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Key Economic Data 
  2004 2003 2002 Ranking(2004)
Millions of US $ 96,100 82,300 73,300 44
GNI per capita
 US $ 600 520 480 160
Ranking is given out of 208 nations - (data from the World Bank)

Books on Pakistan

Update No: 050 - (25/03/10)

Plugging into Iran
The continuing electricity shortages are becoming a focus of attention in Pakistan, not least because with the coming of the summer the shortages will become even worse. Over the last year or so the government has launched about three new power stations, but relatively small one ones, in the range of 250 MW each. As we speak there is still an estimated shortfall of 4,500 MW; in some rural areas outages can reach 16 hours a day and in the cities 8-10 hours. If the level of water in the reservoirs were to fall, the shortfall might end up being even higher. The utility companies say that they hope to squeeze an additional 2,500 MW by June, in part because the cyclical maintenance and repair is taking place during winter and spring. The great hope is that the agreement signed recently in Ankara between Iran and Pakistan for the construction of a gas pipeline between the two countries will be implemented quickly and without political obstacles; the pipeline is supposed to come online in 2014. The worry derives from Washington’s hostility to the plan; notoriously the Americans are not keen to see Iran’s trade expand, but it is hoped that in this case, given Pakistan’s own difficult predicament, Washington will close at least one eye.

Time for rewards

Having cracked down on the Afghan Taliban leadership inside Pakistan, an old demand of Washington, Islamabad now might feel that it is time to cash in. There is US$1 billion in American aid to the Pakistani army which has not been disbursed yet, in part because of Pakistani lack of compliance with Washington’s demands and in part because of suspicions (and some evidence as well) that in the past, the Pakistanis have diverted equipment and resources meant to fight terrorism to other ends. So far the Pakistanis has lost over US$400 million of US funds due to over billing and insufficient evidence of how the money had been spent. This has created bitterness among the Pakistanis and in the past several months there has been friction between Army and government over collaboration with Washington. Although the Pakistani crackdown on the Afghan insurgents is still difficult to assess, compared to the attitude prevailing until recently it is a major step ahead.

The internal political front is also in movement, with Zardari as usual playing the role of the bad guy. Within the PPP there are new divergences over the transfer of the powers of the President over to the Prime Minister. Gilani is of course in favour, but President Zardari is dragging his feet and delaying the transfer, all to the advantage of Nawaz Sharif and the PML. The transfer of powers should include the authority to make appointments of armed forces chiefs and provincial governors, while the power of the president to dissolve parliament should also be removed.

A new economic manager
The new economic adviser, Abdul Hafeez Shaikh, is expected to enjoy full ministerial powers even if he cannot be appointed minister because he does not sit in the parliament. A respected professional who already served under Musharraf, Shaikh is believed to be going to press for fiscal discipline, stabilise the rupee and lower interest rates. Pakistani manufacturers struggle because of the cost of imports. The IMF pushes for a monetary tightening because inflation has been showing up again in recent months. The stock exchange also suffered a crisis of confidence when negative inflation data started turning up. The consumer prices index reached 13% in February, 0.4 percentage points higher than a month earlier.

Forecast & Summary 2010
The announcement of the success of the South Waziristan operation by the Pakistani army has led to increased pressure from Washington to expand operations to North Waziristan, home to Jalaluddin Haqqani and one of the main regional commands of the Afghan Taliban. Haqqani, however, is one of the most faithful of Pakistan’s clients amongst the Taliban. The idea of taking him on creates very strong resistance within the ranks of the Pakistani army. Although some Pakistani officers hint that Haqqani may no longer serve Pakistan’s interests for having failed to prevent the TTP’s drift towards antagonising the Pakistani security establishment, this seems really a minority view. More common is the refrain that Haqqani will be dealt with after the TTP is destroyed, which however at the current pace of operations might take several years…

The relationship between Washington and Islamabad is increasingly strained, despite President Zardari’s attempt to keep it alive. He is increasingly suspected by the military of playing a double game, whereby he officially protests against American interference and demands help vis-à-vis India, but then colludes with the Americans on imposing tighter and tighter conditions to help, provided to the Pakistani army. The Pakistani bureaucracy has taken matters into its own hands and has been delaying the processing of hundreds of visas of American diplomats and military, probably in the attempt to send a signal to Washington that greater pressure on Islamabad might backfire as well.

Indeed Zardari’s predicament seems to be a difficult one. The army might not be ready to take power directly, but certainly seems inclined to force him out of his job. A major blow to Zardari was the Supreme Court’s repeal of the amnesty for crimes of corruption, which had allowed Zardari to run for office in the waning days of the Musharraf era. Zardari still benefits from immunity as long as he is president, but his political position is weakened. How long can Zardari survive the joint pressure of the army, the judiciary and the political opposition? Zardari is hinting that he might surrender much of his power and revert to a more ceremonial role as in the pre-Musharraf era, a move that could convince the opposition to let him continue in office as President (and enjoy immunity), while focusing on a change of government. Otherwise, the Supreme Court could soon challenge the legitimacy of Zardari’s election.

Although the siege around him is tightening, Zardari seems for the moment to intend to hold on. The Supreme Court ordered the government in January to reopen the case of corruption against the President, whom it claims holds US$600 million in foreign accounts. Zardari had been asked by top state officials to resign in order to avoid the Supreme Court striking and compromising the image of the Pakistani government; they were also concerned that their own names would be exposed as many of them were also covered by Musharraf’s indemnity ordnance too. It is believed that the Pakistan army too advised Zardari to go. Zardari, however, refused. He believes he can hold on, but several observers believe that he is likely to lose the confrontation with the Supreme Court and he might even end up in jail.

Zardari is trying to make himself useful to the Pakistani establishment, if not indispensable, by working to mobilise the international community behind a massive aid programme to Pakistan, aimed at helping it fight the insurgency. He probably hopes that if his name was associated with a major inflow in cash into the country, he would recover a degree of legitimacy. But in the west, any appetite for bankrolling Zardari’s corrupt government is limited; only the prospect of an even less appealing government dominated by Zardari’s rival Nawaz Sharif, can win some support for Zardari.

President Zardari re-emerged from near seclusion towards the end of January and started talking to the press and travelling around the country, probably in an attempt to dispel the feeling that ‘his days were numbered’. However, in yet another display of his lack of political sense, he soon blundered in another hopeless confrontation. Zardari has reportedly been considering the option of referring to the presidential immunity clause in the constitution, in order to ward off the risk of prosecution. However, the position of the Supreme Court seems clear: it had already refused immunity to former president Musharraf on the ground that equality, as taught by Islam, excludes special treatment for anybody. Zardari already lost a confrontation with Chief Justice Chaudhry in February when he tried to appoint two protégés as a Supreme Court judges and Chaudhry resisted. Zardari had to back down and appoint judges acceptable to Chaudhry. Although the Chief Justice himself is coming under criticism by some of his erstwhile allies for his growing political attitude, Zardari’s unpopularity means that few are willing to side with him. Even Prime Minister Gilani, from Zardari’s own party, refused to support his choice of new judges. Zardari insists that the government will keep going until the end of its term and that mid-term elections are ruled out, but the opposition is increasingly aggressive. Nawaz Sharif, the leader of the Pakistani Muslim League and potential replacement of Zardari, had abstained from calling for his resignation until January, but has recently been calling Zardari ‘a danger for democracy’.

The ability of the Pakistani authorities to handle the expanding insurgency is also in doubt. The army has been able to claim ground from the Taliban, but that is hardly a surprise. Will it be able to hold it and to contain the wave of terrorism shaking the country? Many have doubts. Observers were almost universally surprised by the arrest in Karachi of the operational chief of the Afghan Taliban, Mullah Baradar. Mullah Omar’s avowed successor, Baradar is the highest ranking catch by the Pakistani intelligence since 2001. Pakistani and American source converge in attributing the decision to arrest him to months of very strong pressure from Washington. Two other relatively high rank Afghan Taliban were caught at about the same time. Now the question being asked by everybody is: is this the beginning of a determined campaign to hunt down Taliban leaders across Taliban territory or just a one off? Increasingly dependent on Washington aid, Islamabad might have decided that it needed to appease the Americans to an extent; it might also be that the Pakistani services, faced with the possibility of unilateral American actions (such as his physical elimination) decided to opt for the lesser evil and detain Baradar. A third possibility is that the Pakistanis might have decided to hasten the pace of talks between Taliban and the Afghan government, hoping for a positive fall out of successful talks on their side of the border. Holding one of the highest ranking Taliban leaders means that talks can now easily take place at the highest levels.

Most economic forecasts for Pakistan see a modest improvement in the economic predicament for 2010. GDP growth is expected by the ADB to reach 3%, up from 2% in 2009, a forecast shared by the IMF. Inflation is expected to fall to 10% from the 20.8% of 2009. On the economic front the best news of recent months continues to be the steady rise in remittances through official channels. Government sources now estimate that the formal channel accounts for 75% of remittance transfers. Although Pakistani workers are also affected by the international economic crisis, fears about the stability of the banking system in a number of host countries (chiefly the Gulf ones) are providing an incentive to them to transfer as much of their savings back home as possible.

There is a consensus that the government has achieved something in its struggle against inflation, although some of the optimism earlier in the year might have been premature. The Central Bank raised its estimate of inflation for the ongoing financial year (ending June) from 9% to 10-12%, which however would still be a significant gain on the nearly 21% of the previous year. Similarly the current account deficit continues to narrow: in July-December 2009 it stood at US$1.76 billion, compared to US$7.85 billion a year earlier. Imports have fallen from US$18.3 billion to US$15 billion, at a time when remittances have increased.

There are signs of economic recovery in some economic sectors, particularly large scale manufacturing, but the government has so far been unable to make decisive progress in improving the supply of electricity, which is a major constraint to the industry. The cost of the war and a fall in revenue are making fiscal management increasingly complicated. The exchange rate to the dollar has remained quite stable at around Rs 84–85. Private credit is also recovering to some extent. There are few signs, however, that the basic attitude of Pakistani governments has changed: the country remains reliant on the willingness of foreign investors to sort it out. In fact the government might not have developed much capacity to do things itself and fill the gaps, even though the situation in some infrastructural sectors has been disastrous for years. The energy sector is badly in need of widespread repairs as well as of new investment, with about 3,000 megawatts lost each year out of an actual production of 19,000. According to the latest figures from the central bank, overseas direct investment in Pakistan dropped 54.6% in the first seven months of the current fiscal year.

If the national picture shows improvement, in the provinces the outlook is somewhat sombre. In the NWFP in particular, where violence is mostly concentrated, the economy is near to collapse. Many employees have been laid off, potentially adding to instability. Even in more stable environments like Karachi, Pakistan’s economic heart, the viability of economic recovery hangs on sorting out a number of key issues. Power shortages are a major one. The foreign companies like Dubai’s Abraaj, which were brought in to sort the mess out and invest in the badly underinvested sector, are struggling to make a difference. The massive corruption and abuse affecting the sector had deterred investment in the past and the investors from the Gulf might have miscalculated when they decided to move in. The financial crisis in Dubai does not add to the confidence n the ability of the Arabs to have an impact.

The predicament of the Pakistani economy might now be worsened by a resurgent strand of populism in Islamabad. Pakistani government is now trying to shore up its increasingly weak legitimacy and support by raising the banner of economic nationalism. One of the few major foreign investment projects of the last few years, the Reko Diq copper mine, being currently developed jointly by Canada’s Barrick Gold, and Chile’s Antofagasta, risks being cancelled because the government alleges that it was contracted at giveaway prices. Regardless of the merit of the accusations, such a development would represent the death knoll for foreign investment for some years to go.  



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