Double trouble in Pakistan

The worsening security situation and a deepening financial crisis are continuing to cause pain and panic in Pakistan, the world's sixth most populous country. Arabian Business reports on the implications for Gulf investors in the country.

When Benazir Bhutto was assassinated last year, the economic fault lines began to widen in Pakistan. Nearly a year on, suicide bombings have become commonplace, while the Sept 20 attack on the Islamabad Marriott shook the nation and the confidence of investors - many of them recently arrived from the Arabian Gulf.

The Marriott bombing killed more than 50 people and injured over 300. The dead included the Czech Ambassador to Pakistan, a Danish diplomat, three US citizens, four Germans and six Saudis.

The UN missions and British nationals working in the country have been advised to evacuate their families, while British Airways has stopped flying to the country until further notice.

Until mid-2007, investors from the GCC were keen to capitalise on opportunities in the evolving and expanding real estate, energy, banking and telecom sectors of Pakistan. Investments of up to $100bn were planned and announced over the next 10 years from state-owned and private sector companies.

Dubai World committed to invest over $20bn, Emaar unveiled real estate developments of $24bn in Karachi and Islamabad, while Al Ghurair Group, Giga Group and the Abu Dhabi Group have built up significant investments in Pakistan.

In the energy sector, a $5bn joint venture Khalifa coastal refinery project was announced by Abu Dhabi's International Petroleum Investment Company (IPIC).

Pakistan's telecoms sector has pulled in Omantel, Qtel and Etisalat, while all major Islamic banks in the Gulf including Dubai Islamic Bank, Emirates Global Islamic Bank and Al Baraka Islamic Bank are operating in the country.

Progress on Gulf-backed real estate and infrastructure projects has slowed down since late 2007, as the deteriorating security situation has resulted in a wait-and-see situation.

International rating agencies S&P and Moody's have downgraded Pakistan's credit ratings. Foreign exchange reserves currently at just over $8bn are barely enough for 10 weeks of imports and are continuing to shrink, while the trade deficit has gone up by 53 percent to $5.5bn between July and September and could expand further in the coming months.

Bad news and rising incidents of suicide bombings have also devastated the Karachi Stock Exchange (KSE), where market capitalisations have more than halved to $36bn over the last five months.

Trading volumes have been reduced to less than one million shares a day from an average of 20 million a few weeks ago, after the authorities decided to freeze the index at 9,144 points on August 27 to avoid a further freefall and panic selling.

Market analysts say that liquidity injection of at least $500m is required to save the KSE from a catastrophe and to absorb the shocks of a global economic and stock market meltdown. KSE is expected to shed between 1500-2000 points as soon as the freeze is lifted and brokers have recommended that it should be extended for another month.

The floor is likely to be lifted after the government manages to muster considerable financial support from friends of Pakistan at a meeting scheduled to be held in Abu Dhabi in late October. Asif Ali Zardari, the newly-elected president of Pakistan said during a recent visit to the US that his government is seeking financial commitment of between $50bn-$100bn over the next five to 10 years to sustain Pakistan's economy and fight against terrorism.

"In the equity market, portfolio investment from abroad has almost dried up. The global stock situation has not impacted Pakistan so far due to a freeze at KSE.

The government is focusing on increasing remittances and trying to sell stakes in major assets including oil and gas companies," says Muhammed Asad, chief investment officer at Meezan Investments, a joint venture of investors from Saudi Arabia, UAE and other GCC countries.

The challenges faced by the Pakistan Peoples Party-led government in Islamabad are not limited to suicide bombings and a struggling economy. Amid rising inflation, that has crossed 25 percent and is set to exceed 30 percent over the coming weeks, shortages of food items, electricity and natural gas are hampering productivity and causing unrest in rural parts of the country which get no electricity for up to 18 hours a day.

Pakistan imports more than 70 percent of its oil from the Arabian Gulf, especially from Saudi Arabia, and has been badly hit by the high oil prices over the last two years. The high oil prices bloated the import bill and a request to the Saudi government for deferred payments has not come to fruition.

Oil prices hit a high of $147 per barrel in July 2008 and the government continued to provide heavy subsidies to keep local prices down. Prices have gone down by up to 40 percent since July, and local subsidies have been passed on to consumers.

Despite all the bad news, the government and economic pundits are hoping that things could start getting better next year. The Asian Development Bank (ADB) has released $500m of a $1.5bn economic package, while the State Bank of Pakistan (SBP) injected $683m on Oct 6 into the banking system to provide relief and ease the liquidity crunch.

The SBP has also cut reserve requirements of banks by two basis points to 8 percent and has committed to lend further support.

To expedite the economic reform process, Shaukat Tareen, a former senior banker has been appointed as adviser to prime minister Yousaf Raza Gilani on finance, and the privatisation of state-owned institutions is being streamlined to make them attractive for international investors.

The high oil price is not likely to sustain and as a net importer, Pakistan's deficit will come down. A new world order is emerging and Pakistan is China's neighbour, the new government is also working on improving trade and political relations with India.

"The oil concession facility requested from Saudi Arabia now stands at $4bn. Pakistan gets about 110,000 bpd from Saudi Arabia and if it gets credit for at least one year, this could provide substantial relief. The law and order and security situation will play a pivotal role in making things better.

READERS' COMMENTS

MORE FROM ARABIANBUSINESS.COM