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Will post-Musharraf business spike survive?

ISLAMABAD - WILL post-Musharraf business spike survive? This is the question businessmen, industrialists and investors are pondering over. The Rupee-dollar parity suddenly improved and the bench mark Karachi Stock Exchange KSE-100 index perked up 461 points, the day Musharraf announced his resignation.

Currency

And, Pakistani currency rose Rs1.20 against the greenback to change hands at Rs75.40 from a range of Rs76.60 to Rs76.95 just before the announcement. Dollar came down to Rs74.80/90 during the following days. But it crossed Rs77.00 in the inter bank market and Rs77.50 in the kerb on August 22, before closing at Rs76.10 in the inter bank market that day, as political instability and flight of capital persisted.

"The continuing political instability is adversely impacting value of the Rupee, bankers and forex dealers said. There are hints of the Rupee weakening more unless the government gets a balance of payments solution," which is still not visible on the horizon of external balances. Despite the instability, July offered some positive signals. FDI rose to $341 million in July 2008, up from $194 million in the like month of last year. Home remittances in 2008 rose to a record $6.7 billion, up from $4.91billion in 2007.

Government tax collection in July rose 50 per cent compared like month of 2007. But trade deficit in July widened to $1.6 billion, from $1.1 billion in that month. Trade deficit in whole of fiscal 2008 was record $20 billion plus. The current account deficit (CAD) in July, however, widened to $1.010 billion compared to $816 million in the same month last year. The cad deficit for whole of 2008 was a record $14.036 billion.

Forex reserves

The forex reserves were down to $9.568 billion in August compared $10.0 billion in July, and to a high of $16.5 billion in October, 2007. At this level, the reserves can foot import bill for three months. The oil import bill in fiscal 2008 alone was a record $12.0 billion, compared to $7.0 billion in 2007. Wheat imports cost $800 million. But, major wheat flour shortages still persist. In spite of oil prices easing, Pakistan cannot expect a major reduction in the import bill, because demand is rapidly rising as Pakistan continues to suffer from severe electricity and natural gas shortages. It has severely hit industrial production, services sector, commercial and domestic consumers.

After the initial spike in the economic indicators, following the resignation, earlier in the week, the signals turned mixed to weak within days.

But, after nearly eighteen months of political instability and economic slowdown, business stakeholders were expecting that President Pervez Musharraf's resignation, under threat of parliamentary impeachment, will end uncertainty. The such signals are still quite week. More stability will be required in run up to the election of a new President by around mid-September. However, quick action is immediately needed to improve external balances, re-build declining forex reserves, stabilise value of the Rupee, and check spiralling inflation.

Analysts at home and abroad are expressing disquiet. "Pakistan is in danger of a further downgrade of its 'B2' sovereign credit rating as its foreign exchange reserves are being rapidly depleted. This is how Moody's Investors Service said three days after Musharraf resignation. Moodys had downgraded Pakistan from B1 to B2 in May this year. At that time, the new government had just taken office following Febraury 18 elections that defeated Musharraf's party.

"If the government remains unable to govern effectively, then discount policies and their weak implementation can further set back investor confidence. Delays in the ability of its fiscal authorities to wean themselves away from central bank financing of the budget deficit also represent a formidable obstacle for improving inflationary pressure on the Pakistani Rupee. Moodys said, if it concludes in the coming months, that deterioration in Pakistan's credit fundamentals is becoming irreversible, then negative rating actions may follow.

Basic economic issues, over the last five months of the new Pakistan People Party-led government, seem to have taken a back seat. The question of succession is currently the key issue among the political parties to replace Musharraf. As of now, PPP's Asif Ali Zardari has put himself as the front runner for the Presidency.

"The present situation can have credit rating implications," David Beers, S&P's London-based global head of sovereign ratings says. S&P, on the back of Islamabad's widening budget deficit and a large current account deficit in balance of payments had, in May, reduced the credit rating towards its low-end B with a negative outlook. While the economy has slowed down and deteriorating, five month into the government, the ruling party still has to form a vision, or a strategy to face up to the situation.

Subsidised credit

The Federal Ministers belonging to the second largest Coalition partner - Pakistan Muslim League (N) (PMLN), led by two time Prime Minister Nawaz Sharif - are boycotting the Cabinet for several months. They refuse to re-join the Cabinet unless sixty deposed Judges of the Supreme and High Courts, including Chief Justice Iftikhar Mohammad Chaudhry, are restored to their position. The judges were removed and detained along with their families and grand children in November last year when Musharraf had feared that the supreme Court will disqualify him from the Presidential office.

While the government stays deeply involved in political squabbles, failing to come up even with a short-term strategy to shore up the economy and external balances, State Bank of Pakistan (SBP), the central bank, has just announced expanded plans to boost the stagnating exports. It will provide larger subsidised credit at the 7.5 per cent a year. As against this, the current lending rate for six months tenor is 13.5 per cent, according to Karachi Inter Bank Offered Rate (KIBOR).

Dr Shamshad Akhtar, Governor, SBP has announced increasing the credit through Export Finance Facility (EFF). Funds amounting to Rs358 billion will be made available for export of eligible and specified products during the current fiscal 2009, she says. Under the EFF, SBP will provide commercial banks Rs250 billion for re-lending this year 25 per cent higher than fiscal 2008. The commercial banks will contribute another Rs108 billion from their own resources. Put together the EFF funding will total Rs358 billion .

In addition to EFF, SBP will also provide Rs6 billion at a fixed lending rate of Rs 7 per cent for tenors of two to 7.5 years as Long Term Financing for Export-Oriented Projects (LTF-EOP) in 2009. SBP, and commercial banks provided a separate lending of Rs1.134 billion under the Long Term Financing Facility (LTFF), during six months to June 30, 2008, to exporters for tenors of up to 10 years at concessional rates.