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| March 20, 2000 | ||
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| PAKISTAN Limping Along The stock markets are upbeat, but the economy is far from healthy. General Musharraf is faced with some very hard options. By Rory McCarthy in Islamabad
In the coming weeks, Islamabad is expected to renegotiate with the International Monetary Fund (IMF) and unlock the next $280 million tranche of a credit line which has been frozen since the coup. "Obviously there have been expectations of an improvement in the economy going forward," says Saqib Masood, analyst at Jardine Fleming in Karachi. "And in the last two or three months the stock market has been driven by liquidity, with a reduction in interest rates and banks flush with credit." This year's cotton crop has been a bumper 10.5 million bales, huge strides have been made in solving a bitter tariff dispute with power producers and the markets have welcomed the appointment of former Citibank executive Shaukat Aziz as finance minister. Perhaps the markets believe that Pakistan's debt-ridden economy is beginning to turn around. But as Pakistan Chief Executive General Pervez Musharraf realised within a few weeks of taking power, there is no quick fix. "It is clear that the economy is in much worse a condition than we initially thought it to be," Musharraf admitted as he unveiled a bold economic plan in December. The general promised to bring in a broad sales tax, revitalise agriculture, promote smaller industries, encourage oil and gas exploration and cut defence spending by 5 per cent or $140 million. But he has his task cut out. Pakistan's economy is hardly steaming ahead. After growing a sluggish 3.1 per cent in the financial year to June 1999, even the central bank has warned that it is likely to fall short of the targeted 5 per cent growth in the current year. The auto, cement and sugar industries are weak, the Internet and e-commerce revolution appears to have swept past unnoticed and there are still too few signs of new private investment. More than half the country's annual budget is spent on defence and on servicing foreign debt. And the yawning trade deficit, which stood at $1.6 billion in the year ended June 1999, is worsening, and will not be helped by climbing international crude oil prices. As Musharraf and Aziz look ahead at the economy in the coming months the IMF must be foremost on their minds. But as Jardine Fleming's Masood says, before releasing any money the fund will be looking for a contained fiscal deficit, poverty reduction steps and cuts in non-development spending. And if Islamabad can't win over the IMF then other major lenders will probably be reluctant to step in. "To be able to secure funding from the World Bank and ADB (the Asian Development Bank) they need to come to an agreement with the IMF and the sooner the better," says Masood. What lenders will be looking at now is whether the military regime can swallow the bitter pill of the promised retail sales tax, known as the general sales tax (GST), due to come into force from July. The obstacles are huge. No one really knows how much Pakistan's two million small retailers earn and since most escape all taxes they will fiercely resist attempts to make them start reporting their income, particularly if Musharraf uses the army to document the economy as he has suggested. Prime ministers have tried to introduce the tax in the past but failed as store shutters came slamming down across the nation and commercial life dragged to a halt. For Musharraf, who has no electorate to appease, it may be different. "The military does not have to face a political backlash. It is one of the most positive things that can come from this government," says Masood. With less than 2 per cent of Pakistan's 130 million people paying any tax and the IMF watching closely there is no doubting the importance of this step. "The GST will be the No. 1 tax this year," Finance Minister Aziz said last month. The generals have made much of their war on corruption. New accountability courts have been set up and loan defaulters arrested. A small group among the Pakistani elite has outstanding loans worth $4.1 billion, a third of the national budget. Most of the money was borrowed from banks with little or no collateral. Some 50 people have been arrested, including deposed premier Nawaz Sharif's finance minister Ishaq Dar, and $200 million has been reclaimed. But businessmen fear the crackdown will hurt investment and politicians are critical that the army itself has escaped scrutiny. Many in the country argue the military must start to worry about the deeper structural problems holding back the economy. Poverty has actually worsened in the past decade; according to some estimates nearly 40 per cent of the population lives below the poverty line. The World Bank says 59 per cent of the population is illiterate. Hovering over the policy debate is the question of an Islamisation of the economy, after the Supreme Court ruled the charging of interest was un-Islamic and ordered the government to set up an interest-free economy by next year. That pleased Pakistan's many powerful Islamic groups, not the least Jamaat-i-Islami, the country's leading politico-religious group. Others are less convinced and expect the pressure of foreign lenders will encourage Islamabad to put off any decision as it did after lower court rulings in the past. "I think the government is quite modern and will keep in mind the ground realities and Pakistan's place in the world," said one economist at a western investment bank. The ground realities for the generals, four months after they seized power, look difficult. They have the stock market on their side; now they must implement their promises and win over a sceptical international audience.
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 © Living Media India Ltd |
Pakistan's
generals may be running the country but that hasn't upset investors. Since
the military took power in the October coup, Karachi's stock market has
leapt a spectacular 60 per cent with gains across the board. Faced with an
imposing $38 billion foreign debt crisis the military regime has signed
vital rescheduling agreements and is now drawing up a retail sales tax,
long demanded by foreign lenders.