Pakistan Takes Emergency Steps to Save Economy

ISLAMABAD, Pakistan —  The Pakistani government began imposing sweeping measures Friday to hold together its economy in the face of potentially withering sanctions as it fired off new warnings to India that ended any chance for an immediate rapprochement between the two rivals.

The state of emergency, declared after Prime Minister Nawaz Sharif’s announcement that Pakistan had tested five nuclear devices Thursday, provoked fears that the Sharif government might overstep its authority and crush Pakistan’s fragile democratic guarantees.

Coupled with the storm of criticism showered on Indian Prime Minister Atal Behari Vajpayee’s government in New Delhi since India detonated five atomic devices earlier this month, Sharif’s actions illustrated how the South Asian diplomatic crisis has begun to affect the internal politics of India and Pakistan.

Pakistani President Mohammed Rafiq Tarar said he issued the emergency decree to protect the nation from a possible attack by India.

“We have nuclear weapons. We are a nuclear power,” Foreign Minister Gohar Ayub Khan said. “Our retaliation would be taken swiftly, with vengeance and devastating effect.”

Khan refused to rule out more nuclear tests, even as U.S. intelligence sources reported that Pakistan was preparing a second site about 60 miles from the Chagai Hills site where the first explosions took place.

Pakistan claims that India was preparing to launch a strike against Pakistani nuclear facilities.

Indian officials dismissed the allegations, but they have made numerous threats in recent weeks over the disputed territory of Kashmir, the cause of two of the three wars between India and Pakistan.

Pakistan’s bellicose talk was met Friday by conciliatory gestures from Vajpayee, who has faced allegations that his decision to test nuclear weapons fueled the arms race on the impoverished subcontinent.

Vajpayee told the upper house of the Indian Parliament, the Rajya Sabha, that Pakistan faces no threat from India. He repeated his offer to conclude a “no-first-use” treaty on nuclear weapons with the Islamic republic.

“We do not want ill of Pakistan. I want to remove doubts that we want to destroy Pakistan,” Vajpayee said.

The exchange came as Pakistanis braced themselves for the economic sanctions announced by the U.S. and Japan--even as they celebrated their country’s entry into the club of nuclear-armed states.

In Rawalpindi, residents marched, sang and fired AK-47s into the air. At mosques throughout the country, people offered prayers of praise for the nuclear tests. Thousands knelt to give thanks at the Faisal mosque in Islamabad, the nation’s capital.

“Pakistan has become the jewel in the crown of the Muslim world,” Maulana Azaad of the Gulshan-e-Iqbal mosque told his flock in Karachi.

The euphoria was tempered by signs Friday that the Pakistani economy was entering a difficult phase. First came the news not only that the U.S. had imposed economic sanctions on Pakistan but that Japan, the country’s largest aid donor with about $500 million a year, will follow suit.

The government ordered banks to remain closed across the country; the Karachi Stock Exchange, off 28% since the Indian nuclear tests nearly three weeks ago, was shut; and all foreign currency accounts--worth about $7 billion--were frozen.

Finance Minister Sartaj Aziz said Friday that the measures were necessary to stop the flight of foreign money, which could bankrupt the country.

Aziz outlined several measures that he said will help Pakistan survive the sanctions, which he predicted will knock $1.5 billion from the economy: maintaining the value of the rupee, cracking down on the country’s dependence on smuggled goods, cutting public spending, increasing exports and stepping up the collection of income taxes.

“It will be a three-point agenda,” Aziz said. “Buy Pakistani goods, avoid smuggled items and live simply.”

Pakistan is already one of the poorest and most illiterate nations on Earth, with a per capita income of about $1.25 a day.

On Friday, Pakistan’s Central Board of Revenue took out an ad in Dawn, the country’s leading English-language newspaper, warning that residents who fail to register their smuggled vehicles risk having them confiscated.

Aziz acknowledged that some of the measures might be tough for Pakistanis to swallow, but he predicted that the people will go along.

“The mood has changed here,” he said. “We think that people will respond to calls for austerity.”

Aziz said he will use the suspension of civil rights and other guarantees to push through long-needed economic reforms that the government has been unable to carry out. For instance, he said, the emergency rule will allow the government to bypass the courts to collect income taxes--which are paid by fewer than one in every 150 Pakistanis.

Many of Pakistan’s tax dodgers are middle- and upper-income individuals who have the money and clout to ignore the government with impunity. Aziz said he believes that the government can boost its tax receipts by as much as 40%.

Prime Minister Sharif told his Cabinet on Friday that the government’s emergency authority will be limited to economic affairs.

“Fundamental rights of the people and other freedoms associated with this will not be affected,” Sharif said.

Some Pakistanis worried that the line between economics and civil rights is gray and that the government might easily overstep its authority.

Unlike its neighbor India, which has experienced nearly 50 years of democratic government, Pakistan has undergone several periods of military rule.

Asma Jahangir, a prominent human rights lawyer, condemned the emergency declaration, saying he feared civil liberties might be trampled.

“The prime minister talked about belt-tightening and tough economic decisions,” Jahangir said. “But no one mentioned suspending human rights.”

Waheed Kahlfe, a Karachi journalist, said he worried that press freedom might soon be at risk.

“There will come a time when the press will be subject to pressures,” Waheed said. “This will happen when the economic turnaround that the finance minister is planning does not materialize.”

On Friday, office buildings and sidewalks here were full of talk of how the sanctions might devastate the Pakistani economy.

Economists inside and outside the country said they were concerned that sanctions could squeeze Pakistan’s economy so hard that the country will be forced to default on the money it owes foreign banks.

Pakistan’s economic soft spot is its $30-billion foreign debt, equal to 50% of its gross domestic product. Much of the foreign assistance Pakistan now receives is intended to help it pay back its debts.

Mahbub ul-Haq, a former Pakistani finance minister and a close advisor to Sharif, said that if Pakistan is cut off from more loans, it might take the extraordinary step of refusing to repay its foreign debts.

“If creditors don’t give us any assistance, then Pakistan is under no obligation to pay,” he said.

“I think Pakistan is going to default,” said Shahrukh Rafi Khan, director of the Sustainable Development Policy Institute in Islamabad.

Others worried that the sanctions will further erode business confidence in Pakistan, which already suffers from a dearth of foreign investment.

Rumors circulated through Karachi’s wealthier neighborhoods Friday that the rupee had been devalued by half.

“While we are celebrating, we do not know what we have got ourselves into,” said Javed Khamisani, a Karachi businessman. “I see business activity going down.”

Pakistan received some good economic news Friday when two major aid donors--the International Monetary Fund and the World Bank--said that $700 million in loans are not threatened by the sanctions.

Other Pakistanis groped to find some good cheer in the mostly bad economic news. Fateh Malik, a history professor at the Quaid-i-Azam University in Islamabad, said the end result of the hardship may be to draw the often fractious country together.

“I think the sanctions will bring out the inner vitality of the nation,” Malik said.

“We will take the path of self-reliance.”

Times staff writers John-Thor Dahlburg in New Delhi and Art Pine in Washington and special correspondent Kammal Siddiqi in Karachi contributed to this report.