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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: 054 - (25/07/10)

Trouble with the IMF
The Pakistani government has run into serious trouble with the IMF and is postponing a meeting with the Fund, due to its inability to bring the budget deficit down. The IMF demands a maximum deficit of 3.3-3.5%, while the government budget forecasted a 4% deficit; now it is apparent that it will be even more than that, because while the provinces were expected to be 1% in surplus in the planned budget, they have actually drafted their own budgets in deficit. Overall, the deficit might therefore exceed 5% of GDP. The Pakistani government is trying to reconcile data and consider options before meeting the IMF; it is likely that new taxes will be needed. The fiscal mess is compounded by the fact that government institutions (including the army and the presidency) owe a total of US$2 billion in electricity bills; the failure to pay is making the crisis of the power supply sector even worse.

Is Karzai going to bow?
Pakistan is doing somewhat better in it’s regional politics. Signs that Karzai’s Afghan government might be about to bow to Pakistani supremacy have been multiplying in recent weeks, starting with the sacking of the Afghan minister of interior and of the chief of intelligence. Then Afghanistan accepted for the first time the idea of Pakistan imparting training to the Afghan National Army. Finally, Indo-Afghan relations have been cooling noticeably at the same time. If we add the reopening of the Kashmir front, the Indians have all the reasons to be upset. Recent talks about imparting some new dynamism to Indo-Pakistani talks could therefore only fail as they did; under American pressure, the Pakistanis promise more efforts in the same direction, but nobody believes that.

Kayani renewed
The renewal of Armed Forces Chief of Staff Kayani’s mandate for another three years is not really a surprise ; the general had US support and the army was behind him. The official rationale is that the government did not want to change the military commander at a time of war, as that would have been like ‘doing another McChrystal’. The renewal of his mandate, on the other hand, highlights the continuing weakness of Pakistani institutions and the failure of the Pakistani elite to play by its own self-imposed rules. With another three years to go at the top of the armed forces, Kayani is now seen as being on his way to become the most powerful man in the country, a bad omen for Pakistani democracy if anybody still holds any hopes for that. In exchange for its informal support, Washington might be hoping that Kayani will open a new front against the Taliban in North Waziristan, a long-standing American request. US envoy Holbrooke is already reminding the Pakistanis that Washington is still waiting for the Pakistani army to be ready to open the new front. Secretary of State Clinton was in Pakistan recently and unveiled another US$500 million aid package, aimed at muting anti-American sentiment in Pakistan. In reality, there is no indication of a greater Pakistani inclination to comply with American demands. If anything, in recent times Pakistani support for the Taliban in Afghanistan has been increasing. Inside Pakistan, following the outrage caused by some particularly nasty terrorist attacks against Ahmadi sectarian targets and a Sufi shrine, the government has appealed to all political parties to isolate the extremists, but has also renewed an amnesty offer for those willing to renounce violence. There is still evidence that the Pakistani Taliban giving up their fight against the Pakistani state are then being sent to fight on the Afghan front.

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… 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 have 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 relationship between Washington and Islamabad is increasingly strained for other reasons too, 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 for Zardari, had abstained from calling for his resignation until January, but has recently been calling Zardari ‘a danger for democracy’.

In April Zardari finally had to sign the bill which strips him of most of his powers. Without his ability to dissolve Parliament and the authority to appoint the country’s powerful armed services commanders, Zardari is now little more than a titular head of state. He has to rely on his control over the PPP to exercise control over the government. The bill was agreed with Nawaz Sharif’s PML: among other things it removes the ban on Prime Ministers serving more than one term, a step which favours Nawaz whose ambition is exactly the prime ministership. At the same time the bill maintains the immunity of the President while in office. Apart from hopefully marking the end of a bitter struggle between Zardari and Nawaz Sharif, which absorbed much of the government’s energy over the last two years, the bill also marks the rise in power and influence of Prime Minister Gilani, already more respected than the President because of his mediation skills and his image as a moderate. He now has most of the powers taken away from the president. The conflict with the judiciary is not over yet: the Attorney General resigned in protest in April, because the Law Minister was refusing to cooperate in the case of money-laundering which has been re-opened against Zardari. Although the president has immunity, the Supreme Court argues that the investigation has to continue.

While the siege around Zardari tightens all the time, his position inside the PPP is strengthening because the repeated moves of the Supreme Court against him are giving the rank and file the sense that what is going on is a politically motivated move to get the President out, which of course it is.
Conflict between government and the Supreme Court continues as the latter is now reviewing the decision of the parliament to hand over many of the powers of the president to the prime minister; the Court is also continuing to consider cases of corruption involving President Zardari and is asking the government to approach the Swiss authorities for information. On a separate front the Electoral Commission is now talking of substantial reform in the electoral system, in order to prevent future rigging. The Commission was accused in the past of failing to do anything to prevent rigging but whether the planned reforms will be implemented successfully, remains to be seen. After the resignation of the Finance Minister some months ago, a new blow to the financial credibility of the Zardari government has come in June with the resignation of Saleem Raza, head of the State Bank of Pakistan. Particularly damaging was the timing: in the middle of negotiations with the IMF and just days ahead of the release of the national budget. Allegedly Raza felt that the government constrained his ability to operate independently.

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.

Real GDP growth forecasts are now mostly between 2-3% for both the current and coming fiscal years. Significant investment in the electricity generation sector is now coming from USAID, Asian Development Bank, European Investment Bank, World Bank, GTZ. USAID in particular is considering to make ‘transformational’ large scale investments in Pakistan’s energy, water and agricultural sectors, with a medium and long-term impact over the next 10-15 years. The government’s own effort to address the energy crisis continue to be hampered by scandals and political infighting: in April a deal with French form GDF Suez over the import of LNG gas was blocked by allegations of corruption. The growing international propensity to intervene in rescuing Pakistan, risk of course generating dependency and weakening the resolve of the political elite in addressing the structural problems of the Pakistani state. The World Bank reminded this point to everybody in April, stressing how despite pledges that the fiscal deficit would not exceed 4.9% of GDP this year, it is now forecast to reach 5.3%. Progress towards raising the tax/GDP ratio to 15%, as promised by the Pakistani government, is nowhere to be seen and the ratio still stands at 9.2% this year. The Federal Board of Revenue is now trying to implement the VAT, but is facing huge problems because of the dysfunctionalities of the Pakistani state. The verification of invoices and cross-matching of reported sales and purchases is proving very difficult in the presence of an antiquated paper-based system and a modernisation seems difficult to achieve by July, when full VAT implementation is supposed to start.

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. Pakistan's current account deficit for example is improving faster than initially forecast, as exports are recovering somewhat. The central bank has now lowered its forecast for the 2009/10 current account deficit to 3.2-3.8% of GDP, down from the previous 3.7-4.7%. In reality, the rising oil prices are likely to push the current account deficit high again in the coming months. In general, however, the economic climate seems to be improving, as is the mood of investors. The Karachi Stock Exchange has passed the 10,500 mark again in April, mainly due to the renewed interest of foreign investors in the Pakistani oil and gas sector. Imports have fallen from US$18.3 billion to US$15 billion, at a time when remittances have increased. The new economic adviser appointed in March, 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.

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. 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. 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 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. The gap between power demand and supply is widening rather than contracting and now stands at 4,500MW, with supply just at 10,200MW. The old problems have not been resolved: infrastructure is old and defective and causes huge losses, compounded by public and private power theft, which accounts for about a third of the losses; government power generation plants operate well under capacity because of lack of maintenance and shortages of spare parts, which the government cannot afford; private producers do not fully exploit their potential because non-payments are throwing some of them into financial trouble. The new and unforeseen development is the ongoing very dry season, which curtailed the potential of hydropower plants by as much as 4,000MW. Current plans to expand power generation do not address some of the structural problems and might therefore achieve little. Now even China has entered the fray and seems intentioned to build two nuclear power plants in Pakistan, stoking controversy, given the country’s past role in nuclear proliferation. It is also a message to Washington, who refuses to help Pakistan develop its nuclear industry.

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.

The Pakistani government is coming under scrutiny from the IMF because of its slow progress in attaining the goals set by the IMF as conditional to the concession of a US$11.3 billion loan, of which the fifth tranche was released in May. Although economic performance has improved on some accounts, on others of them the trend is still negative. The current account deficit continues to narrow: it was down to US$3 billion for the first 10 months of the financial year, compared to US$9 billion a year earlier. During the same period the trade deficit also narrowed, although not as much: it fell from US$14.2 a year earlier to US$12.2 billion in April. Otherwise the news is not good: foreign investment, running at US$5.4 billion in 2007-8, has been in decline since then and might struggle to reach half that figure in 2009-10; it was US$1.77 billion during the first 10 months of the financial year. Credit to the private sector is also down even compared to a year ago, when the crisis was already ongoing. Moreover, Pakistan’s biggest industry, that of textiles, is under threat because yarn is increasingly being exported to China, where prices are higher, starving local manufacturers of supplies. The government is under pressure to reduce exports, but cotton manufacturers oppose any additional tax on exports.

The government announced moderately positive economic news in June, with GDP growth reaching 4.1% in the last fiscal year, a significant increase from 1.2% in 2008-9. Official unemployment figures do not mean much in Pakistan, but it increased from 5.2% to 5.5%. The agricultural sector did poorly, but manufacturing and services grew more than expected. Foreign exchange reserves have built back up to US$16 billion, from a low of less than US$6 billion in 2008.

The budget itself is a matter of great controversy for a number of reasons. The introduction of a Value Added Tax (VAT) has been delayed to October, causing some rift with the IMF which had expected it to be introduced in July. The general sales tax has been increased from 16% to 17%, but the tax exemption thresholds have been raised significantly and the salaries of government employees raised by 50%, while their pensions have been increased by 15-20%. Most controversial of all, defence expenditure is increasing by 17% from an already very high 4.04% of GDP. It now going to be 4.47% of GDP, that is 20.14% of the Federal Budget. The debt burden of the Pakistani state rises to 55% of GDP, whereas the budget deficit stands at 4%. Of course the rise in defence expenditure has been justified with the fight against insurgents and terrorists, but nonetheless it is clear that the government is trying to appease the military as well as the public servants and feels isolated and vulnerable. The cut in 10% to the salaries of cabinet members is failing to impress anybody, because everybody knows that they all have land and business activities, as well possibly extra-legal incomes and that salaries account for a small part of their resources.

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 under-invested 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 recent 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.

On the energy front, little has moved during June. The Americans have now expressed doubts about the Pakistani-Chinese contract for the construction of two nuclear power stations; it is unlikely that the Chinese will slow because of US objections, but in any case it will take several years for this new source of energy to come on line. Similarly, the deal with Iran over the gas pipeline to Pakistan has been signed, but it is not going to start delivering gas before 2015. US pressure on Pakistan not to sign the deal seems to have been overrun by the country’s desperate need for energy supplies and by the prospect of transit revenue if the pipeline was to be extended to India.




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