Pakistan’s Packed Cabinet Purge Purse
Despite the spectacular bin Laden assault, Pakistan shares continued their flat course as a cabinet reshuffle and consolidation demanded by the opposition following the departure of the ruling party’s coalition partner failed to ease political bickering and produce a fiscal reform package needed to unlock the remainder of the IMF’s $11 billion support program. The army had also recommended ministerial changes and combinations to bolster anti-terror credentials and cost-cutting as defense spending and the intersection of military-commercial links come under scrutiny. The Fund had granted a nine-month extension to achieve compliance with tax revenue and VAT introduction targets, as the current arrangement expires with a heavy repayment schedule next year that has kept sovereign CDS at the distressed threshold. The MQM group left the government in January after a fuel subsidy cut designed to satisfy the criteria, but popular outcry and judicial rulings questioning legality provoked immediate retreat. The last $3.5 billion chunk and new post-flood donor commitments which have been slow to materialize are essential to bridging the fiscal deficit that will surpass 8 percent of GDP as growth slumps to 2.5 percent. The roughly $120 billion in debt at 75 percent of national income is divided equally between domestic and external issuance, with servicing costs above $3 billion in the past fiscal year with benchmark interest rates and inflation in double-digits. This year’s rupee outlays have been five times original projections as provisions in the fiscal responsibility law were again breached. To diversify the buyer base, the central bank has increasingly turned to sukuk auctions as Islamic banking assets are at 5 percent of the industry total. The balance of payments has skirted another crisis on aid infusions, with the US approving a new 5-year $1.5 billion annual economic development pipeline, and record worker remittances mainly from the Gulf region. International reserves are close to $18 billion as the currency has steadied at 85 to the dollar.
Sri Lanka’s stock exchange has shown the same trajectory as commercial sovereign debt and international assistance plans are on hold after the UN filed a report accusing the government of human rights abuses in the final civil war victory push against Tamil rebels. The GDP growth forecast has been for another 8 percent on tourism, infrastructure, agriculture and garment advances, and a new tax regime went into effect that should help collection. The current account deficit has widened however, and authorities continue currency intervention amid incremental capital account liberalization. Both South Asian markets, despite lackluster results, are far ahead of Bangladesh’s 30 percent loss as the bottom frontier performer, as retail punters take to the streets to press for official rescue with few remedies available in the cabinet
