Pakistan Economic Growth to Hit a Five Year Low

Pakistan's central bank expects economic growth will come in between 5.5 percent and 6 percent in fiscal 2008, which ends June 30, down from 7 percent the previous year. This forecast comes on the heels of dire talk of economic "meltdown" by the new leadership that is facing serious political instability amid serious differences in the PPP-PML(N) coalition government. The ongoing unease with new leadership is continuing to accelerate loss of confidence in Pakistan's economy by businesses, investors and consumers.

In a quarterly report released Saturday, the State Bank of Pakistan said the economy was showing "increasing signs of stress" as a result of both homegrown and international factors. A disappointing wheat harvest will likely impact the key agriculture sector, while chronic power shortages - both households and businesses face regular load shedding - have slowed industries including steel and textiles, it said.

With the dramatic rise in international commodity prices, the food and fuel subsidies have contributed to the government's rising budget deficit, which the central bank said would reach 6.5 percent to 7 percent. The deficit was just 4.3 percent in fiscal 2007. With imports rising faster than exports, the central bank said Pakistan's current account deficit will rise between 7.3 percent and 7.8 percent - a record high.

State Bank has raised interest rates from 10% to 12.5%, the rupee is in free fall, the dollar reserves are disappearing and both S&P and Moody’s have cut Pakistan’s credit ratings.

KSE 100 index lost 2992 pts during May 2008 starting at 15122 & ending at 12130. The index lost 879 pts during the week ended May 30th , 2008, at a nine month low.

Credit-default swaps on Pakistan's government debt increased 10 basis points to 530 in Hong Kong, according to Morgan Stanley's prices. That means it costs $530,000 a year to protect $10 million of Pakistan's debt from default for five years.

The impact on the working poor is already apparent from the longer lines of people waiting for free food from charities, according to a BBC report. "Laborers started appearing in the beggars' queues some three years ago, and have now become a dominant element," says Mohammad Azeem, who supervises the distribution of food to beggars at Sabri Hotel in Karachi. According to Mr Azeem, the queues have grown longer during the last couple of months that saw the Pakistani rupee shed nearly 10% of its value, undercutting its purchasing power.

In the crisis situation that exists, strong economic and political leadership is needed to rescue the economy from imminent collapse. Unless the PPP and the PML(N) leadership deal with the situation on war footing, Pakistan could slide back to the near bankruptcy situation that existed in 1999 prior to the Musharraf-led coup against Nawaz Sharif's government.