Pakistan’s Supreme Dilemma Dare
Pakistani shares stayed detached from the rest of Asia’s run-up as the IMF, which dropped its stand-by arrangement on poor tax compliance, sounded the Article IV report alarm on “considerable downside risks” mirroring the political standoff between the Supreme Court and government over corruption charges and military infighting over fighting the internal and cross-border Afghan insurgency. The prime minister has been held in judicial contempt as President Zardari struggles to complete his term on ill health and slim parliamentary party control. Relations with the US have soured after Bin Laden’s elimination, with a NATO report now citing collaboration between the armed forces and Taliban, and the former ambassador to Washington under house arrest for allegedly warning of a civilian overthrow plot. Bilateral security aid, which was previously under scrutiny for accounting irregularities, has been frozen pending a joint State-Defense Department policy review. Over the upcoming election cycle, new economic assistance proposals will remain sidetracked such as import duty relief and additional risk guarantee and venture capital support from OPIC, which is to be reorganized into a Cabinet-level Trade ministry under an Obama Administration initiative. In the past fiscal year GDP growth of 2 percent was three times under the threshold need to absorb fresh labor market entrants. Double-digit inflation persists and poverty incidence is “worrisome” as the central bank has become too “accommodative” on budget deficit financing, according to the Fund. It has spent $2 billion in reserves in recent months propping up the rupee as the external account deteriorates. This year’s GDP expansion should be 3.5 percent on 12 percent consumer inflation, but slower remittances and IMF reimbursement will saddle the balance of payments and the fiscal gap will not meet the 5 percent of output goal “absent corrective measures.”
In its recommendations the lender urged continued post-program monitoring and tax base broadening which could include allowing provinces to raise revenue. Monetary tightening and additional exchange rate flexibility are overdue, and bank supervisors lack sufficient independence as they try to cope with higher industry NPLs. Power shortages are still a critical bottleneck and plans to develop hydro-electric projects are on hold pending rule changes and international commercial and official loans. Investors have exhorted the authorities to copy lessons from the region’s other Muslim giant, Indonesia, which was just awarded another top-notch sovereign upgrade after distressed status a decade ago post-Asia crisis. The economy is advancing at a 6.5 percent clip on consumption and commodity exports and has just passed a long-awaited infrastructure facilitation package designed to trigger a $150 billion building wave in the next two years. However graft and violence pose literal roadblocks there too as a major oil refiner also defaulted on an external bond as a supreme challenge, promoters admit.
