Pakistan's Economic Meltdown
By Riaz Haq
Modern economies and markets are largely driven by business, investor and consumer confidence. The movers and shakers of business and investment world look to the national political and economic leadership and their pronouncements and actions for cues on what is to come. When they sense a lack of competent leadership, their confidence drops and the markets and the economies come crashing down, as has been observed in Pakistan recently.
In his first comments about Pakistani economy since the formation of PPP-PML(N) coalition government, the PPP co-chairman Asif Ali Zardari told a press conference on May 17 that Pakistan's economy is headed toward "meltdown". These remarks came immediately after Finance Minister Ishaq Dar had pulled out of the cabinet on the issue of the
judges restoration. Thereafter, Nawaz Sharif said that Pakistan's ruling coalition had agreed to "expel" President Pervez Musharraf from power, further contributing to market unease.
As the PPP and PML leaderships continue their political posturing, the larger story is the massive loss of confidence by business/investment community in Pakistan. It is worrying to see a sudden halt to foreign
investments and the flight of capital by Pakistani investors to investments elsewhere in the world.
The State Bank has raised interest rates from 10% to 12.5%, the rupee is in free fall, the dollar reserves are disappearing and both S&P and Moody's have cut Pakistan's credit ratings.
KSE 100 index has lost 2992 pts during May 2008 starting at 15122 and ending at 12130. The index has lost 879 pts during the week ended May 30th , 2008, standing at a nine month low.
Credit-default swaps on Pakistan's government debt increased 10 basis points to 530 in Hong Kong, according to Morgan Stanley's prices. That means it costs $530,000 a year to protect $10 million of Pakistan's debt from default for five years.
As Pakistan's foreign currency reserves dwindle, the ability to borrow additional cash has been impaired by Pakistan's credit rating cut for the first time in nine years by S&P and Moody's Investors Service,
which cited "growing economic imbalances and renewed political difficulties."
"The ratings could impact Pakistan's effort to raise debt overseas or sell shares in companies," said Zaheeruddin Khalid, head of research at Al-Meezan Investment Management Ltd. in Karachi, which oversees $270 million in stocks and bonds.
A recent report on Pakistan's Geo TV said that Pakistani real estate companies have been moving capital out of the country to the tune of at least $15 billion so far to invest in Gulf real estate. Such steep
loss of capital will inevitably lead to job losses in Pakistan and contribute to further economic and political instability.
Unfortunately, it takes time and serious effort to create confidence in markets and economy. But it is very quick and easy to destroy such confidence by ill-conceived, impromptu statements. Zardari's comments such as Pakistani economy heading toward a "meltdown" add fuel to the fire and weaken confidence in Pakistan's economy and drive away
investors. What Pakistan needs more than anything else is a sense that the leadership understands the issues and working seriously in a focused manner to resolve the economic issues. They need some sense of political stability and predictability.