Pakistan's Economic Crisis Deepens

The Karachi Stock Exchange's 100 share index lost 615.26 points, 4.5%, to an eight month low of 13,011.74. The KSE index is now down 17% from its peak at the end of April amid growing loss of confidence in the country's leadership.

The latest drop in the KSE-100 was triggered by the country's central bank's decision to raise interest rates to 12.5% from 10% to slow the inflation rate. However, the key issue for business and investment community in the last few months has been growing anxiety over the lack of economic and political leadership. Finance Minister Ishaq Dar's ill-advised and ill-timed statements talking down the economy have also contributed to the loss of confidence in the Pakistani markets. The result has been the flight of capital from Pakistan. Instead of continuing to invest in Pakistan, the capital is now flowing away to the Gulf and invested in real estate by Pakistanis.

A recent report on Pakistan’s Geo TV said that Pakistani real estate companies have been moving capital out of the country to the tune of at least $15 billion so far to invest in Gulf real estate. Such steep loss of capital will inevitably lead to job losses in Pakistan and contribute to further economic and political instability.

As Pakistan's foreign currency reserves dwindle, the ability to borrow additional cash has been impaired by Pakistan's credit rating cut for the first time in nine years by Moody's Investors Service, which cited "growing economic imbalances and renewed political difficulties."

According to Bloomberg, the South Asian nation's foreign-currency sovereign rating was lowered to B2 from B1, one level below Turkmenistan and Jamaica. The ranking on locally-issued debt was also reduced to B2, Moody's said in an e-mailed statement today. This followed the May 15 announcement by Standard and Poor which also cut Pakistan's sovereign debt rating.

"Macroeconomic management and policy formulation remain significantly constrained" given the rivalry between the two main coalition partners -- the Pakistan Peoples' Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N), said Standard & Poor's credit analyst Agost Benard.

"The ratings could impact Pakistan's effort to raise debt overseas or sell shares in companies," said Zaheeruddin Khalid, head of research at Al-Meezan Investment Management Ltd. in Karachi, which oversees $270 million in stocks and bonds.

Credit-default swaps on Pakistan's government debt increased 10 basis points to 530 in Hong Kong, according to Morgan Stanley's prices. That means it costs $530,000 a year to protect $10 million of Pakistan's debt from default for five years.

As the average Pakistanis' suffering deepens with the growing lack of "roti, bijli and paani" (food, electricity and water), the elitist media and the self-proclaimed "civil society" led by the lawyers and the Nawaz league appear to be completely disconnected from the ground realities. They continue to harp on restoring deposed judges and are bent on exacting revenge from Musharraf, regardless of the disastrous consequences of their actions on common people's livelihood.

This coalition, while well-intentioned, now appears to have been a serious negative distraction for Mr. Zardari and the PPP government. It is time for Mr. Zardari and Prime Minister Gillani to acknowledge this reality and get on with focusing on the real priorities of the people to address their basic economic issues of survival.

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