Hot spots: Pakistan.(international)

The crisis of confidence that has hit the Karachi stock market is indicative of a general collapse of trust in the civilian government that the country elected only a few months ago to replace the military regime of Gen. Pervez Musharraf. Predictably, the new administration has turned out to be dysfunctional, especially since a dispute in mid-May over the reinstatement of judges fired by Musharraf prompted former Prime Minister Sharif to take his Muslim League (PML-N) out of the governing coalition and support the administration in parliament only on an issue-by-issue basis.

There are technical factors that have been partially responsible for the market dive, but the real problem is that investors are worrying about inflation and the dangerously widening fiscal and current-account BoP deficits and are troubled by the realization that the new government has failed to set any promising new directions. The national consumer price index in June was nearly 22% higher than a year earlier. The prices of main daily commodities have surged by 20%-30% in the past year. Since the government can no longer afford fuel subsidies swallowing up the equivalent of 6.5% of GDP and will have to keep cutting the subventions, Pakistanis have surely not yet seen the worst of the monetary erosion. The budget deficit is equal to 7% of GDP and growing. The high cost of importing food and fuel has drastically widened the country's foreign merchandise trade and current-account BoP shortfalls, with the latter currently running at an unsustainable 8.3% of GDP, and has sapped official international monetary reserves by more than 35% since last October, when they had hit a high point of just over $14.7 billion.

The rupee, not surprisingly, has touched record lows against the globally weak U.S. dollar. It has lost more than 13% of its value so far in 2008. The government has just raised the prices of fuel products for the sixth time in five months, by up to 17%. Chronic power outages are continuing to disrupt businesses. But Prime Minister Yousuf Raza Gilani, unwilling to accept any responsibility for this state of affairs, is blaming President Musharraf (whose regime had presided over years of economic growth near 7% per annum and a steady increase in the country's foreign exchange cushion) and global trends in oil and food prices, over which he has no control.

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Pakistanis apparently don't agree that the administration has no responsibility. In a just-released public opinion poll, 86% of respondents said they thought their country was headed in the wrong direction, compared with 59% in June 2007, when Musharraf was still at the helm. The outside world and especially the U.S. appears willing to help with money for development. U.S. Senators Joe Biden and Richard Lugar recently introduced a bill that would triple the current level of non-military aid to $1.5 billion annually over five years, provided Islamabad offers greater accountability concerning the funds it spends on counter-terrorism efforts.

The government appears prepared to accept the condition in order to be able to take advantage of the extra money. It also insists that it is close to finalizing a deal with Saudi Arabia under which it will be able to defer payments for oil ...