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Double trouble in Pakistan

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Points of Essence:

  • A period of uncertainty is looming in Pakistan as the internal political troubles are brewing and financial crisis is hitting it hard. It will be a tough time ahead for Pakistan as foreign investments especially from the GCC countries have slowed down since late 2007 and it is further exacerbated with the downgrading of its credit rating by the International rating agencies S&P and Moody’s. The declining foreign exchange reserves which is currently at just over $8bn are barely enough for 10 weeks of imports and the trade deficit ballooning to 53 percent to $5.5bn between July and September and is expanding, will put Pakistan on a challenging economic outlook.
  • The Islamic financial sector in Pakistan however seemed unfazed by the  recent events as all major Islamic banks in the Gulf including Dubai Islamic Bank, Emirates Global Islamic Bank and Al Baraka Islamic Bank are still operating in the country.

By Yawar Mian in Islamabad

The worsening security situation and a deepening financial crisis are continuing to cause pain and panic in Pakistan, the world’s sixth most populous country. Arabian Business reports on the implications for Gulf investors in the country.

When Benazir Bhutto was assassinated last year, the economic fault lines began to widen in Pakistan. Nearly a year on, suicide bombings have become commonplace, while the Sept 20 attack on the Islamabad Marriott shook the nation and the confidence of investors – many of them recently arrived from the Arabian Gulf.

The Marriott bombing killed more than 50 people and injured over 300. The dead included the Czech Ambassador to Pakistan, a Danish diplomat, three US citizens, four Germans and six Saudis.

The Marriott bombing in Islamabad has shaken the nation and the confidence of foreign investors.

The Marriott bombing in Islamabad has shaken the nation and the confidence of foreign investors.

Abu Dhabi Group will not only keep its routine investment in Pakistan but also explore other areas to ensure economic stability in the country.The UN missions and British nationals working in the country have been advised to evacuate their families, while British Airways has stopped flying to the country until further notice.

Until mid-2007, investors from the GCC were keen to capitalise on opportunities in the evolving and expanding real estate, energy, banking and telecom sectors of Pakistan. Investments of up to $100bn were planned and announced over the next 10 years from state-owned and private sector companies.

Dubai World committed to invest over $20bn, Emaar unveiled real estate developments of $24bn in Karachi and Islamabad, while Al Ghurair Group, Giga Group and the Abu Dhabi Group have built up significant investments in Pakistan.

In the energy sector, a $5bn joint venture Khalifa coastal refinery project was announced by Abu Dhabi’s International Petroleum Investment Company (IPIC).

Pakistan’s telecoms sector has pulled in Omantel, Qtel and Etisalat, while all major Islamic banks in the Gulf including Dubai Islamic Bank, Emirates Global Islamic Bank and Al Baraka Islamic Bank are operating in the country.

Progress on Gulf-backed real estate and infrastructure projects has slowed down since late 2007, as the deteriorating security situation has resulted in a wait-and-see situation.

International rating agencies S&P and Moody’s have downgraded Pakistan’s credit ratings. Foreign exchange reserves currently at just over $8bn are barely enough for 10 weeks of imports and are continuing to shrink, while the trade deficit has gone up by 53 percent to $5.5bn between July and September and could expand further in the coming months.

Domestic troubles have affected the KSE.

Domestic troubles have affected the KSE.

Bad news and rising incidents of suicide bombings have also devastated the Karachi Stock Exchange (KSE), where market capitalisations have more than halved to $36bn over the last five months.

Trading volumes have been reduced to less than one million shares a day from an average of 20 million a few weeks ago, after the authorities decided to freeze the index at 9,144 points on August 27 to avoid a further freefall and panic selling.

Market analysts say that liquidity injection of at least $500m is required to save the KSE from a catastrophe and to absorb the shocks of a global economic and stock market meltdown. KSE is expected to shed between 1500-2000 points as soon as the freeze is lifted and brokers have recommended that it should be extended for another month.

The floor is likely to be lifted after the government manages to muster considerable financial support from friends of Pakistan at a meeting scheduled to be held in Abu Dhabi in late October. Asif Ali Zardari, the newly-elected president of Pakistan said during a recent visit to the US that his government is seeking financial commitment of between $50bn-$100bn over the next five to 10 years to sustain Pakistan’s economy and fight against terrorism.

“In the equity market, portfolio investment from abroad has almost dried up. The global stock situation has not impacted Pakistan so far due to a freeze at KSE.

The government is focusing on increasing remittances and trying to sell stakes in major assets including oil and gas companies,” says Muhammed Asad, chief investment officer at Meezan Investments, a joint venture of investors from Saudi Arabia, UAE and other GCC countries.

The challenges faced by the Pakistan Peoples Party-led government in Islamabad are not limited to suicide bombings and a struggling economy. Amid rising inflation, that has crossed 25 percent and is set to exceed 30 percent over the coming weeks, shortages of food items, electricity and natural gas are hampering productivity and causing unrest in rural parts of the country which get no electricity for up to 18 hours a day.

Pakistan imports more than 70 percent of its oil from the Arabian Gulf, especially from Saudi Arabia, and has been badly hit by the high oil prices over the last two years. The high oil prices bloated the import bill and a request to the Saudi government for deferred payments has not come to fruition.

Oil prices hit a high of $147 per barrel in July 2008 and the government continued to provide heavy subsidies to keep local prices down. Prices have gone down by up to 40 percent since July, and local subsidies have been passed on to consumers.

Despite all the bad news, the government and economic pundits are hoping that things could start getting better next year. The Asian Development Bank (ADB) has released $500m of a $1.5bn economic package, while the State Bank of Pakistan (SBP) injected $683m on Oct 6 into the banking system to provide relief and ease the liquidity crunch.

The SBP has also cut reserve requirements of banks by two basis points to 8 percent and has committed to lend further support.

To expedite the economic reform process, Shaukat Tareen, a former senior banker has been appointed as adviser to prime minister Yousaf Raza Gilani on finance, and the privatisation of state-owned institutions is being streamlined to make them attractive for international investors.

The high oil price is not likely to sustain and as a net importer, Pakistan’s deficit will come down. A new world order is emerging and Pakistan is China’s neighbour, the new government is also working on improving trade and political relations with India.

“The oil concession facility requested from Saudi Arabia now stands at $4bn. Pakistan gets about 110,000 bpd from Saudi Arabia and if it gets credit for at least one year, this could provide substantial relief. The law and order and security situation will play a pivotal role in making things better.

Pakistan imports more than 70  percent of its oil from the Arabian Gulf, especially from the KSA.

There is plenty of petrodollar liquidity in the Gulf and with stability it could once again start flowing into Pakistan. The telecoms, real estate and energy sectors will continue to attract investments from the Gulf if the security situation improves,” says Asad.

In a surprise move, chairman of the Abu Dhabi Group HH Sheikh Nahyan Mabarak Al Nahyan flew down to Islamabad on Oct 9 and assured his group’s long-term support and commitment to Pakistan’s economy.

The Abu Dhabi Group currently has investments of more than $10bn in Pakistan and owns Bank Al Falah, Wateen Telecom, Al Falah Insurance and stakes in WARID Telecom and several real estate and healthcare ventures.

“We are committed to pulling Pakistan out of the global fiscal crisis. Abu Dhabi Group will not only keep its routine investment in Pakistan but also explore other areas to ensure economic stability in the country,” Sheikh Nahyan said.

Shrugging off the current economic downturn in Pakistan, Bank Al Falah is to open 49 new branches across the country and introduce new banking products. It currently has 225 branches in 88 cities.

The Abu Dhabi Group also has a stake in United Bank Ltd, Al Falah Securities, UBL Insurers and has committed to invest $1.2bn through a 50:50 real estate joint venture with the government of Punjab province to build a 73-storey tower in Lahore, which if and when completed will be the highest building in Pakistan.

While the government is waiting for a response to its request made in July to Saudi Arabia to defer oil payments, positive signs have emerged during a visit to Islamabad by Iranian foreign minister Manouchehr Mottaki on Oct 10.

Mottaki said that Iran will consider providing crude oil to Pakistan on deferred payments and will also expedite the formalisation of details on the planned Iran-Pakistan-India (IPI) gas pipeline to meet Pakistan’s rising energy deficit.

Iran could supply crude oil on deferred payments for up to three months but Pakistan is seeking a one-year facility to ease its balance of payments and trade deficit.

Despite opposition from the US to the IPI gas pipeline, Islamabad and Tehran have been negotiating the details of the multibillion-dollar project for several years and are getting closer to signing a gas sales and purchase agreement.

The two countries have now agreed to go ahead with the project even if India is not able to participate in the initial stages, and there is a possibility of China joining the extensive gas supply scheme.

Iran’s assurance to supply crude oil on deferred payments could also trigger a positive response from Saudi Arabia and the GCC states, which have been major investors in Pakistan and host millions of Pakistani expatriate workers. Pakistan is the only nuclear-armed Muslim country in the world and its close proximity and friendly ties with the oil-rich Gulf states are crucial to regional peace and stability.

The GCC and the US may not want Pakistan’s heavy reliance on and alliance with Iran to overtake their good relations with the troubled country.

Saudi Arabia and the UAE, which alongside Pakistan were the only countries to recognise the Taliban government in Afghanistan before the war, could play an instrumental role in a peace deal with the ‘friendly’ Taliban.

Such a deal would prove extremely positive for Pakistan and its economy which has been suffering despite having immense potential for growth and progress. If the war in Afghanistan comes to an end, Pakistan will be in a better position to control the worsening security situation in its northern areas along the more than 1400 km, porous border between the two countries.

Pakistan’s dairy and agriculture sector offers immense opportunities for investment and development to local, regional and international investors.

It has land and water and sector experts say that if enough capital goes into intensive dairy and agriculture projects that are managed properly the results could be extremely lucrative in the medium to long-term. But that has yet to happen.

“Pakistan could easily feed itself and its neighours for a long time to come. I have never seen such fertile land anywhere around the world. In the dairy sector there are several by-products that could be produced to earn three times more profits than cash crops. Pakistan needs help to better manage its resources, particularly the human resources,” says Bill Stevenson, general manager at the Pakistan Dairy Development Company (PDDC).

The PDDC, run by a group of dairy and agriculture experts from New Zealand and Australia, is undertaking an extensive farm development programme across the Punjab and Sindh provinces where investors from the Gulf – including Saudi Arabia, Qatar and the UAE – have acquired land from the government to set up modern dairy development and agriculture ventures.

“Law and order is the key to Pakistan’s future progress and development. At present if the locals do not feel safe then how can foreigners come into the country. People in Pakistan are not used to democracy.

“There is a need for 15-20 years of democratic stability and the process has to sustain.

“The commitment of funding for development projects has to be longer.

“The government has to understand that it takes time to produce results, and the thinking has to be convinced about the need for training and planning for the long term,” says Stevenson.


Written by Suapi Shaffaii

October 20, 2008 at 11:30 am

Posted in General Issue

Tagged with ,

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