Pakistan's troubled finances: Economic blasphemy

In saving itself, Pakistan’s government has jeopardised the economy

Pakistan's troubled finances

ON JANUARY 3rd Pakistan’s central bank began printing rupee notes carrying the signature of Shahid Kardar, who was appointed governor of the State Bank of Pakistan in September. Unfortunately inflation has robbed money of over 15% of its value in the past year, and no let-up is in sight for the new notes. It is the most visible sign of an economy slouching towards another financial crisis. At the start of the year the government raised petrol prices, prompting the Muttahida Qaumi Movement (MQM) to quit the coalition government led by the Pakistan People’s Party (PPP). It left the PPP “with a choice between saving the government and saving the economy,” as Maleeha Lodhi, Pakistan’s former ambassador to the United States and Britain, put it in the News, a Pakistani daily. On January 6th the PPP made its choice, reversing the price rise. The decision has rescued the government but also robbed the exchequer of 5 billion rupees ($58m) a month. By the end of the fiscal year in June, the government’s deficit could reach 6.5% of GDP, according to Sayem Ali of Standard Chartered bank, or even 8% if oil prices continue to rise, according to Mohsin Khan of the Peterson Institute, in Washington, DC.

Pakistan’s budget has a lot to bear. The World Bank reckons that recovering from the summer’s devastating floods, which damaged over 1.6m homes, will cost up to $10.8 billion. To date, aid has been modest. Donors have pledged just $2.1 billion, or $11 per person, compared with $363 per person promised to Haiti after its earthquake —a slightly unfair comparison perhaps. Yet Pakistan’s fiscal troubles are antediluvian. It is one of the most lightly taxed countries in the world. Fewer than a quarter of the country’s firms declare any taxable revenues, and only 11 out of every 1,000 of its citizens pay tax on their incomes, according to the World Bank. As a result, tax revenues amount to a mere 10% of Pakistan’s GDP. The government had hoped to raise that ratio by broadening its sales tax, which is riddled with exemptions. Yet it lacked the heart to defy lobbies which slip through the threadbare tax net. They include exporters who escape tax on their domestic sales, as well as retailers and wholesalers who elude tax altogether. The proposed reforms also proved unpopular with the broader public, who resent paying anything to a government that gives them so little in return.

The government’s failure has jeopardised its agreement with the IMF, which is withholding the remaining $3.5 billion of the bail-out funds it offered back in 2008. At that time, the rupee was tumbling and Pakistan’s foreign-exchange reserves barely covered three weeks’ worth of imports. If the country is not yet in similar trouble, it can thank Pakistani folk abroad, whose remittances surged by 16.8% in the second half of 2010, compared with a year earlier (see chart). This is one reason why the rupee has not sunk further, and why the central bank’s reserves still cover six months’ worth of imports. Yet foreign investment has slowed to a trickle, and higher commodity prices will add to the country’s import bill. Meanwhile, Pakistan’s foreign debt must be serviced. The finance minister is in a pickle. If Pakistanis lose heart, too, they may quit the currency, scrambling for dollars instead. Should that happen, Pakistan’s reserves will quickly vanish. And here is the big difference between 2008 and today: Pakistan has already had its IMF rescue.

Pakistan's fight against the Taliban: The crumbling centre

Pakistan’s religious mainstream makes common cause with militants

Pakistan's fight against the Taliban


THE assassination on January 4th of Salman Taseer by Malik Mumtaz Qadri, a commando in his security detail, contained a chilling message: the Barelvi sect of Islam has become a militant new force in Pakistani politics. Most Pakistanis are Barelvis. They have traditionally disavowed violence, followed the peaceful Sufi traditions of the subcontinent, and paid homage to scores of saints, big and small, at tombs across the country. Mr Qadri is also a Barelvi. But when he determined to “punish” Mr Taseer for supposedly committing blasphemy—the governor of Punjab province had campaigned against Pakistan’s blasphemy law—Mr Qadri seems to have been influenced by the rise of firebrand Barelvi mullahs calling for all blasphemers (on their definition) to be killed. After Mr Qadri’s arrest, Barelvis marched in their thousands, along with co-religionists of other sects, parties and persuasions, shouting “death to blasphemers”. Lawyers showered rose petals on the murderer, and the policemen guarding him have uploaded approving videos of him on YouTube. A full-blown, all-party religious revival has erupted, a disturbing turn for both state and society. The Taliban—who hail from the hardline Deobandi sect of Islam, close to the Wahhabism espoused by Osama bin Laden—have stoked the mainstream resurgence. Facing defeat by Pakistan’s army in the tribal areas of the north-west, the Taliban struck urban targets, including police stations and the army’s general headquarters. When the government persuaded Barelvi mullahs to condemn suicide-bombings as “unIslamic”, the Taliban assassinated them and bombed their mosques and Sufi shrines. Yet the trauma has made the Barelvi leaders more militant, not less. The anti-blasphemy bandwagon makes common cause with the Taliban. Other groups have sensed an opportunity for an Islamic political revival, including non-Taliban Deobandi and Wahhabi groups. Two such groupings play a critical role in Pakistani politics. The Jamiat i Ulema e Islam (JUI), a Deobandi outfit, is led by a pragmatist, Maulana Fazal ur Rehman. The JUI contests elections in the tribal areas, and is a coalition partner of the ruling Pakistan People’s Party. But Mr Rehman must heed hardliners inclined to abandon parliamentary politics and switch loyalties to the Taliban. So the JUI is against the “war on terror” because it is an “American” war. It has also condemned Mr Taseer. The other grouping represents Lashkar-e-Taiba, notorious anti-India jihadists. The organisation is banned, but “charities” front for it. Both groupings hate America, retain close links with the ISI, Pakistan’s powerful military intelligence agency, and detect Western plots behind Mr Taseer’s campaign to amend the blasphemy laws. Anti-American sentiment, in turn, provides the excuse for the government and army not to do more against the havens in North Waziristan of the Taliban, al-Qaeda and Taliban associates in the Haqqani network. The army says that, apart from being stretched by having to hold former Taliban areas and to defend its border with India, it cannot go into Waziristan without full public backing. This week America’s vice-president, Joe Biden, was in the capital, Islamabad, urging action. Pointing to a rising tide of anti-American passion, the government and army appear to have shrugged their shoulders.