Pakistan’s next battle is to salvage economy

KARACHI, JULY 14: After avoiding a potential war with India over the Himalayan region of Kashmir, Pakistan's next battle is with a famili...

KARACHI, JULY 14: After avoiding a potential war with India over the Himalayan region of Kashmir, Pakistan’s next battle is with a familiar foe its faltering economy.

The struggle to rehabilitate the economy, still bruised from last year’s nuclear test-related sanctions and heading for more trouble, is an immense task, analysts and economists said. They added the government could not use the conflict around Kashmir’s Kargil sector as an excuse for slowing a reform process promised to donors, as it did by blaming sanctions last year.

"I don’t think they can use Kargil as an excuse. It’s not a valid excuse," said an economist at a Western bank. He said the Kargil situation could have seriously threatened the economy if it had dragged on or turned into a full-blown war, but an early end to the crisis averted that.

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Pakistan and India agreed on Sunday on the modalities of the withdrawal of Moslem militants from the region, paving the way to defuse their worst military stand-off in nearly 30 years. Theeconomist said the key issue would be whether the International Monetary Fund (IMF) was still convinced about Pakistan’s progress on structural reforms and economic targets.

Arshad Arif, research head at First Capital ABN AMRO Equities, said an IMF mission expected next month was unlikely to be satisfied with Pakistan’s performance. "The mission will review exactly what we have done up to June 30. I’m afraid there are major slippages," he said. The IMF resumed a $1.5 billion lending programme to Pakistan in January after the United States and other countries partially lifted sanctions imposed after nuclear tests in May last year. Officials blame the sanctions and suspension of aid that followed the nuclear tests for a potential loss of $8 billion to $10 billion to the economy in investment and trade.

Arif said the most serious slippages had been on promises to widen the tax net and raise energy charges. "We had promised to raise the number of income tax assessees to 1.8 million by June 30. The figure is1.5 million," he said.

Arif said plans to introduce an agriculture tax and a general sales tax at retail level also remained unfulfilled. "Increases in power and gas tariffs were also not implemented despite agreeing to them with the IMF in the policy framework paper."

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The economist said Kargil had caused uncertainty among domestic and as well as foreign investors already very cautious about investing in Pakistan. He said the government still had a lot to do to revive investor confidence, including resolving a year-old power sector row involving foreign-backed independent power producers (IPPs).

"The IPP row, especially Hubco’s fight with the government, have to be resolved," he said. The government accuses Hub Power Co Ltd of overcharging for the electricity it sells to the state utility. Hubco denies the charge.

Jehanzeb Naseer, research head at Jardine Fleming Pakistan, said conflicts such as Kargil had occurred in other countries but they had still attracted foreign investment. He said thecontinuing IPP row and restrictions on foreign exchange repatriation, partially lifted early this year, had blocked foreign fund inflows. "If you look at Morgan Stanley Asia Index ex-Japan, it has gone up 200 percent since January. Our stock market is up 15 percent. That is what you have missed out," he said.