World economic crisis pushes Pakistan close to collapse
Sunday, October 19, 2008

ISLAMABAD, Pakistan -- Take a restive, nuclear-armed nation with an untested new government, an escalating Islamic insurgency, long-standing tensions with its neighbors and an economy in free fall for months.

Then add in a global financial crisis. Some analysts and diplomats fear that Pakistan could come to exemplify a perilous new phenomenon: a strategic but unstable state at risk of being pushed to the breaking point by external economic factors.

Government officials insist that Pakistan's economic fundamentals, while weakened, are holding steady. But this politically volatile country of 165 million people, a U.S. ally in the fight against the Taliban and al-Qaida, can ill afford more upheaval.

Pakistan's creditworthiness rating is the second-worst among nations ranked by Standard and Poor's, superior only to that of the Seychelles. Last week, the country's president, political novice Asif Ali Zardari, felt compelled to offer public assurances that "Pakistan is not going bankrupt."

On Monday, armed police surrounded the Karachi stock exchange to prevent a recurrence of stone-throwing rioting by investors that occurred in July.

"The global crisis has really added fuel to the fire," market analyst Muhammad Suhail said. "There was a time window earlier this year to address all this, and we missed it."

At the onset of days of current mayhem in worldwide markets, Pakistan -- a relative economic success story for much of the past decade -- was undergoing a punishing reversal of fortune.

In the past six months, its main stock exchange has lost more than half its value. The national currency, the rupee, stands at historic lows, even with propping up by the state bank, which also intervened to improve market liquidity. Foreign-exchange reserves are dangerously depleted, the budget deficit is at a 10-year high, inflation is running about 25 percent annually and debt obligations are looming large.

From the poorest of the poor to the wealthy elite, Pakistanis are feeling vulnerable and frightened. Some say the state of the economy scares them even more than the threat of terror attacks.

"You know, I can wake up any morning and say to myself, 'OK, God willing, I don't think a suicide bomber is going to find me or my family today,' " said Zeeshan Qadir, a merchant. "But I know for certain it is going to get harder that day to pay my bills."

In a country with a tradition of educating many of its best and brightest in Europe and the United States, an Islamabad society matron -- who did not want her name used because she would feared it would reflect badly on her husband's beleaguered construction company -- bemoaned the now-ruinous cost of overseas tuition for her college-age sons.

"I really dread telling them they may have to come home," she said, twisting the rings adorning her delicate fingers. "But I don't see how we can continue to afford it."

Those at the lowest economic rung, meanwhile, say they no longer can count on charity to see to their basic needs.

"Before, the people who saw me every day would give me enough rupees to buy bread," said a crippled beggar named Mangal, who seeks alms from motorists caught in traffic jams in Rawalpindi, adjacent to the capital, Islamabad. "Now they only give the smallest kind of coin and say, 'Sorry, brother. I don't have much to spare.' "

Even before the global credit crunch began, Pakistan was a tough sell to international investors whose television screens are filled with gruesome images, such as the Sept. 20 truck bombing of the Marriott hotel in the heart of the capital.

The past 12 months also have seen a dramatic upsurge in suicide bombings by Islamic militants, a six-week bout of martial law, the assassination of the country's best-known politician, Benazir Bhutto, and a wrenching transition from the nearly nine-year military rule of Pervez Musharraf.

Now, the government is desperate for an infusion of foreign cash; it is seeking $10 billion in emergency funds from overseas to avoid default. But in light of everyone else's troubles, a bailout might not be forthcoming -- or might not be on the scale that Pakistani officials had hoped.

"The good news is that no one, absolutely no one, wants Pakistan to fail financially -- we all recognize the dangers inherent in that kind of scenario," said a Western diplomat in Islamabad, speaking on condition of anonymity because he was not authorized to speak for his government.

"The bad news is that this is happening at a moment when we lack the level of ability to help that we had even a few weeks ago," the diplomat said. Among Western observers, there is general agreement that a broad financial collapse in Pakistan could paralyze its government and potentially trigger widespread unrest, imperiling efforts to contain Islamic militants in the tribal areas and, by extension, complicating the war in Afghanistan. As well, the country's nuclear arsenal is always a point of concern at times of turmoil, although during past crises, senior Pakistani officials have insisted it is secure.

Mr. Zardari's newly appointed financial adviser, Shaukat Tarin, traveled to Washington, D.C., for the weekend gathering of bankers and finance ministers. High hopes also are being pinned on a meeting in Abu Dhabi later this month of an ad hoc group known as the Friends of Pakistan, which includes Western governments and international organizations.

But the deterioration appears to be accelerating. The Karachi stock market, until earlier this year one of the world's most robustly profitable exchanges, has become a barometer of growing economic distress.

Only six months ago, with share prices at record highs, the exchange's main floor was a sweaty hubbub of deal-making and profit-taking. On a recent day, traders sat listlessly, leaning back in their chairs and chatting into their mobile phones and only glancing now and then at price displays. A few simply rested, head in hands.

After the worldwide collapse of share prices the week before, authorities considered closing the Karachi exchange for two weeks. But it was open for business Monday, albeit with the same strict price controls that have been in place since late August to prevent a further plunge -- and dozens of police with guns and batons patrolling outside.

"Small investors have been absolutely destroyed," said Qasar Qaimkhani, who leads an investors' association, some of whose members gathered outside the exchange Monday to vent frustration and fury.

In attempting to weather the storm, Pakistan has some significant advantages, including a fairly diversified economy. Three million citizens working abroad send home about $6.5 billion in annual remittances. Very few bank assets are tied up in mortgages. The government has begun to move away from subsidies that are a drag on the economy.

Some help is already on the way. Pakistani officials have said the World Bank would provide $1.4 billion this year, mainly earmarked for paying down the budget deficit, and the Asian Development Bank last month approved a $500 million loan to help ease food and fuel prices.

Consumer confidence has eroded steadily. In Karachi, Islamabad and other major cities, there has been a run in recent days on foreign-currency accounts held in Pakistani banks.

First published on October 19, 2008 at 5:12 am