Will Pakistani Economy Rebound?

Will Pakistani Economy Rebound?

By Riaz Haq
Amidst major counterinsurgency operations in and around Swat Valley and growing refugee crisis, there are signs of optimism by investors and bond holders in Pakistan’s economy. The KSE-100, Karachi’s stock index, is up 27 percent this year, compared with a 12 percent gain in MSCI’s emerging-market stock index of 26 emerging economies, including Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. The Pakistani rupee, which declined 22 percent against the dollar last year, the second-worst performer in Asia, fell 1.8 percent this year.

Pakistan’s 6.875 percent dollar bond maturing in June 2017 yielded 18.62 percent last month, versus a record high of 26.30 percent on Nov. 3, 2008, according to data compiled by Bloomberg. The price has climbed to 52 cents on the dollar, from as low as 35 cents last year. “Broadly, we believe that it definitely doesn’t look as bleak for Pakistan,” said Joel Kim, who helps oversee $433 billion globally as head of Asian debt at ING Investment Management in Hong Kong. “They’ve passed the worst point. The IMF money has helped stabilize things.” But Pakistan’s bond risk still remains high: Five- year credit default swaps based on Pakistan’s bonds show investors need to pay $2.2 million annually to protect $10 million of Pakistan’s debt for five years, the third-highest in the world, according to CMA Datavision. As recently as June of last year, Pakistan sovereign debt credit default swaps (CDS) traded at 530 basis points in Hong Kong, meaning it cost $530,000 a year to protect $10 million of Pakistan’s debt from default for five years.

Terrorism has cost Pakistan $35 billion in economic losses and damage to infrastructure, according to a statement given to reporters by President Asif Ali Zardari’s aide on April 17. More than 3,500 terrorist incidents have occurred since 2007, killing an average of 84 people per month this year, the aide said.

In addition to the $7.6 billion loan from IMF, Pakistan has been promised $5.3 billion in aid by more than 20 countries to help shore up its economy and combat al-Qaeda and Taliban militants. While the political risk in the country remains high, the flow of loans and aid is helping shore up the nation’s economy. Pakistani business officials say the perception of political risk is overstated and international investors are starting to return.

Strong growth and job creation in both India and Pakistan over the last five years were fueled in large part by huge inflow of cash and investment. Investment accounted for about 39 percent of India’s gross domestic product in fiscal year 2008, up from 25 percent five years ago. At its peak, more than a third of investment came from abroad, according to Credit Suisse. But in the last three months of last year, foreign loans and direct investment in India fell by nearly a third, to their lowest level in more than two years, according to a report in New York Times. Foreign direct investment in Pakistan fell to $5.19 billion in the year ending June 30, 2008, from a record $8.43 billion a year earlier, government data show.

“There is now very early signs of portfolio investment starting to come back,” Asad Umar, the president of Karachi- based Engro Chemical Pakistan Ltd., told Bloomberg TV in a recent interview in New York. “Pakistan is going to come out of it earlier than the rest of the globe.”

The IMF forecasts the economy will expand 2.5 percent in the 12 months ending June 30, the slowest pace in eight years, after growing at an average annual pace of 6.8 percent since 2002. The State Bank of Pakistan forecast in April that economic growth for the year through June will slump to between 2.5 percent and 3.5 percent, far below the 5.5 percent the government has projected — and too slow to create the 2.5m jobs a year for its fast-growing population of about 170 million people. During 2002 to 2007, Pakistan’s economy grew at an average rate of 7% annually, creating about 2.5m jobs a year, barely keeping up with the number of young people ready to join the work force each year, according to Salman Shah, senior economic adviser to former President Musharraf of Pakistan. However, the current economic slowdown has resulted in significant job losses in almost all private sectors of the economy, increasing visible signs of poverty. According to a BBC report last year, three times a day, hundreds of men, women and children line up outside dozens of Karachi restaurants for meals which are paid for by philanthropists and charity donors. These lines were considerably shorter, or non-existent until early 2008. Many of those lining up are industrial workers who have lost their jobs.

Pakistan’s future, as India’s, lies in the nation’s ability to move workers from farms to manufacturing and in engaging more with the world rather than retreating from it. Pakistan, like India, also is relatively light on exports as a part of the overall economy. In Pakistan, exports account for less than 15% of gross domestic product, according to Shah, compared with about 25% in India and 40% in China. While India’s economy must create 11-12 million new million jobs a year, Pakistan’s economy needs to add 2.5-3 million jobs annually to employ all the young people entering the job market each year.

Ms. Ann Patterson, the US ambassador to Pakistan, believes that ultimately the security will depend on economic growth in Pakistan. She is working on a U.S.-sponsored investment-aid-trade based economic revival that would help offset the resentment created by America’s “12- year divorce” from the region after the first Afghan War. “We’re trying to get people to see that we’re committed by helping with investment, Patterson told Forbes magazine, “because you meet older people and they will say to you, “Oh, I remember dam such-and-such, and the Americans built that.” That’s the kind of synergy we look for, because it builds goodwill for both of us.”

Regardless of the foreign assistance to deal with the current crisis, I think all Pakistanis must demonstrate their care and concern by donating and volunteering to help the refugees. The key for Pakistani military’s success in defeating the Taliban is in how well Pakistani government can maintain public support for the military action.

Pakistani military’s robust response to the rising militancy appears to be backed by a significant majority of the people. If the Pakistani political leadership can deal with its fall-out, such as the refugee crisis, and sustain the popular support for the ongoing military action, and the government executes a rational set of economic policies, it is quite reasonable to expect an economic rebound within a year. Given strong underlying growth dynamics in South Asia, the negative feedback effects of the global financial crisis should be temporary as well. A relatively rapid rebound can be expected in 2010, with a projected revival of GDP growth to 7 per cent, spurring job growth again.
My Photo Author Riaz Haq is Founder and President of PakAlumni Worldwide. The original article was published at his blog ‘Haq’s Musings’.

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ansaa says:

Pakistan economy should grow and I don’t see any reason for not doing so other than the extremist activities of a group of people who beleive that they are the only ones who are on right path and all others are wrong.  These people think that they can change the world using their guns and suicide bombers. I hope they will start realizing that they are helping the enemies of Pakistan only.

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