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Journalism of Courage
KARACHI, JUNE 28: The Kashmir conflict could cause long term damage to Pakistan’s ability to attract foreign investment because it reinforces the image of a country which has recurring foreign exchange crises, political instability and a fragile frontier, analysts said today.
"Pakistan could be pigmented for a long time as an unstable country with not only economic and political problems, but also unstable frontiers and, with nuclear capability, the level of risk becomes much higher," said an economist at a foreign bank
They said that if the standoff in Kashmir dragged on for a couple of months, Pakistan stood to miss key budgetary targets for fiscal 1999/2000 (July-June) which had to be met to comply with performance criteria of international donors.
Diplomats and bankers said the United States could, if the standoff worsened, try to delay tranches of a $ 1.56 billion International Monetary Fund credit to add to diplomatic pressure on Pakistan for resolution of the conflict.
"Given Pakistan’s external vulnerability, this will be an expected move by the western donors. The IMF will simply have to say that there are some points in the budget which need further review before releasing the tranches," the economist said.
Pakistan’s cash foreign exchange reserves were last reported at $ 1.68 billion against an expected current account deficit of $ 1.77 billion for fiscal 1999/2000.
But some analysts believe the domestic political stakes are too high for prime minister Nawaz Sharif to be seen bowing to US pressure to withdraw from Kashmir insurgents that Sharif calls Kashmir freedom fighters but which India terms Pakistani-backed infiltrators.
"They (the government) simply can not withdraw their stance though the US is currently busy doing its job, can anybody expect any miracle? well at least we don’t," said Arshad Arif head of research at ABN-Amro equities. Analysts said the economy was starting to show signs of strain just when indications of a revival were getting strong.
"The entire economic activity is in a limbo. In fact… even the Indian traders who were supposed to be seen promoting trade between the two countries have witheld their commitments," Sai Yasin Lakhani, chairman of the Karachi Stock Exchange.
The KSE 100-share index stood at 1,044 today with market capitalisation at 285 billion rupees compared to 1,392 and capitalisation of 367 billion on May 26 when India intensified air and ground operations in its northern Kashmir region.
"The foreign investment will be affected. Money only comes where there is peace and assurance of growth. Foreign investment comes only in a peaceful environment," Lakhani said of the long-term impact of the Kashmir dispute. Foreign investment was more than halved after Pakistan carried out nuclear tests last may in response to tests by India. Official data put direct foreign investment at $ 300.7 million in 1998/99 (July-March), compared with $ 639.9 million in 1997/98.
Pakistan expects inflows of $ 1.3 billion in remittances, $ 500 million in foreign currency deposits and another $ 1 billion in foreign direct investment for 1999/2000.
Bankers said the central bank’s tight vigil on the foreign exchange market since the start of the Kashmir conflict has resulted in most private transactions going underground.
Dealers said the rupee is now valued in the black market at around 55-56 rupees to the dollar against interbank rate of 51.20/51.30, a gap which could push more forex transactions underground.
