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Thursday, October 14, 1999 Published at 08:24 GMT 09:24 UK

Business: The Economy

Pakistan stock market tumbles

Restaurants have tried to make it business as usual

Share prices in Pakistan fell 8% on Thursday as the stock market opened for the first time since Prime Minister Nawaz Sharif was toppled by the military.

Pakistan in crisis
The Karachi Stock Exchange-100 index had fallen 101 points to 1,155.9 an hour after the start of trading.

One trader said: "The market really got a jolt."

The stock exchange had remained closed on Wednesday following the central State Bank of Pakistan's decision to suspend all financial transactions for a day amid fears of a panic run on banks.

[ image: Everyone is waiting to see what the plans are]
Everyone is waiting to see what the plans are
Meanwhile Pakistan's central bank on Thursday extended the suspension on trading in foreign exchange for a week, in an effort to prevent a possible flight of hard currency.

Pakistan's foreign exchange reserves - estimated at $1.4bn - are enough for about three weeks of imports.

After the country carried out nuclear tests in May 1998, about $200m were transferred abroad from foreign currency accounts in Pakistan.

Delays exacerbating the problem

Foreign exchange dealer Owais Kaalia said of the ban: "It is to save the market from those who run after dollars in such a situation. Once the army generals come up with a right framework, I believe the market would open and react in a right way."

Bankers have reported receiving frantic calls from investors asking to withdraw their foreign currency deposits.

The head of research at one brokerage said: "We thought we had seen the worst in May last year and that a modicum of confidence was returning ... The fear is that this coup could turn out to be a bigger jolt than the nuclear tests."

Analysts said a delay by the military in announcing its economic policy plans was making the situation worse.

One said: "They should realise they don't have time."

IMF blocks loan

The coup took place as the government tried to cope with serious economic problems.

[ image: Poverty and unemployment are widespread]
Poverty and unemployment are widespread
Foreign investment is in short supply, unemployment is high and the International Monetary Fund (IMF) predicts that the economy will slow down sharply.

Pakistan's economic prospects took a turn for the worse last year, when the IMF and other international lenders halted new loans because of its nuclear tests.

This was a serious blow because Pakistan has some $30bn of foreign debt and limited resources with which to pay it off.

Foreign firms angered

The IMF later relaxed its sanctions, but the respite was brief. On 23 September it again began withholding money from its $1.6bn loan to Pakistan, saying the government must first carry out reforms to its chaotic finances.

The taxation system has come in for particular criticism. Little money is collected, with only about 1% of people paying income tax.

The opposition has made much capital out of government plans to introduce a general sales tax of 15%, similar to the UK's VAT. Huge demonstrations in September by the owners of small businesses persuaded the government to retreat.

Much of the money received goes on servicing the government's debts and on its large defence budget. The relationship with the military - both its spending and its actions - is clearly problematical.

Many Pakistani businessmen had been disappointed with the government of Nawaz Sharif.

Some say there had been little incentive to invest and that the investment climate had been noticeably more favourable in neighbouring India, which has begun liberalising its economy.

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