ASIAN ECONOMIC OUTLOOK: PAKISTAN

Business Loses Confidence

By Ahmed Rashid
Issue cover-dated September 06, 2001

AS PAKISTAN'S military regime attempts to grapple with four years of stagnation, a U.S. economic slowdown will affect Pakistani textile exports and result in even lower foreign investment. Foreign investment into Pakistan dropped to its lowest in two decades in the year ending June 2001. Direct and portfolio foreign investment totalled just $182 million against $480 million in the previous year. Portfolio investors withdrew $130 million last year as Morgan Stanley closed down its country fund and pulled out of Pakistan along with Templeton Emerging Markets' Fund.

A U.S slowdown is already affecting textile exports, which account for 60% of Pakistan's exports. Textile exports were down 6.5% in July, compared to the same month last year. Last year Pakistan aimed for an export target of $10 billion but could only achieve $9.1 billion, which was still 7% up on the previous year. With the U.S. accounting for 25% of textile exports, Pakistan will be hard pushed to sustain even $9 billion in exports this year.

Agricultural exports are also experiencing a downturn with this year's basmati crop unable to find export markets. The global trend of lower raw cotton prices has also hit farmers' incomes, which are already down due to two years of drought which affected wheat and sugarcane crops.

But a U.S. slowdown would lower global oil prices while a weaker dollar will make imports cheaper and lower debt repayments--much of Pakistan's $38 billion foreign debt is benchmarked to Libor or U.S. interest rates. However the real issue for the military regime, which has promised elections in October 2002, remains the lack of business confidence in the economy.