Pakistanis worry they’re at great risk in global crisis

ISLAMABAD, PAKISTAN —  Take a restive, nuclear-armed nation with an untested new government, an escalating Islamic insurgency, long-standing tensions with its neighbors and an economy in free fall for months.

Then add in a global financial crisis. Some analysts and diplomats fear Pakistan could come to exemplify a perilous new phenomenon: a strategic but unstable state at risk of being pushed to the breaking point by external economic factors.

Government officials insist that Pakistan’s economic fundamentals, while weakened, are holding steady. But this politically volatile country of 165 million people, a crucial U.S. ally in the fight against the Taliban and Al Qaeda, can ill afford more upheaval.

Pakistan’s creditworthiness rating is the second worst among nations ranked by Standard & Poor’s, superior only to that of the Seychelles. Last week, the country’s new president, Asif Ali Zardari, felt compelled to offer assurances that “Pakistan is not going bankrupt.”

On Monday, armed police surrounded the Karachi stock exchange to prevent a recurrence of the stone-throwing rioting by investors that occurred in July.

“The global crisis has really added fuel to the fire,” said market analyst Muhammad Suhail. “There was a time window earlier this year to address all this, and we missed it.”

At the onset of the current mayhem in markets worldwide, Pakistan -- a relative economic success story for much of the last decade -- was already undergoing a punishing reversal of fortune.

In the last six months, its main stock exchange has lost more than half its value. The national currency, the rupee, stands at historic lows, even with propping up last week by the state bank, which also intervened to improve market liquidity. Foreign-exchange reserves are depleted, the budget deficit is at a 10-year high, inflation is running about 24% annually, and debt obligations are looming large.

From the poorest of the poor to the wealthy elite, Pakistanis are frightened. Some say the wretched state of the economy scares them more than the threat of terrorist attacks.

“You know, I can wake up any morning and say to myself, ‘OK, God willing, I don’t think a suicide bomber is going to find me or my family today,’ ” said Zeeshan Qadir, a merchant. “But I know for certain it is going to get harder that day to pay my bills.”

In a country with a tradition of educating many of its best and brightest in the West, an Islamabad society matron -- who did not want her name used because she feared her remarks would reflect badly on her husband’s quietly beleaguered construction firm -- bemoaned the now-ruinous cost of overseas tuition for her college-age sons.

“I really dread telling them they may have to come home,” she said, distractedly twisting the rings adorning her delicate fingers. “But I don’t see how we can continue to afford it.”

Those at the lowest economic rung, meanwhile, say they can no longer count on the balm of charity to see to their basic needs.

“Before, the people who saw me every day would give me enough rupees to buy bread,” said a crippled beggar named Mangal, who seeks alms from motorists in the city of Rawalpindi. “Now they only give the smallest kind of coin and say, ‘Sorry, brother, I don’t have much to spare.’ ”

Even before the global credit crunch began, Pakistan was a tough sell to international investors whose television screens are regularly filled with gruesome images from here, such as the Sept. 20 truck bombing of the five-star Marriott Hotel in Islamabad, the capital.

The last 12 months have also seen an upsurge in suicide bombings by Islamic militants, a six-week bout of martial law, the assassination of the country’s best-known politician, Benazir Bhutto, and a wrenching transition away from the nearly nine-year military rule of Pervez Musharraf.

Now, the government is desperate for an infusion of foreign cash; it is seeking $10 billion in emergency funds from overseas to avoid default. But in light of everyone else’s troubles, a bailout may not be forthcoming -- or may not be on the scale that Pakistani officials had hoped.

Among Western observers, there is general agreement that a broad financial collapse in Pakistan could paralyze its government and potentially trigger widespread unrest, imperiling efforts to contain Islamic militants in the tribal areas and, by extension, complicating the war in Afghanistan. Then too, Pakistan’s nuclear arsenal is always a point of concern at times of turmoil, though during past crises, senior Pakistani officials had insisted that it was secure.

Zardari’s newly appointed financial advisor, Shaukat Tarin, traveled to Washington for last weekend’s gathering of bankers and finance ministers. High hopes are also being pinned on a meeting in Abu Dhabi, United Arab Emirates, later this month of an ad hoc group known as the Friends of Pakistan, which includes Western governments and international organizations.

But the deterioration appears to be accelerating. The Karachi stock market, until this year one of the world’s most robustly profitable exchanges, has instead become a barometer of growing economic distress.

Only six months ago, with share prices at record highs, the exchange’s main floor was a sweaty hubbub of deal-making and profit-taking. On a recent day, traders sat listlessly, leaning back in their chairs and chatting into their phones, and only glancing now and then at price displays. A few simply rested, head in hands.

After the worldwide collapse of share prices late last week, authorities considered closing the Karachi exchange for two weeks. But it was open for business Monday, albeit with the same strict price controls that have been in place since late August to prevent a further plunge -- and dozens of police officers with guns and batons patrolling outside.

In attempting to weather the storm, Pakistan has some significant advantages, including a fairly well diversified economy. Three million citizens working abroad send home about $6.5 billion in annual remittances. Few bank assets are tied up in mortgages. The government has begun to move away from subsidies that are a drag on the economy.

Some help is already on the way. Pakistani officials have said the World Bank will provide $1.4 billion this year, mainly earmarked for paying down the budget deficit, and the Asian Development Bank last month approved a $500-million loan.

In some respects, Pakistani financial officials see themselves as having been ahead of the regulatory curve. For example, they had banned “short selling” before the global market turmoil broke out.

“The rest of the world is discovering it will have to remake its financial systems,” said Karachi-based economic analyst Haris Gazdar.

“Here, we have already realized that.”

But consumer confidence has eroded steadily. In Karachi, Islamabad and other major cities, there has been a run in recent days on foreign-currency accounts held in Pakistani banks. On Monday, small-business owner Ayoub Assaf was crestfallen after his bank told him it did not have sufficient funds on hand for the large withdrawal he had hoped to make from his dollar account. Nervously fingering his BlackBerry, he shook his head.

“I left it too late,” he said.

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laura.king@latimes.com