DUBAI // Relieved investors helped Pakistani stocks and the country's currency rally as the resignation of president Pervez Musharraf brought an end to a tense and unpredictable political showdown. But even with the crisis behind it, the country's economic challenges are likely to grow, especially if no strong political leadership emerges in the coming months.
"The stock market and the currency markets have given very positive responses, but this is not the end of all issues. This exuberance is going to be short-lived. As we go ahead, a lot of questions will open up," said Imtiaz Gadar, an analyst at KASB Securities based in Karachi. Mr Musharraf announced his resignation yesterday in the face of an impending impeachment motion by the government's ruling coalition, ending his nine years in power in Pakistan.
The initial reaction from investors caused a spike in stock prices in the country. The Karachi Stock Exchange's KSE 100 Index, rose 4.49 per cent to close at 10,719.62, - the strongest rise for the index since its fall from a record peak of 15,600 in April. The Pakistani rupee also touched an intraday high of 2.2 per cent against the dollar as soon as Mr Musharraf's televised address to the nation ended.
However, analysts and traders said the euphoria could fade quickly as problems such as depleted foreign reserves, rising oil prices, food and power shortages and high inflation are unlikely to fade away with Mr Musharraf's departure. Political instability could also quickly return, as members of the coalition now controlling the government have had sharp disagreements on many issues that have up until now taken a back seat to their efforts to depose the former leader.
Pakistan has seen rising rates of foreign investment, especially from Gulf investors. UAE and Pakistani officials are discussing large-scale land sales to UAE investors for agricultural use, and UAE property developers have several projects slated for the port city of Karachi, as well as other parts of the country. Foreign direct investment in Pakistan increased from US$4.48 billion (Dh16.45bn) for the 2005-2006 fiscal year to $8.4bn for the 2006-2007 fiscal year. The trend reversed as political instability shook the country and fell back to $5.19bn in the fiscal year that ended in June.
Still, Pakistan's proximity to the Gulf and close ties with Gulf investors are expected to keep the country in the investment spotlight if it remains relatively stable politically. Adeel Khan, an investment adviser based in the UAE, said the stormy political climate could give foreign investors pause if it continued. "The next big question will be how the foreign investors react to this leadership change."
Mr Khan said Gulf investors could be "a little nervous" going into corporate investments in Pakistan as they traditionally preferred to deal with strong leaders like Benazir Bhutto, Nawaz Sharif and Mr Musharraf. "I spoke to some energy firms and they are sceptical about investments in Pakistan," he said, and added that the major worries for investors was bureaucratic red tape and compliance of international arbitration laws in Pakistan.
"Investors like their problems solved on the ground and stronger country heads can do that in Pakistan," he said. Pakistan's foreign exchange reserves at the end of June stood at $13.28bn, falling from $17.02bn at the end of last year. The agriculture sector contributes to about 26 per cent of the country's gross domestic product and Pakistan mainly relies on exports of its two main cash crops, wheat and cotton.
However, the nation is already importing wheat this year and the cotton crop is not expected to do well due to heavy rains, said Ahmed Nabil, the chief operating officer of Javed Omar Vohra and Company, a brokerage and financial advisory firm based in Karachi. "With two cash crops out of the equation, we can't even rely on help from the agriculture sector," he said. Pakistan is facing a severe food shortage, and a lack of adequate supplies of wheat and rice incited food rioting early this year.
Analysts hope the government will now concentrate on the economy. From an economic point of view, the coalition had no excuses now and must erform, said Asad Iqbal, the managing director at Ismail Iqbal Securities. Consumer Price Index (CPI) inflation, which takes the base value of the year 2000, is running at more than 21 per cent, rising from 8.8 per cent at the end of last year. CPI food inflation stood at 32 per cent at the end of June, while non-food inflation reached 13.8 per cent, rising from 6.3 per cent at the beginning of the year.
The country's core inflation, according to the central bank, is 17.2 per cent, up from 8.7 per cent at the start of the year. "What I would like to see right now is the coalition government sticking together to address the economic problems - rising inflation, a widening trade gap and so on," said Sanjay Mathur, an economist at Royal Bank of Scotland. Pakistan's balance of payment on imports has risen from $2.95bn in December last year to $3.44bn within six months.
* With Agencies
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