Neighbours: Pakistan, Limping Along


	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

India Today issue dated March 20, 2000 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.

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.

GENERAL'S SAVING GRACE

It's only a five-hour stopover, almost as if President Bill Clinton were waiting for a connecting flight from Islamabad airport. Though Clinton's decision to drop by in Pakistan on March 25 after his five-day India visit has come as a sigh of relief for Islamabad, the tokenism of the gesture is not lost on political observers. Senior Pakistan officials in fact admitted the Government was worried a refusal by Clinton to call on America's traditional ally in South Asia would have dealt an embarrassing blow to the five-month-old military regime.

Clinton is expected to meet Pakistan's President Muhammad Rafiq Tarar, who has become little more than a figurehead since the October coup, and hold talks with General Pervez Musharraf. Diplomats here see the visit as an effort by Washington to balance its relationships in South Asia at a time of rising tensions and a chance to give Musharraf some support for his promises of political and economic reforms. The general is still desperate for international backing, particularly the reopening of a $1.6 billion creditline from the IMF that was frozen after the coup.
In particular, Islamabad wants Clinton to step in and help find a solution to the Kashmir row, which the US President has already described as one of the hottest flashpoints in the world. Delhi has repeatedly said it sees no place for third-party involvement. Indeed, a day after Washington announced Clinton's Pakistan stopover, the White House ruled out any mediation by the US president in the Kashmir dispute.

Islamabad was quick to insist it had offered no promises to encourage Clinton to call. "The US has never sought, nor has Pakistan given any assurances on any subject," Foreign Ministry spokesman Tariq Altaf told reporters. However, the general is expected to outline plans for local elections and new local government reforms in a key speech on Pakistan's National Day on March 23, just two days before Clinton calls.
Still, Musharraf may find this visit tougher than expected. White House officials have made it clear that Clinton and his team will want to put several issues on the table in Islamabad, some of which are likely to be uncomfortable for Pakistan's generals. Clinton will also discuss the need to avoid a regional arms race and push for steps to tackle terrorism.

Washington wants curbs on the Islamic militant groups fighting in Kashmir, starting with the Harkat-ul-Mujahideen, which it has listed as a terrorist organisation. Yet any attempts by Musharraf to bring in controls over the militants is likely to trigger protests from the powerful religious groups in the country. Already militant groups have warned they will step up their campaign in Kashmir this year and are confident Musharraf will not impose any curbs on their activities. Analysts here say the general will likely tell Clinton he has little control over the actions of the militants.
As Bashir Ahmed, a retired brigadier and head of the Institute of Regional Studies in Islamabad, said, although Clinton is unlikely to find a solution to the five-decade-old Kashmir dispute in a week-long tour, the best hope is that he can start a dialogue between India and Pakistan.

-Rory McCarthy in Islamabad

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