Page last updated at 17:35 GMT, Wednesday, 15 October 2008 18:35 UK

Pakistan stares into economic abyss

By Barbara Plett
BBC News, Islamabad

Islamabad market
Business at markets has been hit

The September bombing of the Marriott Hotel in Islamabad shocked Pakistanis and strengthened fears that the state was unable to stem a spreading Islamist insurgency.

But it's not just the endemic violence that has created a sense of imminent collapse in Pakistan. The country is going through its worst economic crisis in a decade, with massive trade and budget deficits, plunging foreign currency reserves and capital flight.

"It's a crisis of the money economy, and that is very serious," says economist Qaiser Bengali.

"If we are unable to meet our debt repayment, if we're unable to pay for imports, then the wheels of agriculture and industry will certainly come to a stop. Given that Pakistan imports its oil, our aircraft and lorries will not be running without oil."

Security fears

That's the worst case scenario, but for Ittehad Steel, it's already bad enough.

Ittehad Steel director Mohsin Khalid
I don't think consumer or investor confidence has ever been this low in this country
Ittehad Steel director Mohsin Khalid

The factory on the edge of Islamabad employs 400 people who used to work shifts almost 24 hours a day, feeding a construction boom. But sales have slumped by 25%, it's had to cut production, and may have to lay off workers.

The company's director, Mohsin Khalid, admits Pakistan has seen economic trouble before, but says this time deteriorating security has compounded the crisis.

"Law and order, security, that's the primary reason why you see such a level of despair in overall economic, political and social circumstances," he says. "I think people are taking their investments abroad, they don't see the security situation improving."

A few kilometres down the road is one of Islamabad's main markets. People come here to do their weekly shopping. It's cheaper than elsewhere, but still shoppers feel overwhelmed by raging inflation. That together with the fear of bombs has slowed down trade.

"Because of the economic situation I've lost half my customers," says vegetable seller Abdul Aziz. "If I used to get 100 now I get 50. Plus, because of the explosions, those 50 have now been reduced to 25."

Ittehad Steel factory
Workers may be laid off at Ittehad Steel

"I come here every Friday, and every Friday the prices go up," says retired veterinarian Rafiq Raja. "Last Friday we came, and today it's double now."

For the middle class, it's a hard landing after nearly a decade of growth. Economists say the boom was a bubble that's now burst, because of a rise in oil prices, the security situation and global economic uncertainty.

At the back of the market is a government store selling staple goods at subsidised prices. The middle class may be feeling the pinch, but it's the poor who are really struggling.

"I just came to buy a bag of flour - throughout this market I failed to find even a single bag of flour," says shopper Pervez Hussain. "And I was wondering, what will the people do if they will have no flour, if this new democratic government fails to provide the flour?"

Structural change

Many here acknowledge that the government inherited a mismanaged economy from its predecessor. But some accuse it of failing to provide economic leadership during its seven months in power.

We are like a company that invests all its revenues on improving its head office building, and paying an army of security guards
Economist Qaiser Bengali

"I think it's not only an economic crisis. It's a crisis of governance as well, a crisis of governance on a scale we haven't seen before," says Mohsin Khalid. "I don't think consumer or investor confidence has ever been this low in this country."

Whatever the case, the government is now in emergency mode. It's asking the world for a multi-billion dollar rescue package to help it pay for imports and restore confidence, and it's trying to reassure Pakistanis.

"Pakistan is not a public limited company that can go bankrupt," President Asif Ali Zardari said recently. "During our tenure we'll sort out the problems facing us, like the war on terror and the economic crisis. We are negotiating with the international community to help address the situation."

He was speaking at the launch of a $400m programme of income support for the poorest.

Such measures may help Pakistan weather the storm, but Qaiser Bengali, who's in charge of the fund, admits neither it nor a bailout would resolve the crisis, because the roots of the problem are structural.

"What Pakistan has done over the last 30 years is to take money out of industry and agriculture," he says, "and instead of investing in the infrastructure for these sectors, we have invested in the military, in luxury housing, in the civil administration.

"We are like a company that invests all its revenues on improving its head office building, and paying an army of security guards, and there is no money left for spare parts and raw materials. I think that structural change will have to be made."

Changing economic priorities would be a long term strategy. But for more and more Pakistanis right now, life has become a struggle for survival with little hope for relief.

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