Pakistan’s Unwoven Trade Ties
Pakistan’s share index kept its year-to-date drop to single-digits as after 15 years of denying reciprocal treatment, travel and trade access will be granted to Indian companies and executives as the country embarks on companion bilateral openings with the EU, China and the Gulf Cooperation Council. Commerce between the two is under $3 billion, and the accord aims to soon double the sum. Talks resumed after suspension over the Mumbai terrorist killings by Pakistani radicals and follow signing of a “strategic partnership” with Afghanistan emphasizing economic and security cooperation. Lawmakers and think tanks in Washington have also proposed a free-trade agenda but meet opposition over possible textile export tariff cuts and exemptions. The industry is the biggest overseas earner and generates one-tenth of employment, but has suffered from the withdrawal of duty-free privileges abroad and chronic power shortages at home. The electricity mess has spawned riots and is a major contributor through subsidies and foregone revenue to the 6.5 percent of GDP fiscal deficit. Growth is an anemic 3 percent while inflation is quadruple that figure, and with the IMF program still suspended the central bank recently slashed the benchmark rate 150 basis points. Public finances were further strained by another round of colossal flooding and the government is poised to print money to bridge gaps in advance of next year’s parliamentary elections. Plans for an external bond placement, lately mooted in sukuk form to Gulf and expatriate investors, have been indefinitely shelved as CDS spreads are in the upper ranks of the worldwide distressed list. To promote US appetite recommendations by a foreign assistance task force at the Center for Global Development called for regular dialogue with banks and portfolio managers, along with the expansion of political risk and venture capital offerings through OPIC, which is now run by a former JP Morgan Securities director.
Indian stocks in turn continue to be pummeled by interest rate increases to break inflation near 10 percent as the economy slows toward 7 percent on flagging industrial output. The budget deficit could be 5 percent of GDP after second-half borrowing requirements were raised one-third from the original target, while the current account shortfall will not be readily covered by low foreign direct and portfolio inflows. Banks have revealed poorer earnings as the savings rate ceiling has been liberalized after lengthy debate to sharpen competitive challenges. The rupee has drifted toward 50 with only occasional central bank intervention, accelerating the shift of leading conglomerates toward stronger currency locations. However the Ambani’s Reliance Communications has been caught up in the telecoms scandal, and family dynasties in the political realm are also in a transcendent stage as Sonia Gandhi may anoint her Congress Party offspring to lead its next generation.
