Country Report Pakistan July 2009

Outlook for 2009-10

• The reinstatement of the Supreme Court chief justice, Iftikhar Chaudhry, has reduced political tension, and a degree of stability is likely to return in the short term. However, broader political stability will remain elusive.
• The new US policy for Pakistan and Afghanistan encompasses both military strikes on suspected Islamist militants and development assistance, but will also seek co-operation and ???accountability??? from Pakistan.
• Pakistan's acceptance of a US$7.6bn emergency financing package from the IMF means that it will lose a considerable degree of autonomy in setting economic policy.
• The government made good progress in reducing the fiscal deficit in 2008/09 (July-June), but it plans to increase spending in 2009/10. The Economist Intelligence Unit therefore expects the deficit to reach 5.1% of GDP in 2009/10.
• The State Bank of Pakistan (the central bank) expects to see a more marked fall in inflation in the coming months, and as a result will shift its policy bias away from fighting inflation and towards supporting economic growth.
• We forecast that real GDP will expand by only 2.8% in 2009/10, compared with growth of 3.7% in 2008/09.

Monthly review

• A peace deal that had been negotiated between the government and Islamist militants collapsed on June 29th. A militant leader scrapped the deal in protest against US drone attacks and increased army operations in North Waziristan.
• The first ever suicide bombing in Pakistan-administered Kashmir took place in late June. Responsibility for the attack was claimed by Tehrik-i-Taliban Pakistan (the local offshoot of the militant fundamentalist Taliban movement).
• The budget for 2009/10 was released on June 13th. It promises extensive spending to continue combating Islamist militancy, and to provide relief, security and reconstruction efforts for those people displaced by fighting.
• The budget also included modest tax changes. Among other proposals, the government plans to introduce a carbon surcharge on petroleum products, and to extend the reach of value-added tax.
• On June 26th the Asian Development Bank announced that it had approved two loans to Pakistan worth a total of US$500m.
• The economy grew by just 2% year on year (at factor cost) in 2008/09, well below the target of 4.5% and the 4.1% growth rate achieved in 2007/08, according to the Economic Survey 2008/09.

Source: Country Report