COUNTRY REPORT Pakistan Afghanistan At a glance: 2001-02 OVERVIEW The military government is likely to face a united Pakistan People's Party and Pakistan Muslim League opposition sooner rather than later, and may decide not to remain in power until October 2002. Although an agreement with the IMF appears imminent, the prolonged period of negotiations, and the government's inability to resolve the dispute with an independent power producer, the Hub Power Company, have severely tarnished investor confidence. Tensions with India will remain high over the disputed territory of Kashmir. Although the government remains committed to extending the tax base, progress will remain slow and the government will back away from fully imposing unpopular taxes. Key changes from last month Political outlook • There is a growing possibility that the military may attempt to hold a general election by the end of 2001, so that the military is not discredited and Pakistan's international stature improves. • Moves to exclude supporters of the two main parties from the forthcoming local elections may result in increased support for more extreme ethnic and religious parties, with potentially dangerous consequences. Economic policy outlook • The government appears committed to following through its privatisation proposals, but its target of raising up to US$4bn in the forecast period is optimistic. Economic forecast • The EIU has raised its average consumer price inflation forecast for 2001 to 8%, as the effects of the imposition of the general sales tax at retail level, and the depreciation of the currency in September-October, filter through into consumer prices. 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ISSN 0269-7173 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK 1 Contents 3 Summary Pakistan 5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2001-02 8 Political outlook 10 Economic policy outlook 11 Economic forecast 14 The political scene 17 Economic policy 21 The domestic economy 21 Economic trends 22 Industry 23 Agriculture 24 Infrastructure 25 Foreign trade and payments Afghanistan 27 Political structure 28 Economic structure 28 Annual indicators 29 Outlook for 2001-02 30 The political scene 32 Economic policy and the economy List of tables 11 Pakistan: international assumptions summary 12 Pakistan: forecast summary List of figures 14 Pakistan: gross domestic product 14 Pakistan: Pakistan rupee real exchange rate 19 Pakistan: external debt 24 Pakistan: foreign investment 26 Pakistan: current account EIU Country Report November 2000 © The Economist Intelligence Unit Limited 2000 EIU Country Report November 2000 © The Economist Intelligence Unit Limited 2000 3 Summary November 2000 Pakistan Outlook for 2001-02 The military government is likely to remain in power until 2002, but may attempt to relinquish power in 2001. Relations with India will remain poor. Business confidence will be weak, but a loan agreement with the IMF should be reached preventing Pakistan from defaulting on its external debt-servicing obligations. The fiscal deficit will remain problematic. GDP growth should strengthen on the back of an industrial rebound. Inflation will rise as the general sales tax is imposed and the currency weakens. The political scene The National Accountability Bureau (NAB) has targeted politicians and bureaucrats, convicting 48 during the first year of the military government but has ignored corruption allegations against the military and judiciary, undermining its moral authority. There are concerns that a crackdown on the press may occur, after armed soldiers carried out an exercise against the Dawn newspaper in Karachi. Resignations have eroded confidence in the military government. India has been blamed for a bombing campaign in urban centres of Pakistan, and fighting has continued across the Line of Control dividing Indian and Pakistani Kashmir. Economic policy The government’s relations with traders’ organisations remain poor, but it is continuing its attempts to increase the income tax net. The debt-rescheduling programme, due to have been completed on October 19th, remains incomplete. The government is kick-starting the privatisation programme. The domestic economy GDP growth in 1999/2000 was underpinned by a strong agricultural performance. Government revenue remains below target, and the rupee has fallen in value since the government removed the unofficial cap on the inter- bank rate. Inflation is rising, but the industrial sector is performing well. Another good cotton crop is expected in 2000/01, but wheat production may fall. The dispute with the Hub Power Company remains unresolved. Foreign trade and Exports have risen by 14.5% year on year in the first quarter of 2000/01, but a payments 12.5% rise in imports has led the trade deficit to increase to US$509m from US$487m in the corresponding period of the previous year. Remittances have increased between July and September, but may fall owing to the widening differential between the black market and official rates, and the depreciation of the rupee requiring expatriates to remit less funds. EIU Country Report November 2000 © The Economist Intelligence Unit Limited 2000 4 Afghanistan Outlook for 2001-02 The Taliban may take control of all of Afghanistan, and will put heavy pressure on the opposition Northern Alliance (NA). Drug production has fallen, but funding cuts to the UN’s drug control programme may reverse this trend. More sanctions may be imposed on Afghanistan, and there are fears of an imminent US missile attack on Afghanistan if Osama bin Laden is linked to an attack on a US destroyer in Yemen. Central Asian states may divide between a minority wanting to recognise the Taliban, and the remainder hostile to it. The political scene The Taliban have reached the border with Tajikistan, placing pressure on the opposition Northern Alliance. The UN continues to push for peace, and a new opposition movement has been formed based in Peshawar. De-mining programmes are facing difficulty. Italy has proposed a humanitarian aid corridor passing aid to both the Taliban and the NA. Economic policy and the The Taliban is attempting to improve commerce, and has targeted domestic economy international trade, with trade barriers between Pakistan, Iran and Turkmenistan removed. A number of industrial projects have been approved. A Pakistan delegation announced plans to open factories and banks in Afghanistan. The UN has called for intervention to prevent famine in drought- stricken areas of northern Afghanistan. Editors: Gareth Price (editor); Graham Richardson (consulting editor) Editorial closing date November 3rd 2000 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule EIU Country Report November 2000 © The Economist Intelligence Unit Limited 2000 Pakistan 5 Pakistan Political structure Official name Islamic Republic of Pakistan Form of state Federal parliamentary system suspended by military coup on October 12th 1999 The executive As a result of the October 12th coup, the chief of army staff and chairman of the joint chiefs of staff committee, General Pervez Musharraf, is now designated the chief executive of Pakistan. The prime minister, who held supreme executive authority as a result of constitutional changes in 1997, has been dismissed. The president remains in place as head of state. The president is elected by an electoral college, consisting of both houses of the federal parliament as well as members of all four provincial legislatures National legislature Bicameral legislature: the lower house, the National Assembly, was suspended on October 12th.