Sweets and stones

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Sep 11th 2008 | DELHI
From The Economist print edition

The economy may be President Zardari’s undoing

AFTER Asif Zardari won the presidency on September 6th, his supporters handed out sweets on the streets of Karachi. They may be the last treats the president can afford to offer. The economy is deteriorating fast. If Mr Zardari is to make a success of his new post, he must soon ask his people to swallow something more astringent. Precisely how vinegary will become clearer on September 12th, when a team from the International Monetary Fund (IMF) arrives in Islamabad to help the government plan an escape route.

When Mr Zardari’s predecessor, Pervez Musharraf, imposed martial law last November, the central bank had about $14 billion of reserves. Now it is the economy that is in a state of emergency. Reserves fell by $260m in the first week of September alone to $5.5 billion, enough to cover only two months of imports. Those imports cost more than they did and Pakistan has yet to come to terms with this awkward fact. In July its food and fuel bill was up by a third from the previous year.

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These measures will be unpopular and painful. Mr Zardari faces “a strong and hostile opposition eager to capitalise on the country’s economic woes,” says Elena Okorotchenko of Standard & Poor’s, a rating agency. The plan by itself will not be enough. “They will also need additional external financing and quite a bit of it,” adds the IMF’s Mr Khan. Saudi Arabia may allow Pakistan to defer payment on the 110,000 barrels of oil it imports from the kingdom each day. The government will also turn to the Asian Development Bank and the World Bank, which may proffer $1.5 billion-2 billion this year, if the government is sufficiently convincing. “If they put the plan together, implement it and get financing, they can prevent a crisis and stabilise the economy,” says the IMF’s Mr Khan. “But that’s a lot of ifs.”

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But Mr Zardari must know that his political survival depends on an economic rescue. For one thing, Pakistan’s army, which has vast business interests, watches the economy as keenly as any credit-rating agency. His new secretary of finance, Waqar Masood, and Shamshad Akhtar, governor of the central bank, are crafting a stabilisation plan. It envisages halving the budget deficit to 4.7% of GDP in the fiscal year that ends in June 2009. Fuel prices, which the government has already raised several times since March, will rise further to eliminate fuel subsidies by the end of the calendar year. Electricity subsidies will be eliminated six months later.

To finance its deficit, the government will stop relying on the central bank—anything it borrows will be repaid within the quarter. Instead, it will sell Treasury bills to banks and the broader public (as well as issuing some Islamic bonds, or sukuk). To find any takers, this debt will have to offer higher rates. The question is how high. Mohsin Khan of the IMF is confident they need not be too punishing. Finally, the government will raise money by privatising some assets, such as the Qadirpur gasfield, and selling more shares in others.

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Its exports are faltering and its shares toxic. The Karachi Stock Exchange, which peaked as late as April, has lost about 40% of its value. In July aggrieved investors pelted the exchange with stones. Foreigners have shown their dismay by withdrawing a net $250m since June.

With the currency sliding to record lows against the dollar and foreign exchange in short supply, bondholders now feel “growing unease” that Pakistan may seek to reschedule its Eurobonds, according to Mushtaq Khan of Citigroup. These bonds were many times oversubscribed when they were issued. But judging by the cost of insuring them against default, they are now the riskiest in the world.

Mr Zardari’s reputation does not inspire confidence that he can get a grip. According to the New York Times, when he was asked how the government should pay for generous price supports for Punjabi wheat farmers, his answer was: “Print the notes”. In recent times the central bank has complied all too readily, which helps explain why inflation was over 24% in July.