Page last updated at 22:20 GMT, Wednesday, 27 May 2009 23:20 UK

Pakistan business fighting on all fronts

By James Melik
Business reporter, BBC World Service

Refugees leaving the Swat Valley
People have been forced to leave their homes and livelihoods behind

Not so long ago Pakistan was being described as one of the booming Asian Tigers, but now its economy more resembles a whimpering pussycat.

As the government continues its military campaign in the Swat valley in the north, hundreds of thousands of men, women and children have fled the fighting, losing their homes and livelihoods.

The turmoil has had serious effects on business and the wider economy.

Pakistan is suffering from falling foreign investment, a weakened currency, a badly bruised stock market, and economic growth that is predicted to be half what it was last year.

The country was forced to turn to the International Monetary Fund (IMF) for a $7.6bn (£5.2bn) rescue package towards the end of 2008.

But the money came with strings - unpopular austerity measures including higher interest rates to tackle inflation.

Taliban censorship

Until a few months ago Raymat Khan ran a business selling televisions, videos and DVD players in the embattled Swat Valley.

He closed his business when the Taliban arrived and destroyed his television sets and DVD players and told him he could not sell such items any longer.

"The Taliban said that watching television is prohibited in Islam," he says.

"Because of the military action, all businesses have been forced to leave the area," he laments.

Even larger companies such as Allied Power, which supplies generators, fibre-optic cables and mobile phone masts to areas of the North West Frontier Province and to Afghanistan, has had its problems.

The IMF's action, added to the inflation in Pakistan, has actually played havoc with business
Babar Ayaz, Business Recorder

Its chief executive Sikandar Shah says the kidnapping of business people had been a major issue.

"People do not feel secure and many have moved to Islamabad, Lahore or Karachi, while many have moved abroad," he explains.

Interest woes

Mr Shah also bemoans the fact that interest rates have risen so high, which effectively means businesses cannot avail themselves of the credit facilities on offer.

It is not just military action that is having a destructive effect on Pakistan's economy however.

The International Monetary Fund gave Pakistan an emergency loan facility, on condition that the government tried to bring down raging inflation which peaked at 25% per cent in the summer of 2008, by raising interest rates and taxes - which has been putting the squeeze on business..

Babar Ayaz of the Business Recorder in Karachi says the global economic crisis is a secondary factor for most small businesses.

"I think they are more affected by the militant insurgency and the law and order situation than the international situation," he says.

He also believes the financial sector in Pakistan has been affected because the economy has been hit and, as a result, people have started defaulting on their loans.

Furthermore, he argues, the IMF has imposed a completely a different formula for Pakistan than what is being adopted around the world.

In most countries, inflation rates have fallen whereas in Pakistan costs have been forced up.

Refugee camp in Pakistan
Displaced people will have to be rehoused and their lives rebuilt

"The IMF's action, which added to the inflation in Pakistan, has actually played havoc with business," he says.

Although the IMF has pumped a lot of money into the economy, it has not produced the expected results because the government is spending more in the fight against terrorism.

"At the same time we have been hit by an electricity crisis and our international exports have gone down," Mr Ayaz says.

Many people believe that if the Taliban was curbed or defeated, the outlook for Pakistan and its economy would improve. But there is no sign of an early resolution of that conflict.

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