Bomb Lands Hard on Pakistan Economy

Since last month's tests, Pakistani share prices have dropped 40 percent. Economists see tough times ahead.

It's the economic bomb whose consequences could be far more troubling than the nuclear bomb," says Nasir Bukhari, chief executive of one of the largest brokerage companies in Pakistan. His worst fears came true after the country came under international condemnation for ordering its six nuclear tests May 28 and 30.

A sharp fall in domestic share prices, down by almost 40 percent in the past three weeks, and global credit rating agency Standard and Poor's downgrading of Pakistan's credit rating, have together undermined the outlook for the country's already weak economy.

Despite senior government officials' dismissal of the impact, a host of expected economic sanctions, most notably by the United States, worries Pakistani businesspeople. The US, under the 1994 Glenn amendment, is obliged to discontinue loans to a country that has detonated a nuclear device. Also, the US now must vote against the International Monetary Fund loan to Pakistan. Pakistan relies to a great extent on support from the IMF and the World Bank. In November, the IMF signed a three-year, $1.6 billion loan pact. In return, Pakistan promised to improve economic growth, increase tax collections, work toward lowering inflation, and increase exports.

With reserves at only $1 billion - insufficient to face a run on foreign currency accounts - Pakistan froze those accounts, which bankers estimate constitute a total of $11 billion in deposits.

At the same time, the government has announced a number of measures to cut official expenditures. In a widely publicized move last week, Prime Minister Nawaz Sharif announced his decision to vacate his new, palatial office in Islamabad. The building had been criticized by Sharif's opponents as a blatant example of waste in a country with an annual per capita income of less than $500.

Mr. Sharif has also called upon Pakistanis to pay their taxes in full, and has promised to make the country's economy strong so that it's never under pressure to seek foreign aid. "We have decided to stand on our own feet," Sharif says. Today we have broken the begging bowl and thrown it out."

Western economists say that the decision on foreign currency accounts and Pakistan's poor market conditions are likely to discourage foreign investors until it's clear that the crisis caused by the nuclear tests is over.

However, many Pakistani and foreign businesspeople say that Pakistan now has a strong opportunity to improve its economy. The country has only 1 million income-taxpayers from a population of 140 million. Many Pakistanis openly evade paying. In the past, efforts to impose a retail tax like a value-added tax or federal and state taxes have been strongly resisted.

"The crisis will be a [boost] for the people, who will be pushed toward self-reliance," says Abid Zaidi, a stock-market analyst. He argues that reforms can now be pushed through without much resistance, because business owners will be in no shape to oppose what most Pakistanis see as an essential national interest to help the country.

On the streets of Islamabad, ordinary shopkeepers are keeping their options open. Many say that they will learn to cope with difficulties ahead. Fruit seller Zahid Khan says, "many Pakistanis will rise to the occasion, because many are convinced that this is the right cause. Sacrificing luxury imports may be a necessity, and the crunch will only come if there are food shortages."