Page last updated at 04:36 GMT, Friday, 26 September 2008 05:36 UK

Pakistan: bombed but not yet broke

By M Ilyas Khan
BBC News, Karachi

Millennium Mall in Karachi
Business is booming in the run-up to Eid

As the night darkens, the crowds swell, clogging the festively decorated shopping avenues of Karachi - Pakistan's only port city, and also its richest.

The night-long shopping frenzy during the weeks preceding Eid, the festival that marks the end of the fasting month of Ramadan, has been an enduring feature of this city of 16 million.

The mood is not much different this year.

Mohammad Arshad, who runs an imitation jewellery stall at the Millennium Mall, a multi-storey plaza in a middle-class neighbourhood, expects to pick up 150,000 rupees ($2,000) in profits at the end of the two-week Eid season.

Shopping trends one week before Eid suggest that traders at the city's old but still fashionable shopping street, Tariq Road, will see their collective profits for the season exceed $100m.

Last year, some 10,000 shops and stalls of Tariq Road grossed $91m during the Eid season, the shop-owners' association says.

So where is the economic meltdown that we have been hearing so much about during the last few months?

Apparently, a worsening trade imbalance because of the rise in international oil and food prices during the last six months has depleted foreign exchange reserves and put pressure on the value of the rupee, the Pakistani currency.

A worsening law and order situation has also shaken investor confidence, sparking substantial capital flight from the country.

Jewellery stall owner Mohammad Arshad

The trends this year are not any better, but I may cover the inflation cost
Mohammad Arshad

The suicide truck bombing of the Marriott hotel at Islamabad last weekend has caused, among other things, British Airways to suspend flights to Pakistan.

Since then, the media is reporting a nearly 50% decline in room reservations at three and five star hotels that host foreign businessmen.

Meanwhile, some investor groups have downgraded the country's credit ratings following doubts over its ability to service its debts.

Urban poverty

But economists believe the country is far from an economic collapse.

"A meltdown? Yes. Inflation is at an all time high of 25%, and food inflation is at over 30%. We have never had it so bad before," says an Islamabad-based economic expert, requesting anonymity.

Stockbroker in Karachi
The mood is not so bright on the Pakistani stock market

"But there are no product shortages to bring trading to a halt and no drastic slide in the purchasing power of the people."

The paradox is easy to explain.

"People who make the most money in Pakistan, such as lawyers or doctors, remain untaxed almost to a man. And all urban property is undervalued for tax purposes. So it is difficult to measure exactly how much income people are actually losing due to inflation," he says.

Poverty, too, is an old phenomenon.

Experts say that absolute poverty went up from around 20% a decade ago to over 33% during the same period - when the country's economy was growing at between seven and eight percent.

And no job cuts are threatened.

Most of the foreign money that created a growth spiral in the economy either went into the speculative sectors of stocks, commodities and real estate, or into banking and insurance.

None of them caused the jobs market to expand.

As for the government, its macro-economic health may be causing international concern but there is no stampede in the corridors of power.

'Nuisance value'

A Lahore-based economist, Shahid Kardar, offers an interesting explanation for this.

"Our style of handling economic difficulties is simple: others should take care of it for us," he said during a recent CNBC TV talk show.

"This is how it was in 1979 when the West bailed us out because it wanted us to counter the Russians in Afghanistan and again after the September 2001 attacks in the US.

"What we offer in return is our nuisance value; we have the militants, we have the nuclear bomb, and the West wouldn't want the militants to have that bomb."

Shoppers in Karachi
Many shops are doing brisk business

Iqbal Ismail, the owner of Al-Karam, one of Pakistan's largest textile industries, shares Mr Kardar's optimism.

"Pakistan is not in an economic mess, all we need is a shot of a few billion dollars to take care of our trade imbalance, and we'll be alright," he says.

Pakistanis will be closely watching a meeting this week of the "Friends of Pakistan", a group of countries involved in the US-led "war on terror".

These countries, and some multilateral institutions, have been withholding huge amounts of money they have pledged to Pakistan since May, apparently to secure guarantees on Pakistani action against militants.

Observers expect a quick economic turnaround if the meeting concludes with financial commitments to Pakistan over a clear time-frame.

Stringent conditions

Alternatively, these countries may decide to keep Pakistan on a lean diet.

Even then, someone - like the Asian Development Bank - will have to offer some minimum budgetary support to keep the government afloat for the time being.

If nothing comes up over the next couple of months, the country will be forced to fall back on the more expensive credit facilities offered by the International Monetary Fund (IMF).

And Pakistanis are no strangers to the IMF.

Generally considered as growth-retarding and poverty-inducing, the IMF packages during the 1990s caused little harm to Pakistan except bind successive governments into stringent spending conditions.

Eid shoppers used to be just as reckless then as they are now.

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