Inflation adds to Pakistan's troubles

Rising prices and a falling stock market have sparked protests in recent weeks, increasing the pressure on a government already facing militancy, political discord.

Emilio Morenatti/AP
Cost-cutter: People in Rawalpindi share a motorbike. Due to rising fuel prices, some Pakistanis have switched to this type of transport from cars.

The Pakistani government, elected in February with great hopes of restoring stability, is not just struggling to deal with a Taliban insurgency, a judicial crisis, and an internally fractured coalition.

It is also managing one of the worst economic periods in the country in the past decade. And as millions of Pakistanis from a cross-section of economic classes feel the heat from a dipping economy, some are beginning to blame the new government.

"The economic situation is deepening the political crisis," says Rasul Baksh Rais, professor of political science at the Lahore University of Management Sciences. "If the government isn't able to address this soon," he says, people could start spilling out onto the streets. And a weak government, he says, might not ready for all this so soon after coming into power.

On Tuesday, transport operators pulled thousands of buses and trucks off the streets of Karachi, Pakistan's biggest city, to protest sharp rises in fuel prices. Gasoline and diesel prices have increased 60 percent since February.

Flour mills across the country also went on strike earlier this month to protest price caps introduced by the government.

Last week small investors rioted and broke windows at the Karachi Stock Exchange, frustrated by the steady decline of a stock market that in recent years was one of the most profitable indexes in the world. It had dropped by about 36 percent since hitting a record high in April.

Assigning blame

Last Saturday, Prime Minister Yousuf Raza Gilani made his first television address after taking office in March and spoke about the multitude of challenges his government faces. But he deflected blame for the economic trend on the previous government's bad policy and the rise of fuel and food prices worldwide.

The coalition government led by Pakistan People's Party (PPP) inherited a chronic shortage of hydroelectric power and wheat, signs for which had started surfacing in the final days of the previous government, made up of Pres. Pervez Musharraf's loyalists.

Soon after the elections, though, the coalition began unraveling, leaving the PPP to grapple with the economy and the growing militancy alone.

Now, as the militancy has risen, the inflation rate has also hit a three-decade high, and prices of staples have gone up almost 30 percent.

This month, the government unveiled its national budget document, which provides the government's blueprint for the coming fiscal year. Keeping with assassinated party leader Benazir Bhutto's populist campaign platform of "Five E's" – employment, education, energy, environment, equality – the government introduced a "Benazir Card" scheme, which provides financial relief to poor families.

But the government also began peeling away subsidies for fuel, food, and utilities to keep the government debt in check in the face of rocketing international fuel prices.

The new budget document also made credit more expensive, which has prompted many investors to withdraw and manufacturers to strike, and taken the economy on a steeper slide.

The rising prices and government policies have forced people like Kaleem Hayat, the owner of a small grocery store in Lahore, to economize. Four years ago, when Pakistan boasted some of the world's highest growth rates, he'd bought his first car to travel with his wife and child.

But this week, as the prices of fuel were raised for the fifth time since the new government took office six months ago, Mr. Hayat discovered that the road tax for his vehicle had also doubled following the country's latest annual budget guidelines.

He decided it was time to wipe the dust off his old motorbike. "With the price of everything else climbing, it's just cheaper this way," he says. "I just didn't think we'd all have to get back on my bike again. We'd gotten so used to the car."

Government support slipping

The economic crisis is fast eroding the popular mandate with which the new government came into power six months ago, observers say.

"This blame game is wholly and entirely irrelevant," says Nasim Zehra an independent analyst. People suffering through the economic downturn and investors in the country and abroad are least concerned with what "happened yesterday," she says, they require fixes for tomorrow. "The fact is that [the new government] are the ones sitting in power now, and if things get worse they are the ones who will have to deal with the fallout."

"Naturally there are external factors to this decline," she continues, "but this is the time the government needs to show efficient handling of a difficult situation." The government needs to be cohesive and confident, but "unfortunately, that's exactly where they lacking."

Hints of a crisis within the government leads to a general air of uncertainty, which has further fed investors' fears, Zahra adds.

A recent by the International Republican Institute, a group funded by the US government with links to the Republican Party, showed that 72 percent of Pakistanis felt their economic situation had worsened in the past year. Half of those polled expected it to get worse over the next year. Inflation had become a concern for 71 percent, compared with 55 percent when the government took over.

The PPP has seen a corresponding decline in popularity over that period from 50 percent to 32 percent.

Opposition parties are now targeting the what they call the government's dismal performance on the economy. Leaders from Mr. Musharraf's loyalist PML-Q party are blaming the government for making a mess of an economy they built. Others who boycotted the election this year, including the major Islamist parties, are announcing plans to protest price hikes and inflation.

"There are always ways out of such economic crises," says Kaiser Bengali, a development economist who advised the government on economic policy. Spending on any nondevelopment project could be decreased, he says, which would mean cuts in the bureaucracy and military's budgets.

But these decisions, he says, are politically difficult. "In a country with a history of coups for the flimsiest of reasons, you can never be too sure what to do."

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