Another day, another rupee

When I see photos like this, as I saw last week in the New York Times, I get nervous. No, the image isn't from the latest Batman or Indiana Jones movies but from Pakistan, which also happens to be on the way to something of an economic meltdown.

A key ally in the region, Pakistan is a desperately poor country—the story in the New York Times quotes a man who had just lost his life savings, which for him was about $4,175—but it has been growing steadily since a recession in 1951, most recently rate of about seven percent per year. However, the political dischord surrounding the government of Pervez Musharraf and the assassination of Benazir Bhutto in 2007 rattled the economy greatly.

In January, Reuters reported that Pakistan's central bank downgraded its yearly projections for the country's economic growth from a robust 7.2 percent to somewhere between 6.6 and 7 percent. But the problem isn't simply short-term political termoil, because Pakistan's economy, like ours, is a consumer economy driven by credit. A few weeks after the Bhutto assassination, the Voice of America reported that:

Economist Qaisar Bengali says the strong performance was not sustainable, partly because on the consumer side of things, it was the result of easier bank credit. That made it possible for more people to borrow to buy big items such as cars. Bengali says when consumer financing is removed, bank profits decline, automobile sector growth declines, and gross domestic product growth declines.

Such reliance on credit means that the Pakistani economy is open to the same pressures that the American economy is. Even in January, Reuters reported that "the central bank also sounded a warning about the country's widening current account deficit and fiscal shortfall, saying they exposed the country to funding risks at a time when the U.S. subprime crisis was troubling global credit markets."

This suggests, once again, that the pocketbook issues of the American economy have implications for international security. But Time reports that for Pakistanis, the troubled economic forecast also suggests a staggering level of incompetence within the country's fragile coalition government.

Since the new government took office, there have been alarming levels of capital flight. Foreign investors began to pull out in the days after former prime minister Benazir Bhutto's assassination. "But mainly it has been due to the weakening of the rupee," says M. Ziauddin, a specialist writer on economic affairs for Dawn newspapers. "People clearly wanted to save their dollars." "Right now there seems to be a crisis of confidence," says Nazar, the economic commentator. "There are serious questions about the leadership. The president is disinterested, and the political leadership [Zardari and Sharif] is out of the country. But it is also a question of competence. The crisis over the sacked judges [which sped protests that led to Musharraf's downfall] and the coalition's internal disputes have left the economy ignored."

As Musharraf clung onto power, I remember his saying that he mistrusted civilian governance because of the high levels of incompetence and corruption that were associated with the regimes of Benazir Bhutto and Nawaz Sharif. At the time, his comments were dismissed. But what if he was right?