Severe economic crisis threatens Pakistan's stability

ISLAMABAD, Pakistan — A worsening economic crisis in Pakistan is pushing millions more people into poverty, and experts fear that it could help Islamic extremists recruit new converts.

The crisis began early this year, as democracy was restored after more than eight years of military rule. Now Pakistan's hard currency reserves have shrunk to $3.5 billion, and without an international rescue package, America's key ally in the fight against al Qaida is likely to default on foreign debt repayments in the next two months, economic experts said.

Inflation is running at 25 percent, according to official figures, electricity is in short supply, and Pakistan's currency, the rupee, has been devalued 25 percent against the dollar. Investor confidence has fallen so low that on Monday, police had to surround the Karachi Stock Exchange to protect it from angry investors. The Exchange already had lobbied the government unsuccessfully to be allowed to close for two weeks.

Terrorist acts by Islamist insurgents have accelerated capital flight and discouraged foreign direct investment. Depositors are lined up at banks to withdraw their money or to send it abroad.

"The canvas of terrorism is expanding by the minute," said Faisal Saleh Hayat, a member of parliament and a former interior minister under Pervez Musharraf, the U.S.-backed former president. "It's not only ideological motivation. Put that together with economic deprivation and you have a ready-made force of Taliban, al Qaida, whatever you want to call them. You will see suicide bombers churned out by the hundred."

"In Pakistan, there are a huge proportion of people just above the poverty line. A slight shock in their income can push them below the poverty line," said Sadia Malik, director of the Mahbub ul Haq Human Development Center in Islamabad, the capital. "This is the kind of shock that would have pushed a huge number of people into the poverty trap,"

The prices of wheat, rice and milk have more than doubled in the last year. The price of flour used to make roti bread, the food staple, has jumped from 12 rupees (15 cents) a kilo last year to 28 rupees (35 cents). Economists warn that prices would spiral even higher if Pakistan defaulted on its foreign debt.

Before the crisis, an estimated that 56 million Pakistanis, around a third of the population, already were living below the poverty line, as measured by their daily caloric intake. Millions more are likely to have joined them now.

One direct impact of the economic slide is that the poor will have to rely increasingly on free education offered by madrassas, or Islamic schools, Hayat said. Islamic schools, some of which have been accused of inculcating children with Islamic extremism, also offer free food and clothing. Although most madrassas aren't radical, critics say they churn out pupils who're ill equipped to join the labor force.

Faiyaz Ahmed, a taxi driver in Islamabad, said that due to his sinking income, he had to withdraw his two youngest children from regular school and was now considering putting them in a madrassa or sending them to work.

"We depend on God, not the government, not the president," said Ahmed, who until recently was a supporter of the governing Pakistan Peoples Party. "Only God can save us now from this mess."

Much of the problem traces to government. During his last two years, Musharraf tried to bolster his flagging appeal with enormous subsidies that the country couldn't afford for wheat, fuel and other staples.

The new government, led by Asif Ali Zardari, who became president last month, has unveiled its own spending commitments, including a $450 million fund to support the poor.

Zardari said in a recent interview that his government pays its security forces far less than the extremists offer recruits. "Those terrorists are paying their soldiers 10,000 rupees ($126 a month); I'm paying seven or six thousand rupees."

Pakistan is looking for at least $10 billion to bail it out and is pinning its hopes on a meeting in Abu Dhabi likely either later this month or early in November, of a newly-established consortium known as "Friends of Pakistan," which includes the United Arab Emirates, China and the U.S., economic experts said.

"If Pakistan had a good, solid macro stabilization for the short term, and growth program for the medium run, most donors, multilateral and bilateral agencies, would buy into that," said Faisal Bari, a professor of economics at the Lahore University of Management Sciences. "There is a realization that a stable Pakistan right now would be very important, not just for the region, but for the war on terror."

(Shah is a McClatchy special correspondent.)


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