004-07.

Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 before easing to 6.9% in 2007.

The central bank is pursuing tighter monetary policy while trying to preserve growth. Foreign exchange reserves are bolstered by steady worker remittances, but a growing current account deficit - driven by a widening trade gap as import growth outstrips export expansion - could draw down reserves and dampen GDP growth in the medium term.

Release of Global Corruption Report 2008

Transparency International's Global Corruption Report 2008 released on 25th June 2008 analyzes how corruption affects all aspects of the water sector, from water resources management to drinking water services, irrigation and hydropower.

Syed Adil Gilani Chairman, TI Pakistan said that corruption in Pakistan's water sector since decades has been one of the major cause of slow economic development, shortage of power, irrigation as well as potable water. The Water & Power Development Authority (WAPDA) is responsible for major development, operation, distribution and maintaining dams, barrages, irrigation systems, hydropower plants as well as thermal power plants. Pakistan's Indus Basin Irrigation System, the world's largest water diversion scheme with more than 1.6 million kilometers of watercourses, is a prominent example of how corruption pervades economic development and distorts the priorities of infrastructure investment. Rather than counteract the pervasive dynamics of corruption. Pakistan's water sector, like many of those around the world, is fraught with large and small-scale corruption. According to a 2003 and 2006 survey by Transparency International, Pakistan's Water and Power Development Agency is perceived to be the second most corrupt institution in the country. Close to half of the more than 31,000 complaints received by Pakistan's anti-corruption ombudsman in 2002 were related to this one institution. He quoted the World Bank Pakistan water strategy report 2005 admits that top positions in the country's water bureaucracy are sold at a high price.

The Global Corruption Report 2008 reveals, there are several encouraging initiatives from all over the world that demonstrate success in tackling water corruption. This is the pivotal message that more than twenty experts and practitioners emphasize in this report.

The second part of the Global Corruption Report 2008 provides a snapshot of corruption-related developments in thirty-five countries from all world regions.

Pakistan Country report comprises of legal and institutional changes in 2007, application of Public Procurement Rules in Sindh, and the Judicial crises occurred due to 9th March 2007 action against Chief Justice Iftikhar Muhammad Chaudhry, Military Role in grabbing of land, companies, such as the military has held unaccountable power for most of Pakistan's sixty years of existence and the weapons procurement with the secrecy such deals attract - has provided a flourishing channel for corruption.

The GCR 2008 also analysis the scale of the inroads made by the military into 'civilian' sectors of Pakistan's economy, including land, construction, property, manufacture, fertilizers, agriculture, road-building, trucking, etc, and that full generals enjoy individual wealth in excess of US$8.3 million, while President Musharraf has converted US$690,000 of army-granted farmland in Islamabad into US$10.34 million of movable assets.

The report talks about the incident where Justice Chaudhry had reversed the privatization of Pakistan Steel Mills to friends of highest government functionaries and actively pursued the case of the several hundred 'missing persons' Since his appointment in June 2005.