By Syed Fazl-e-Haider

KARACHI, Pakistan – As the human cost of Pakistan’s position in the frontline of the “war on terror” grows, the economic burden is also mounting through growing military activity and damage to commercial activity.

In Karachi, the country’s commercial capital and home to a large number of foreigners, the December 28 suicide attack on a procession of Shi’ite Muslims raised security concerns among investors. It was the city’s deadliest attack in over two years, with at least 43 people killed and businesses facing a loss of billions of rupees through the attack itself and from riots that broke out as protesters torched a large number of shops and buildings.

About 5,000 shops are estimated to have been burnt to ashes along with stocks of goods in the city’s Boulton wholesale market, which supplies all types of commodities to the entire country. Preliminary losses are estimated at about 35 billion rupees (US$412 million) and more than 10,000 people have lost their jobs.
The United States has announced financial support of 1 billion rupees for those affected. The funds will be given to the American Business Council (ABC) to help its efforts to support affected small businesses, US ambassador to Pakistan, Anne W Patterson, said in Karachi. Patterson said the violence and destruction that took place in the days after the December 28 attack multiplied the initial bombing tragedy, with businesses, livelihoods and savings of many people destroyed.

The December 28 attack also affected trading activity in other wholesale markets as Boulton serves as a hub for supplying plasticware to the entire country. Many exporters also operate from this market.

Almost all sectors of the economy are already under severe stress due to weak economic growth. The three main sectors – telecoms, power and finance – have lost their attraction to investors due to terrorism.

November was the third consecutive month in which the country posted a decline in foreign direct investment (FDI), and inflows are expected to continue to decline in the coming months, with confidence further undermined as domestic political differences come more to the fore.

FDI dropped by 52% in the July-November period, the first five months of the financial year, to $774 million, compared with $1.62 billion in same period of the previous year.

The cost of last year’s military operation in October against the Taliban and al-Qaeda in the northwest regions bordering Afghanistan is also weighing on the economy. The offensive involved sending 28,000 troops into the South Waziristan tribal area. Officials in Islamabad claim that the fight against militancy is costing Pakistan about $8.5 billion a year.

“Fighting an expensive war has taken its toll on Pakistan,” Bloomberg recently quoted Nasim Beg, who manages 16 billion rupees in stocks and bonds at Arif Habib Investments Ltd in Karachi, as saying. “The positive aspect for the future is that the government took real action against the terrorists in the form of two major operations.”

On the political front, President Asif Ali Zardari faces calls to step down after the Supreme Court struck down an amnesty that had protected the increasingly unpopular leader and several of his political allies from corruption charges.

The National Reconciliation Ordinance was promulgated by former president Pervez Musharraf as a result of a US-brokered deal that allowed former prime minister Benazir Bhutto to return home from self-exile and participate in politics without facing charges. Under the deal, corruption investigations involving up to 8,000 ministers, bureaucrats or politicians from across the spectrum, were stopped.

After the assassination of Benazir Bhutto in December 2007, her husband, Zardari, took over leadership to the Pakistan People’s Party (PPP) and was elected president in September 2008 after Musharraf’s resignation. Zardari faces several corruption cases, including the alleged misappropriation of $1.5 billion and an alleged multimillion dollar money laundering case.

Meanwhile, at the other end of the financial spectrum, double-digit inflation has pushed more people below the poverty line. The consumers price index jumped 10.26% in the five months through December compared with a year earlier. Inflation is likely to rise further as a 13.5% increase in electricity tariffs comes into force from this month under an agreement with the International Monetary Fund, which is lending funds to the country to help it meet its international debt obligations.

The IMF last month disbursed the fourth tranche of $1.2 billion of an $11.3 billion stand-by arrangement for the country. The fund increased its loan to Pakistan last July under an initial $7.6 billion economic program first agreed in November 2008 to avert a balance of payments crisis.

Last month, Moody’s Investors Services maintained Pakistan’s B3 rating, reflecting a gradual stabilization of its economic and financial strength. The rating also reflected the entrenched nature of supply-side constraints and low savings, narrow tax revenues and relatively weak external competitiveness. These drawbacks are reinforced by poor governance, slow policy and administrative reforms, as well as delays in much-needed external assistance.

“Although constitutional order is being restored, Pakistani politics remain fractious and polarized,” said Aninda Mitra, Moody’s sovereign analyst for Pakistan, in his recent analysis. “Ongoing delays in the implementation of important structural, policy and administrative reforms reflect the fears of ensconced, vested interest groups at the cost of broad and sustained gains for the economy as a whole.”

Syed Fazl-e-Haider (www.syedfazlehaider.com) is a development analyst in Pakistan. He is the author of many books, including The Economic Development of Balochistan (2004). He can be contacted at sfazlehaider05@yahoo.com