Tuesday, January 11, 2011

Pakistan Facing a "Convergence of Risks"

Pakistan Facing a "Convergence of Risks"

Capital raising efforts to aid Pakistan's economic development could be curtailed in the wake of the latest political crisis.

The latest political crisis in Pakistan could hurt the country’s chances of securing IMF loans, resulting in a tough capital raising climate over the next few years, according to Standard Chartered Bank's country economist in Pakistan.

“While the PPP-led government is likely to survive the latest political crisis, it no longer has sufficient support in parliament to pass the tax reforms committed to under the IMF stand-by arrangement,” said Sayem Ali, Standard Chartered Bank’s country economist in Pakistan, in an interview with Suite 101.

Over the course of last week tensions between the ruling government and other parties have intensified after the assassination of Salman Taseer, a key aide of current President Asif Ali Zardari of the PPP. Taseer was governor of Punjab, Pakistan’s largest and most populous province.

Meanwhile, the country is still recovering from devastating floods in September 2010 that left 20 million people displaced and over 6 million people in immediate need of aid. The disaster pushed Pakistan’s economic agenda back, making it more difficult to kick-start growth and create employment opportunities.
Ali says there is an entirely different story on the ground in Pakistan, one about the opportunity for businesses in the country.

Last month, the London Stock Exchange (LSE) hosted its first Pakistan Privatisation and Capital Markets Forum, highlighting the investment opportunities available in Pakistani public and private sector companies to London-based investors.
Ibukun Adebayo, Head of Business Development in South Asia for the LSE said that the exchange, as the world’s most international equity market, was uniquely placed to facilitate investor meetings for some of Pakistan’s leading companies and a chance for London-based investors to see the potential for high growth and returns in Pakistan.
€Attending companies included Pakistan Petroleum, Pakistan Steel, United Bank and others.

Pakistan's government pushes through reforms but loses political capital

If the government cannot push unpopular tax reforms through, the IMF may end the programme prematurely, not releasing a $3.4 billion tranche of the $11.3 billion stand-by arrangement loan. There has been no distribution of funds from the IMF since May 2010.
Ali says the government deserves credit for some of the fiscal reforms passed in the last three years. A domestic power tax was increased by close to 95 percent and petroleum product subsidies were terminated under conditions of the IMF loan agreed to in 2008. As well, exchange rate reforms were passed to stabilise Pakistan’s currency.
“We have seen the government running out of time, the IMF has given until September this year to comply with remaining performance targets, but time is passing for them to push through some difficult reforms,” said Ali.
Economic reforms over the last three years have caused inflation to sky-rocket to 66 percent which in turn has created political instability. Anger over a fuel price hike forced the ruling government in retreat last week and Pakistan’s Prime Minister, Yusuf Raza Gilani, reversed the rise to save a shaky government, bringing allies back into the fold.
Reversal of the fuel hike further increased tensions with the US and various media reports state that Secretary of State Hillary Clinton called the move a “mistake”. US Vice President Joe Biden is expected to visit Pakistan this week.

Funding for Pakistan missing in action

Promised funds from other agencies have been slow in arriving, says Ali, adding that the government of Pakistan says they are owed $2.5 billion dollars under the coalition support fund. This funding was for military services provided by the Pakistani army that were rendered in 2010.
Economic aid in the form of the Kerry-Lugar bill included a pledge of $1.5 billion annual economic assistance, but in the last year since legislation was passed by the US congress, only $500 million has been dispersed, of which $200 million was released just last week and through the UN flood aid appeal.
“I am not really sure what the issues are, but it’s been slow and its made things more complicated for the government for sure,” said Sayem Ali.

He forecasts the slowdown in currency inflows to test the strength of the rupee as major creditors suspend disbursements due to the deteriorating fiscal position, but points to inflation as the immediate

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