By Jorn Madslien
Business reporter, BBC News
A few months ago the Karachi Stock Exchange saw its index of leading shares reach the highest point in its history after a six-year rally.
But as the country's new president, Asif Ali Zardari, takes office the circumstances are very different.
Shares in Pakistani companies have crumbled, losing one-third of their value since April, as investors have fled a country mauled by political upheaval and a violent Islamic insurgency.
The rupee has also taken a Zardari sweeps to victory in Pakistan's presidential election ...
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G8 Finance Ministers discuss soaring oil and food prices ... dive, falling some 20% so far this year to a historic low of 77.45 to the US dollar last week, and inflation has soared to almost 25%.
Big spender
Pakistan has squandered more than $7bn (Ј4bn) of its foreign currency reserves in 10 months and its budget deficit has reached its highest level since the late 1970s.
Much has been blown on arms, with the military accounting for some 15% of government spending.
It has also paid out vast sums in subsidies that have become ever more important, as well as increasingly tricky to maintain, as millions of people face starvation in the face of soaring global food and fuel prices.
The nation is now left with less than $10bn in its foreign currency coffers and its budget deficit stands at $21bn.
Consequently, the country is struggling to pay its debts, though it was recently granted breathing space by Saudi Arabia, which is owed almost $6bn for oil already delivered.
"Saudi Arabia has agreed [in principle] to provide an oil facility, which would defer the payment of part of the oil import bill for Pakistan," explains Masood Ahmed, director of external relations at the International Monetary Fund.
Curbs required
For Pakistan, such concessions are literally about keeping the lights on; industry and households alike are already struggling with lengthy power cuts, which in turn curb economic activity.
President Zardari is urged by the IMF to significantly tighten "both fiscal and monetary policy to contain inflation and reduce the external current account deficit" - in other words, to cut back on both government spending and to raise interest rates to curb consumer spending.
"In particular, fiscal consolidation should include the phasing out of energy subsidies," according to IMF adviser David Hawley.
But although slashing such subsidies would help curb overall spending, it would also push up inflation, the Economist Intelligence Unit points out in its 2008-09 outlook.
And, probably more importantly, they would lead to higher fuel and food prices, which will make it harder to curb the destabilising Islamist insurgency.
Raising taxes does not seem to be a viable solution, for similar reasons.
So President Zardari may be forced to order the sale of some of the family silver. A list of state-owned assets, including companies and resources, that might be put up for sale is already being drawn up.
But foreign investors, spooked by the recent upheaval, may well view such assets with suspicion, even though they also realise their tremendous potential.
Many will be loath to return until the violence is under control and the government is in a position to implement economic reforms, and herein lies the crux.
The unrest in Pakistan is fuelled by economic hardship, which in turn makes investors stay away.
Some observers expect the situation to come to a head, with Pakistan eventually asking the IMF for assistance, though as yet "the authorities have not requested a Fund programme", according to Mr Ahmed.
(BBC)
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