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Political Crisis, Inflation, Power Crisis Hurt Pakistan Economy

  • Nancy-Amelia Collins

Political turmoil in Pakistan, rising inflation and power shortages could derail the country's strong economic performance of the past five years. VOA's Nancy-Amelia Collins reports from Islamabad.

Pakistan has cut its economic growth forecast as its political crisis deepens following last month's assassination of former Prime Minister Benazir Bhutto.

The central bank now expects the economy to grow by seven percent or less in the current fiscal year, instead of the earlier forecast of 7.2 percent.

Ms. Bhutto's assassination while campaigning for national elections sparked riots that forced thousands of businesses to shut until calm returned.

The government estimates the riots caused nearly $2 billion in property damage and lost revenue. Those losses may add to problems some economists say already confronted the country - rising inflation, fiscal and trade deficits, and power shortages.

Faisal Bari, a professor of economics at Lahore's University of Management Sciences, says some of those issues should have been dealt with earlier.

"I think these years that we've had, we'll have to pay for some of the things that we did over the years or didn't do, as in we didn't do the reforms that were required in areas like power, in areas like judiciary, and other areas, property rights, etc.," said Bari.

Ms. Bhutto's death followed months of political turmoil. For much of last year, thousands of people protested against the increasingly unpopular President Pervez Musharraf, and the country also battled rising violence from Islamic militants.

For the past several years, Pakistan's economy has shown robust growth of around seven percent annually. Economists say it was fueled by aid from Washington to help fight terrorism, remittances from Pakistanis working overseas and foreign investment in the country.

Economist Qaisar Bengali says the strong performance was not sustainable, partly because on the consumer side of things, it was the result of easier bank credit. That made it possible for more people to borrow to buy big items such as cars. Bengali says when consumer financing is removed, bank profits decline, automobile sector growth declines, and gross domestic product growth declines.

"And this pattern of consumer-financed growth led to very sharp rise in imports," said Bengali. "Our trade deficit is completely out of control now. It has also created a very high inflation rate. So growth cannot be managed in a way that you have very good numbers for three, four, five years and then those numbers turn into a liability."

The trade deficit, which economists say runs above $10 billion, contributes to higher interest rates, as the nation borrows to cover the deficit.

Bengali says the government's fiscal deficit, expected to be above the earlier forecast of four percent, also adds to the problems.

"The government's current expenditure is running very high, it's a major contributor to inflation," said Bengali. "The government constantly borrows more money from the central bank than it has budgeted for. In the first five months of this fiscal year, they borrowed the entire amount that they were supposed to borrow for the whole year, and they've continued to borrow since then."

The central bank expects inflation to be near seven percent for the year that ends in June, compared with its target rate of 6.5 percent.

Energy problems factor into the economic woes. Bari says the government has not reformed the energy sector to increase private investment in new electricity plants.

As a result, many parts of the country are without power six hours each day.

"The harder reforms that we were supposed to do when going was good were not done and I think the incoming government is going to pay for that in this year and probably the next one," said Bari.

After Ms. Bhutto's death, the government postponed national elections to February 18, instead holding them this week as planned. Some economists say that even if the elections go off without a hitch, and the country's political scene calms down, the economy will provide plenty of challenges to the new government.