Even for a country now routinely scarred by violence, the scenes were startling. On Thursday, the clashes in Pakistan were not with militants near the Afghan border but in the financial districts of Pakistan's major cities as hundreds of angry investors visited their rage on stock markets that failed them.
The most dramatic scenes took place outside the Karachi Stock Exchange, where the benchmark index sank to a fresh low after 15 successive days of losses. Desperate to stave off further ruin, investors appealed to the management to put a stop to trading. When they were rebuffed, the crowds stormed out, tore doors from their hinges and hurled stones through the windows. In Lahore, the second largest city in the country after Karachi, car tires were torched in the street. Similar scenes broke the usual calm of the capital city of Islamabad.
The recent sharp fall is being attributed to a range of factors. Most immediate was the decision of the Securities and Exchange Commission of Pakistan to remove a 1% daily limit on how far share prices could decline, bringing it back up to 5%. There was also a ban imposed on short selling. But political factors were also at play. "Short-term day traders, who were using borrowed money, were a major factor," says Yousif Nazar, an economic commentator and former head of emerging markets at Citigroup. "But investors were also unnerved by reports that the United States was planning to strike inside Pakistan and the sight of the new coalition government falling apart." Recent U.S. airstrikes into the tribal areas along the Afghan border, paired with a rise in troop levels in Afghanistan's eastern provinces have heightened fears that Washington may act unilaterally against militants in Pakistani territory.
The broken shards of glass outside the Karachi Stock Exchange have perhaps become the most striking symbol yet of Pakistan's fast souring economy. Until recently, the exchange was among the most impressively performing markets in Asia, breathlessly touted by President Musharraf's government as a crucial component of the robust economy that he had built over the last eight years. But in the past year, as Pakistan passed through a string of political crises, the economy has slowed down. (It grew 5.8% this past year, compared with 7% the year before.)
The country is facing a litany of economic problems: shortages of wheat, electricity and fuel, galloping inflation (currently at 20%), and the rupee plunging to a record low. The emergence of an unsteady coalition government in late March has done little to inspire investors' confidence. Foreign exchange reserves have depleted by half while budget and trade deficits have widened.
In order to address some of these concerns, the government has turned to its allies in search of relief. The United States has agreed in principle to dispatch 500,000 tons of wheat, local newspapers reported Friday. The move comes a week after Saudi Arabia agreed to defer $6 billion in oil payments for a year.
The Karachi Stock Exchange had peaked in mid-April after the Pakistan People's Party led by Benazir Bhutto's widower, Asif Zardari and the Pakistan Muslim League-N led by former prime minister, Nawaz Sharif, shed their differences and formed a coalition government. But as the parties bickered among themselves, the index fell 36%, wiping out many people's life savings. Indeed, Karachi's small but powerful business community felt comfortable under the one-man rule of President Musharraf. Despite Musharraf's unpopularity, there is some nostalgia for the stability his regime afforded. In late May, rumors of his imminent exit sent the stocks tumbling by 4.5%.
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."