Time for Zardari to meet economic challenge

Posted in Pakistan | 05-Sep-08 | Author: Syed Fazl-e-Haider| Source: Asia Times

A poster showing Asif Ali Zardari, head of the ruling Pakistan People's Party and widower of two-time Prime Minister Benazir Bhutto.

QUETTA, Pakistan - With Asif Ali Zardari's prospects of securing the presidency of Pakistan in Saturday's election looking bright, the country may start to turn aside from the at-times brutal politicking that has wracked the country for the past eight months.

Zardari, the widower of slain former prime minister Benazir Bhutto and co-chairman of the ruling Pakistan People's Party (PPP) has the support of the country's major political parties. Since Bhutto's assassination in late December, economic growth has slowed, inflation has surged, and the stock market's stellar gains of 2007 have been reversed.

A top priority for the new president will be to take measures to tame inflation, which surged to 12% in the fiscal year that ended in June and accelerated to 24.3% in July. Inflation may worsen before it improves, with the impact of rising international oil prices still to be felt.

The poor have been the hardest hit by the rising cost of living, while the relentless surge in prices of essential commodities has eroded the purchasing power of middle- and lower-income groups.

The business community is also struggling to adapt to higher costs, with its ability to compete with counterparts overseas diminishing. Measured against other countries by a business competitiveness index, Pakistan fell 15 positions last year, to 79th position from 64th, according to the annual report of Competitive Support Fund, a joint initiative of the Ministry of Finance and the US Agency for International Development established to reposition Pakistan's economy on a more global competitive footing. The World Economic Forum's Global Competitive Index ranks Pakistan 92nd out of 131 countries.

The drop in the country's competitive rankings will have far-reaching implications for reducing poverty, fiscal and trade balances, inflation and improving economic growth.

Zardari will also be looked to for help in putting the country's stock markets back on track. Political uncertainty and a weak economic outlook have driven the benchmark Karachi Stock Exchange (KSE)-100 share index down 36% this year, making it Asia's third-worst performer, after China and Vietnam. One step would be to reverse the country's deteriorating law and order situation, which has pressured has foreign investors to withdraw their funds from the market.

As discouraging news continued throughout last month, the authorities responded to six consecutive days of heavy losses by setting a floor for the index.

In its latest "Asian Weather Report", US-based Merrill Lynch said Pakistan's problem is politics, although it went on: "It can be argued political noise is nothing new to the country; last year there were over 60 suicide bombings and yet the stock market rose 40%."

Halting the decline in value of the rupee is a further challenge. The currency has slumped about 20% against the US dollar this year, putting it among the world's five worst performers. The falling value makes imports more expensive, helping to widen the trade deficit in July to a record US$20.7 billion.

Zardari, if elected, would replace former president Pervez Musharraf under whom the country's economy grew an average of 7% during the past five years. Growth slowed to 5.8% in the fiscal year ended June 30, the slowest pace since 2003.

The replacement of Musharraf, seen as a strong ally to the US in its "war on terror", may affect the ability of the country to attract billions of dollars in aid and assistance and encourage overseas investors to pour funds back into the stock market and business ventures. Only strong support by the US and European countries for the political leadership in Islamabad can increase the inflows of foreign exchange and promote foreign investment.

Over the past five years, the US has been assisting Pakistan for its key and frontline role in US-led war on terror. The US has been paying reimbursement claims for fuel, food, ammunition and maintenance costs. By 2007, Pakistan had received $5 billion from the US under a "Coalition Support Fund" program for conducting military operations to fight terrorism and receives $300 million per year in American financing of equipment and training.

Zardari has accused Musharraf of misappropriating up to $700 million of US aid out of $1 billion given for supporting the "war on terror", with the army getting only $250 million to $300 million in reimbursements.

He had also claimed that the US aid might have gone to fund rogue members of the country's military intelligence apparatus. Musharraf has dismissed the allegation as "rubbish" and has said that pocketing foreign aid by an individual was not possible because of the systemized way in which it was utilized.

Some US senators had already demanded a scrutiny of their country's military aid to Pakistan, alleging that as much as 70% of assistance to the country had been misspent. Last December, the US senate approved a $785 million aid package for Pakistan without conditions but placed some restrictions on a small portion of military assistance for the fiscal year 2008.

Meanwhile, concern grows over the decline in Pakistan's foreign-exchange reserves, which have fallen to as low as $6.6 billion, enough to cover just three months of imports, according to Standard & Poor's. Moody's Investors Service last week said reserve depletion was the "most imminent risk', according to a Bloomberg report last week.

Seeking to ease pressure on the reserves, Zardari has already sought to convince Saudi Arabia to restore a special oil facility (SOF) to Pakistan. Earlier this year, a Zardari-led delegation including Prime Minister Yusuf Raza Gilani sought the facility of 110,000 barrels a day on two years' credit, worth $4.82 billion.

Saudi Arabia has asked Pakistan to wait for its final response regarding the facility until the election of the new president, according to a report in Pakistan's Daily Times this week, citing sources in the Petroleum Ministry. Saudi Arabia had extended the SOF to Pakistan under former prime minister Nawaz Sharif's government following the imposition of economic sanctions against Pakistan when it conducted nuclear tests in May 1998. The facility was later converted into a credit facility.

At present, Pakistan imports oil from Saudi Arabia on 30 days' credit facility, a report on the newspaper's website said last month.

The United Arab Emirates has also agreed to continue to provide oil to Pakistan on extended payment terms. Pakistan imports over 80% of its annual oil requirements from the Arab states including Saudi Arabia, Abu Dhabi, Qatar and Iran.

Syed Fazl-e-Haider, sfazlehaider05@yahoo.com, is a Quetta-based development analyst in Pakistan. He is the author of six books, including The Economic Development of Balochistan, published in May 2004.