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On March 27, 2010 Pakistan’s central bank left its benchmark discount rate unchanged at 12.5 percent. With inflation running at above 13 percent, this means the effective real discount rate in the country is in the negative territory. The bank is caught between competing objectives of (a) reviving the economy (through low rates) and (b) fighting inflation (by raising rates). “An upward adjustment in the policy rate at this juncture runs the risk of impeding the still nascent recovery,” the central bank said in its statement. “A downward adjustment runs the risk of fueling already high inflation.”

A vicious economic cycle of low growth, high inflation, political instability and capital flight seems to have taken over the country:

• Consumer prices in Pakistan rose 13.04 percent in February from a year earlier after climbing 13.68 percent in January. The rise in inflation has partly been caused by the policies that are being imposed on the country by IMF.  For instance, Pakistan increased gas and electricity tariffs by an average 13.5 percent on March 1 as part of a directive by the IMF to end subsidies. These prices are expected to rise further in the coming weeks.
• The economy grew by a mere 2 percent in the last financial year ended June 30, the slowest pace in eight years. The economy needs to grow by at least 6 percent over the next five years to reduce poverty, according to government’s own projections.
• Foreign direct investment in Pakistan dropped 53 percent to $1.32 billion in the first eight months of the fiscal year that started July 1.
• More than 300 people have died since Jan. 1 as militants retaliated against the army’s offensive that targeted Taliban extremists in the country’s northwest.
• In light of the deteriorating security situation, many MNC’s are closing down their operations in the country. Just last week Singapore Airlines which had four flights a week from Pakistan to Singapore, announced that it has closed its offices, sacked its entire staff and stopped all flights.

Pakistan’s business elite is concerned about these developments and exploring options outside the country.  Historically, Singapore has been a favored location for Pakistan’s business elite due to its large Muslim population and historical connections forged during the shared experience under British colonialism.  Pakistan’s economic challenges are likely to accelerate the migration of Pakistan’s business elite to Singapore.

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