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Today's Paper | December 05, 2024

Published 02 Jan, 2008 12:00am

Bad signals for economy if uncertainty prolongs

ISLAMABAD, Jan 1: Pakistan’s exports, investor confidence, credit rating and debt payment capacity could suffer greatly if the current political uncertainty and law and order situation, particularly in Sindh, prolongs, senior government officials said.

In background discussions, these officials suggest that Pakistan’s image abroad has been the worst victim on last week’s Liaquat Bagh tragedy that killed 22 people, including former Prime Minister Benazir Bhutto, and subsequent 53 deaths and colossal loss to public and private property in violent protests since then.

They said Karachi was the country’s industrial and business capital as well as a port city where violence ad closure of business can cause nervousness among foreign investors.

They said the government was finding it difficult to get enough tanker lorries to shift oil products from port to the pipeline system or to move petroleum products through rail. That means that business and industrial activity is getting affected across the country.

A senior official said Pakistan’s exports were already showing signs of stagnation and a further dent would mean that financing of current account deficit would become difficult.

He said the imports may also be affected but that should not be a cause of concern in the short run. He said almost 1,100 points plunge in the stock market was a clear sign of nervousness in the ranks of domestic and foreign investors.

He agreed that uncertainty surrounding the election date was a major cause of concern.

An economist at the planning commission, requesting anonymity, said a series of events taking place in quick successions have exposed government’s claims of booming economy and it was time for the president and other institutions to ask Shaukat Aziz where the strength of economic fundamentals has gone.

He said the much talked about foreign exchange reserves are on the decline and inflows have also been affected in the recent weeks.

Most of the economists were already worried about the country’s political situation since March this year and followed by ad hocism in dealing with the crucial economic issues, like rising inflation, food shortages and increasing trend in fiscal and current account deficits ahead of Jan 8 general elections, nothing could have been worst than Liaquat Bagh tragedy.

“My worry is that Pakistan’s capacity to repay foreign debts and service its sovereign bonds would become fragile if the current situations goes out of hand even in the short run,” said an economist at a foreign bank.

“The first victim of such a situation is always the investment climate that takes a long effort to improve,” he said, adding that investors even from the friendly countries, like the Gulf would adopt a “wait and see approach” even if they don’t “rethink their investment strategy” towards Pakistan.

Economists believe that the situation could lead to slowdown in foreign inflows both in the shape of remittances and foreign investment.

Last year, foreign investment into Pakistan went beyond $7 billion that coupled with substantial remittances from overseas Pakistanis met current account deficit. The current account deficit has again reached almost $5 billion in the first five months of the current year, almost 15 per cent higher than last year. Any reduction in remittances or the foreign investment could be really problematic.

They said the risks to national economy posed by inflation, food shortages, higher fiscal and current account deficit were real even before the government announced a date for general elections, but “the killing (of Benazir Bhutto) is an extraordinary event which has the potential to cause extraordinary harm to the economy,” a government official said, and added maturity would need to be shown by all the stakeholders.

Dr Ashfaq Hassan Khan, economic adviser to the finance ministry, said it was really a great national tragedy but economy could only be affected when production activity comes to a halt, factories are closed, imports and exports come to a standstill and tax collection becomes difficult.

“If all these things happen on a sustained basis, it is going to be a problem, but I don’t foresee such a scenario on a large scale.” At the moment, it is too early to say about the impact on credit rating and debt repayment capacity, he said, adding the political leadership, particularly those heading the PPP, would never like that to happen with the national economy.

He, however, conceded that such events shy away foreign investment although violent public sentiment at the loss of a national leader was quite a natural element.

“This effects adversely the sentiments of foreign investors who will definitely feel nervous towards Pakistan,” he said.

Analysts suggest the growing agitation following the death of former prime minister apparently meant stronger hostility towards President Musharraf that could increase the risk of default on country’s $2.7 billion sovereign international bonds.

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