Pakistan violence threatens to undo growth

Pakistan’s business community is braced for a period of instability in the wake of the assassination of Benazir Bhutto, fearing wide-ranging consequences for an economy that had recently emerged as a promising investment destination.

In the days since the killing of the former prime minister and opposition leader on Thursday, rioting across the country has claimed the lives of at least 40 people. Enraged Bhutto supporters have destroyed banks, railway tracks, stations and private property, paralysing commerce and transport.

“The city of Karachi alone loses at least Rs5bn [$82m, €55m, £41m] a day when the city shuts down,” said Farooq Hasan, the head of Management Association of Pakistan, a private business lobby. That figure does not include the cost of replacing damaged property.

“The fear among businessmen now is that this cycle of violence continues and that will be very bad news for the economy.”

Businessmen have warned that losses will mount significantly if violence spreads from Sindh, of which Karachi is the capital, to other parts of the country, especially the populous neighbouring province of Punjab.

The performance of the Karachi stock exchange (KSE), which reopens on Monday for the first time since Ms Bhutto’s assassination, will give the first tangible indication of the mood among equity investors.

“The question is not so much that of the stock market going down. The issue is really how far, and how bad, are the losses,” said a foreign fund manager in Pakistan. Most brokers expect an ugly session, with the stock market potentially falling by the limit of 5 per cent.

The KSE has been one of the fastest-growing emerging markets in recent years, as US-led western economic support drove robust growth. Despite political uncertainty, it has been one of Asia’s better performers for 2007. At the close on Thursday, the Karachi 100 index was up 47 per cent on the year at 14,772.08 and had set all-time closing highs the previous two sessions.

Over the past five years, Pakistan’s economy has averaged growth of more than 7 per cent, up from about 4 per cent during the 1990s.

Concerns about the impact of the latest violence come on top of fast-rising worries about the knock-on effect of high global oil prices. Since the start of the financial year in July, Pakistan has not raised domestic oil prices despite soaring international energy costs. Economists warn that the government is unlikely to meet its goal of keeping its fiscal deficit at 4 per cent of gross domestic product this financial year.

One western economist, estimating the effect of oil prices on its international trade balance, warned that Pakistan would have to pay an extra $2bn this financial year compared with last if global oil prices remained above $90 a barrel. “The government has simply not dealt with what other countries recognise as a major crisis,” the economist said. “The oil price effect has not been passed on.”

Pakistan’s central bank recently reported that higher oil prices had helped push the current account deficit in the first five months of the financial year up to about $4.8bn, from approximately $4.1bn during the same period a year ago.

Zubair Khan, an economist and former commerce minister, blames political factors. “The government has just tried to pass the buck on to the next regime after elections planned for January,” he said.

In the previous financial year, Pakistan pulled in over $8bn in equity and direct investment and from the privatisation of state assets. However, Mr Khan believes that the country will not be able to reach those levels this year, especially given the prospect of a downgrade by international rating agencies if violence and political disorder increase.

Ordinary Pakistanis are already feeling the pinch. “For every day of work I save Rs300 [$5]. In the past three days I have had no income and we haven’t had enough food in our house,” said Rahim Tariq, an Islamabad taxi driver who has stayed at home for fear of his car being attacked.

“If people turn to rioting more and more, that will only put me out of business,” added Khalid Jamil, a fruit seller whose inventory went rotten because of a dearth of shoppers.

Mr Hasan of Management Association of Pakistan said the future of the economy appeared tied to the fate of President Pervez Musharraf, who over the past year has faced protests from lawyers, members of civil society, journalists and opposition parties. “This infighting has to stop – especially now with so many disturbances – for the economy to be stabilised,” Mr Hasan said.