Pakistan's key stock prices were expected to surge starting this week in a sign of approval of the country's debt rescheduling agreement struck recently with the Paris Club of creditors, financial analysts told IRIN on Thursday.
The feeling across the stock market has been strong since the 11 September attacks in the US as many investors have hoped for a US-backed large-scale international package of economic assistance as a quid pro quo for Washington's war in Afghanistan.
By contrast with the share price falls on Western markets, the Karachi Stock Exchange (KSE) representative 100 index has surged by nearly 10 percent since 11 September, though it still remains about 8 percent below the point it had reached when trading for the year began in January this year.
"The magnitude of the Paris Club relief is unexpected and calls for a major re-rating," AKD Securities, a brokerage house based in the port city of Karachi, said in its latest report on the KSE. "The index's trend is indicating that the stage is set for an upward break-out," it added.
The stock market's optimism is usually among the first signs of confidence in the economy, which has been caught in turbulence ever since Pakistan conducted its nuclear tests in May 1998. Western economic sanctions which followed those tests unprecedentedly constrained Pakistan's public finances.
The country's development spending was the hardest hit in the first two years after the 1998 nuclear tests, imposing all-round cuts of expenditure on social sectors.
According to official statistics, Pakistan's financial year (July-June) from July 1999 saw development spending of 98.3 billion rupees, which was less than a fifth of the expenditure of 547.3 billion rupees during that year. The development spending fell to 87.7 billion rupees in the year beginning in July 2000, which was an even smaller proportion of the current expenditure of 655 billion rupees that year.
While the current financial year is only halfway through, Pakistani leaders hope they will be able to substantially increase spending on the social sectors in the second half, from January to June. That confidence follows the debt rescheduling in Paris, which involves substantial concessions on about US $12.5 billion in debt owed to Paris Club member countries.
This debt of $12.5 billion is among the more expensive debts in Pakistan's overall foreign debt of about $38 billion. Officials say the concessions will substantially reduce annual debt servicing costs. Pakistani government officials say they expect to save about $3 billion on debt servicing in the next three years alone.
"The agreement allows us to create much-needed fiscal space to redirect to health, education, women's development, poverty reduction and jobs," Pakistani Finance Minister Shaukat Aziz said after the announcement by the Paris Club.
The rescheduling involves about two-thirds of the $12.5 billion debt to be repaid over the next 38 years, while the remaining one-third over the next 23 years. The debt to be repaid over the next 38 years also has a 15-year grace period, while the debt to be paid back over the next 23 years comes with a five-year grace period.
The agreement effectively means that Pakistan is no longer in danger of defaulting on repayments on its foreign debt. Some economists say the concessions mean that Pakistan's total foreign debt of about $38 billion has been reduced by about 30 percent.
One immediate benefit of the debt rescheduling is that Pakistan is now positioned to achieve its target of spending just over 120 billion rupees (US $1.97 billion) during the current financial year.
However, despite the optimism surrounding Pakistan's increased ability to manage its public finances, economists acknowledge that the future of the economy will continue to be dominated by concerns over prospects for growth and new investment. In the past two years, annual economic growth rates have been only marginally higher than the population growth rate of about 3 per cent.
Prospects for economic growth have been undermined in part by the fall in agricultural production as a result of a continuing drought in parts of Pakistan. Agriculture is a major contributor to annual economic output, accounting for almost a quarter of the annual Gross Domestic Product. Almost two-thirds of Pakistan's population relies on income from farms as a direct or indirect means of subsistence.
Pakistan's other main challenge is to revive large-scale foreign investment, which, market analysts say, was last year no more than a modest $250-300 million. While Pakistan has secured an important relief in foreign debt repayment, its ability to attract new investment has been weakened on account of the war in Afghanistan.
"The war has left behind major fears over the security of this region. Pakistan must now find it even harder than before in attracting new investors, because there's a fear that this is a bad neighbourhood," a senior foreign banker in Karachi told IRIN.
The other constraint working against Pakistan is a weak outlook for the global economy, likely to remain so amidst concerns that opportunities for economic growth and expansion worldwide may suffer in the medium term.
According to figures released by the government's bureau of statistics, exports during the first five months of the financial year rose a marginal 0.29 per cent to $3.734 billion, up from $3.724 billion during the same period a year ago. Imports for the five-month period this year of $4.169 billion were more than 10 per cent below the $4.640 billion from imports during the same five months last year.
While Pakistan's overall trade deficit of $434.588 million during the five-month period this year was substantially below the trade deficit of $917 million last year, economists said it was not a sign of robust economic activity.