Pakistan facing turbulent times since nuclear tests

By Scott McDonald

ISLAMABAD (Reuters): Two years after it carried out nuclear tests, economic and political fallout continues to swirl around Pakistan's feeble finances and turbulent politics.

The government of Prime Minister Nawaz Sharif said it was an unavoidable response to similar trials by arch-rival India that left it no choice but to advertise its nuclear deterrent.

Deterrent or not, a year ago it nearly went to war with India. Sharif, who ordered the nuclear buttons pushed, was toppled in a coup and the economy still flirts with bankruptcy.

By defying world opinion to carry out the tests, Pakistan was slapped with sanctions which helped smother economic growth, a blanket from which it still has not fully emerged.

The political front since the May 28, 1998, tests has been just as turbulent.

Sharif received an immediate popularity boost because of the tests, but, handcuffed by a feeble economy and his own strong-arm tactics, he was cast aside in a bloodless coup last October after losing a showdown with Army Chief Gen. Pervez Musharraf.

And international pressure to show restraint on nuclear proliferation and not conduct further tests had clouded relations with Western countries before the coup worsened them further.

"In retrospect, if the business community could vote for the nuclear tests now, a significant number would vote against them," said Mansoor Ali, head of research at Jahangir Siddiqui & Co Ltd.

"Before, 90 percent were in favor of the tests," said Ali, referring to the widespread public joy which greeted the tests.

The impact on Pakistan's foreign exchange situation and foreign investor confidence was immediate, and while there have been improvements the problems still linger, Ali said.

"An important thing has been the credibility of the government in terms of foreign exchange," he said.

Hours after the tests, Pakistan froze hard currency accounts in the country and imposed capital controls. Although new foreign currency accounts have been allowed and most of the controls have been lifted, wariness remains.

"The inflow of dollars has stopped, remittances (from overseas Pakistanis) has gone down by 60 percent," Ali said.

The cash crunch forced Pakistan to delay some of its debt payments, and drove it to seek a rescheduling of its foreign debt of $38 billion, a grace period which runs out at the end of the year.

Many of the problems -- wholesale corruption at the highest levels, a largely illiterate population -- were already in place before the nuclear tests, but the tests made them harder to deal with, the analysts said.

"The nuclear test and the consequences of economic sanctions imposed on Pakistan exposed the country's weak balance of payments position," said Atif Subhani, research head at Global Securities Ltd.

"The rescheduling of its external liabilities was inevitable even prior to the tests. The tests just ensured that Pakistan approached its creditors for relief sooner rather than later," he said.

"What the tests have done highlight Pakistan's vulnerability of its forex inflows. The IMF has over the years warned Pakistan about its weak external account," Ali said.

Relations with India have plummeted since May 1998. Talks on the bitter dispute over Kashmir were deadlocked when the neighbors nearly fought their fourth war last summer following an intrusion in the strategic Kargil heights in Indian Kashmir.

That ended when U.S. President Bill Clinton pressured Sharif into pulling back the intruders, although Pakistan denies allegations that it is behind the guerrillas fighting Indian rule of Kashmir, saying it gives only moral and political support to those fighting for independence or union with Pakistan.

The United States was also at the forefront in condemning Pakistan's nuclear tests and has been urging it to show restraint on nuclear proliferation and not conduct further tests.

Those concerns surfaced again in the runup to the May 28 anniversary, with U.S. officials warning that although there was no evidence Pakistan was planning any tests, it would be a "big mistake" if it did.

"We would view very unfavorably a further test by Pakistan. We don't have evidence that they intend to test, but it would be obviously a serious setback if they did and I think a big mistake for Pakistan," White House National Security Adviser Sandy Berger said this week.

Islamabad, which denied it was planning any tests, has said it should not be stopped from testing if India carried out more tests.

Last Friday, a government statement said the National Command Authority, set up in February to command and control Pakistan's nuclear weapons, had "...reaffirmed Pakistan's resolve to consolidate its nuclear capability as a means of deterring aggression."

It did not elaborate.