Pakistan's military regime creates doubts in market

KARACHI (AFP): Pakistan's two-month-old military government gained some credibility by launching a tough crackdown against corruption and bank loan defaulters, but some of its steps also sent negative signals to the market, according to analysts.

"At least five recent developments are creating doubts about the effectiveness of the new military regime," analyst Arshad Arif said.

Listing the steps, Arif, associated with ABN-AMRO bank, said the army-led National Accountability Bureau (NAB) delayed settlement of repayment with big defaulters. It also by-passed the central bank in requesting information from the financial institutions.

A lack of support to falling cotton prices in the country, "unrealistic statements" from the finance ministry on privatization and the withdrawal of the 15 percent general sales tax (GST) on electricity were all sending negative signals to the market, he said.

The Karachi Stock Exchange has already started discounting the positive changes expected from the new government, because "the present run-up might be a mere liquidity bubble," he observed.

Analysts were of the view that after the much publicized Nov. 16 deadline for settlement of bank loans, the military government has yet to come up with any further progress on its recovery campaign.

"No big defaulter is reported to have paid his arrears. Total recovery is still eight billion rupees, out of 211 billion rupees (US$4.1 billion)," Arif said, adding the campaign seems to be "losing its steam."

Most of the money was borrowed from banks with little or no collateral.

The NAB last month arrested more than 20 people allegedly involved in corruption and bank loan defaults. Officials say it plans the second round of its crackdown next week.

The government has already enacted a tough new law under which offenders face jail terms of up to 14 years and can be disqualified from holding public office for 21 years.

However, a banker, requesting anonymity, confirmed the NAB directly asked for financial information in violation of the central banks' jurisdiction.

"This issue has potential to disturb our system and credibility," the banker said.

This practice also negates the theme of the reform agenda of military ruler Gen. Pervez Musharraf, who has vowed to strengthen the institutional framework, he said.

The falling cotton price is also a disturbing factor for the market because the trading of cotton-related stocks has always been considered "major value gainers."

Despite promise by the Trading Corporation of Pakistan (TCP) it will stabilize the market, prices in the country's major cotton producer province of Sindh have crashed to a 15 year low.

"If this level persist, we fear the next cotton crop in the province will be a major disaster," said Ali Jan, a top cotton grower in Sindh.

Cotton trader Rajindar Kumar said traders had serious concerns over TCP's ability to support the prices in the local market.

The TCP has only six billion rupees to buy 1.3 million bales, "leaving at least seven million bales at the mercy of manipulative ginners and spinners," Kumar said.

After suffering a cash loss on the cotton crop, would any farmer go for cotton cultivation next year?, grower Jan asked.

Analysts said they supported the appointment of former World Bank executive Shaukat Aziz as finance minister, but had reservations over his recent "bullish" statements about the privatization process in Pakistan.

"Given the shallowness of the local stock market, we do not foresee any privatization to pass through the bourses successfully," Arif added.

The government also decided last month to withdraw 15 percent GST on electricity imposed by the previous government amid criticism from consumers.

Analysts said the imposition of the GST on the electricity supplied by the state-owned Water and Power Development Authority (WAPDA) had always been a problematic issue for the governments in the past.

The latest move will reduce revenues of the cash-strapped WAPDA, they said.

"This tax imposition and withdrawal game has been the norm of the (former) Nawaz regime and a continuation of this trend shows that the current government is also feeling similar sort of insecurity," Arif said.