Pakistan Business Forecast Report Q1 2009

2009: Unlikely To Prove An Annus Mirabilis

Pakistan will remain besieged on many fronts in the coming year, despite the return to democratic rule. Politically there is still great uncertainty, particularly in view of the growing threat from militants in the northwestern tribal regions. President Asif Ali Zardari will likely face an uphill struggle in convincing Pakistanis that he is the unifying leader that the country desperately needs, not to mention in building the trust of the military. The relationship with the US could also remain strained, in view of continued cross-border attacks from Afghanistan and an ensuing sharpening of anti-American sentiment. Meanwhile, the manifold asymmetries in the economy - perhaps most conspicuously the yawning twin deficits - will constrain the governments fiscal maneuverability, while still elevated inflation prevents the State Bank of Pakistan from relaxing the monetary reins. Islamabad has been seeking some US$10bn in foreign financial assistance to plug the hole in the balance of payments, including from the countrys long-time ally China. Although there are capital inflows on the radar, a key risk is that these do not materialise fast enough to prevent Pakistan from defaulting on upcoming debt payments, including a US$500mn bond maturing in February 2009.

The ominous clouds hovering over Pakistan are unlikely to disperse as we enter 2009, with the economy still in urgent need of stabilisation and the threat posed by Islamist militants reaching critical proportions. During his first month at the helm of the country, President Asif Ali Zardari has been busy trying to solicit urgently-needed funding from multilateral institutions and friendly governments, while addressing regional sensitivities and mending any damage inflicted on Pakistans perceived sovereignty (and public sentiment) by the repeated cross-border attacks of the US military from Afghanistan. Squaring growing external pressures, most notably from the US, to get tougher with the militants (and the countrys increasingly desperate need for external financial assistance) with brewing domestic anti-American sentiment is one of the central balancing acts that Zardari is facing.

The Pakistani economy has been battered on many fronts over 2008, and will likely remain in a mild state of shock over the coming months. A return to the impressive growth rates seen over the past few years - of 6.0-7.0% - looks highly improbable over the short-to-medium term, with the government having to channel its energy towards stabilising key macroeconomic variables. Prime Minister Yousaf Raza Gilanis recently appointed finance advisor Shaukat Tarin stressed that he is more concerned about inflation than a deceleration in growth, stating that 'if we can slow down the growth to maybe three or three and a half percent that is acceptable. BMI has revised its growth prognosis for FY2008/09 and now expects economic expansion to decelerate to 4.0%, from 5.8% in FY2007/08.

The business environment will remain highly challenging in 2009, and reforms to ease the life of enterprises could stall as the government grapples with acute economic and security woes. The latter is likely to dent foreign investment inflows, at a time of receding global risk appetite - with many global companies licking their wounds after the debilitating financial market meltdown in Western markets. Lingering inflationary pressures in conjunction with liquidity is likely to keep credit constricted and impinge on business operations. There is investment in the pipeline to bolster the countrys power generation, however long lead times and human resource constraints are likely to mean that the mismatch between demand and supply will persist for some time still.