Pakistan's Economic Woes Pose New Threat: WSJ

Pakistan's Economic Woes Pose New Threat
Energy Shortages, Runaway Food Prices
Ignite Public Anger, Test Leadership
By PETER WONACOTT, Wall Street Journal, July 21, 2008; Page A7
Islamabad, Pakistan

Economic turmoil is roiling Pakistan, spawning another daunting test for the country's wobbly leadership.

A key ally of the U.S. in its global fight against al Qaeda and the Taliban, Pakistan is trying to contain an insurgency by Muslim militants that is spreading from border areas with neighboring Afghanistan. The government also is struggling to hold together a shaky coalition of warring political parties.

Now, an onslaught of economic woes threatens to overshadow both these challenges. Pakistan raised prices of fuel products Sunday for the sixth time in five months, by as much as 17%. Runaway food prices, energy shortages and a plunging stock market have hit Pakistanis hard and left the government scrambling to defuse public anger, say officials and analysts.

"The economic issue is rapidly surpassing all other issues," says Shahnaz Wazir Ali, a special assistant to Prime Minister Yousuf Raza Gilani who has helped draft emergency relief measures for the country's poor.

Pakistan's consumer-price index was nearly 22% higher in June than a year earlier. Chronic power outages, which have come during Pakistan's sizzling summer months, have disrupted businesses and helped sour the political mood. Before a modest gain Friday, the main Karachi Stock Exchange index had fallen for 15 straight sessions, triggering a window-smashing rampage at the exchange Thursday by anguished investors.

On Saturday, in his first televised national address since becoming prime minister in March, Mr. Gilani tried to shift much of the economic blame to President Pervez Musharraf, whose military-backed administration ran Pakistan for eight years before the country returned to civilian rule earlier this year.

Mr. Gilani said his government was paying the price for underinvestment in the agriculture and power sectors during Mr. Musharraf's rule. Other problems, such as high inflation stemming from rising global oil and food prices, were beyond Pakistan's control, he added.

The prime minister urged the business community to curb capital flight and instead invest domestically. And he asked the public to reduce its consumption of fuel and cooking oil to reduce imports. Mr. Gilani also promised quick relief for the poor through cash handouts and other new government aid programs.

The current distress marks a substantial shift from the euphoria that followed Pakistan's February elections. After former Prime Minister Benazir Bhutto was assassinated in December, her Pakistan People's Party went on to win the most seats in Parliament, defeating supporters of Mr. Musharraf, a former army general and chief military commander.

The PPP formed a coalition government with the other big electoral victor, the Pakistan Muslim League. That party is led by Nawaz Sharif, also a former prime minister and longtime rival to Ms. Bhutto. But the two key partners quickly fell out over the issue of when and how to reinstate judges Mr. Musharraf sacked last year while they deliberated whether he was eligible to run for another term in office.

In protest over the PPP's reluctance to act, Mr. Sharif's party withdrew from top posts in the coalition government until the judges are reseated. On Saturday, Mr. Gilani, who is a PPP leader, promised that there would be "good news" soon on the judges' issue, but didn't elaborate.

The political bickering has fueled public frustration. In a public-opinion poll released last week, 86% of respondents thought Pakistan was headed in the wrong direction, compared with 59% in June 2007, when Mr. Musharraf was in charge. The survey, conducted by the International Republic Institute, a Washington nonprofit organization, also found that 72% said their economic situation had worsened by June of this year. In a similar poll covering the same period last year, the figure was 34%.

The economic downturn has come just as swiftly. The economy expanded at a 5.8% annual clip for the fiscal year that ended June 30, after growing close to 7% annually during the previous five years. Imports of expensive oil have cut Pakistan's foreign-exchange reserves by more than 35% since last October, widened the country's trade deficit and put pressure on its currency, the rupee, which has touched record lows against the dollar in recent weeks.

Salman Shah, a former finance minister and economic adviser to Mr. Musharraf, says the new government missed opportunities to reassure investors by failing to push ahead with privatization of big state companies or to market bond issues overseas. He also decries the government's push to slow consumer spending, arguing that purchases of mobile phones, televisions and other items had spurred growth in recent years.

"It's like giving your Mercedes to the cook, and he crashes it," Mr. Shah said of the new leadership.

Pakistan raised fuel prices Sunday as it copes with inflation, energy shortages and a plunging stock market.
Some of Pakistan's poor are also calling for more assertive leadership. Mohbullah, a 45-year-old truck driver who goes by a single name, returned to Peshawar this past week after two months on the road, exhausted and having earned just 300 rupees ($4.24) from his trip. Food and bribes at police checkpoints absorbed much of his income, he says.

"The government should come here and listen to our complaints," he says. "Why are we suffering?"

Officials insist help is on the way. Under one relief program, the government has pledged to set aside 50 billion rupees to be extended in monthly payments to the poor. Called the "Benazir Income Support Program," it is the biggest cash handout in Pakistan's history, according to Ms. Ali, the assistant to the prime minister, who helped design it.

The aid initiative has another goal. It could help diminish the allure of joining up with Islamist militants, who commonly offer financial incentives to the families of volunteer suicide bombers, Ms. Ali says. "People who are living better, who can plan for their children's future, are less likely to veer toward extremism," she contends.

Dealing with the insurgency is a central aspect of Islamabad's relations its biggest aid donor: the U.S. Militants have organized under a group called Tehrik-e-Taliban Pakistan and have spread their influence beyond the country's lawless tribal regions to North West Frontier province.

In recent days, Pakistani security forces have pounded strongholds in the northwest with helicopter gunships, seeking to drive insurgents out of towns around the provincial capital of Peshawar.

The U.S. has committed more than $10 billion to Pakistan since the Sept. 11, 2001, attacks. Last week, Sens. Joe Biden (D., Del.) and Richard Lugar (R., Ind.) introduced a bill that would triple the current level of nonmilitary aid to $1.5 billion annually over five years. The money is to be set aside for schools, roads and medical clinics, but the bill would also demand Islamabad provide greater accountability of spending on its counterterrorism efforts.

Mr. Gilani, in his address Saturday, said he was committed to fighting terrorists and ending religious extremism in Pakistan.

But American-led North Atlantic Treaty Organization troops in Afghanistan complain that Islamist insurgents there are crossing Pakistan's border to find sanctuary in tribal areas. A clash with Taliban insurgents last month led to a U.S. air strike on the Afghan-Pakistan border that accidentally killed Pakistani soldiers and inflamed tensions between Islamabad and Washington.

In his speech, Mr. Gilani reiterated that foreign forces wouldn't be allowed to operate inside Pakistan. "No foreign power will be allowed to take action on Pakistan soil," he said. "Any decision or action within its boundary will be taken by the country itself."

Write to Peter Wonacott at

Also See:
Unilateral Action by U.S. a Growing Fear in Pakistan - NYT


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