Economic Worries Trump Security Fears in Pakistan

Bombs explode and a state of emergency is imposed. Judges are sacked, lawyers protest en masse, and the country's most popular politician is assassinated. But if you ask Pakistani Jamila Bibi what she's worried about, she doesn't cite terrorism or political instability. She's worried, she says, because she has no customers.

"Oil is so expensive, flour is so expensive, I can't sell anything. We are under great distress," the 51-year-old widow says at a weekly market in Islamabad, standing under the bras she used to sell with ease. "I've taken a loan out to educate and feed my grandchildren. I don't know what to do. Everything has become so expensive, I'm left with nothing."

There are many things that people fear in this troubled country. Bombs have been placed under fruit carts in markets. Mosques have been attacked. Residents avoid standing next to police or soldiers, the most common target.

But if you want to get a sense of what preoccupies people on a daily basis, on an hourly basis, ask them about the price of bread. Ask them about the price of flour, if they can even find flour.

"The flour was very expensive," says Mohammed Nazir Gul, who managed to locate one of the rare government stores in Islamabad with a few bags left. "People come from miles and stand in line. Thank God there's no line here."

A severe flour shortage first hit Pakistan in December. Then there was the unprecedented rolling blackouts, or "loadshedding," as it's known here, implemented for the first time during the winter months. Then there was the shortage of CNG in the big cities. Then there was the inflation, some of the worst of any country in the region: Over the last year the price of clothes rose 9 percent while food jumped 12 percent. And from November to December, the price of flour rose 20 percent.

Day in and day out, there is no good news for the Pakistani middle class. But despite the media's focus on terrorism, it is economic woes, perhaps more than people's physical fears, that are the most important going into next month's election.

It didn't always used to be like this. A few years ago the story of the Pakistan's economy was one of promise and profits. Annual economic growth averaged more than 7 percent from 2002 to 2007. The stock market soared 40 percent last year. And foreign investment flowed into the country, rising almost 50 percent to $5.1 billion as of last June.

You can find that promise in the offices of Foundation Securities, an investment bank in Islamabad whose windows afford some of the best views of the mountains that ring this city. In the main room, couches and tea and magazines are set up around a huge TV screen that updates every few seconds. People come here to watch their stocks rise and fall, minute by minute, rupee by rupee.

"The Pakistani economy has done tremendously well the last four or five years. Everybody has made money," says Azhar Hussain, Foundation Securities' deputy manager. "Post -9/11, Pakistan was seen to be a country which was toeing the line of the West, and very acceptable. So a lot of money came in. And a lot of money came in from different places."

Money from Pakistanis returning home, money from Pakistanis who profited from stocks or real estate. And foreign money from the Middle East, from Singapore, from Europe and, more than any other country, from the U.S.

From July 2007 to January 2008, the cumulative inflow from American investors into Pakistan was $1.5 billion. The next largest investor was Britain, with less than half that amount.

And when the foreigners and the rich locals were spending, they created unprecedented demand for even big-ticket items.

"We had a couple of fantastic years in 2005 and 2006," says Ahmed Sajeel, the regional manager for BMW. He opened the country's first BMW dealership in late 2003 in Islamabad, quickly becoming automaker's fastest growing market in the region. In 2006 he sold 270 cars. But last year, he sold only 150. "2007 was particularly patchy. Things have slowed down a bit."

Even though the bottom hasn't fallen out, that trend is evidenced across the economy. The cumulative outflow of foreign investment has outpaced the cumulative inflow in January. One week ago, the State Bank of Pakistan reported foreign exchange reserves fell to $15.2 billion from October's $16.4 billion.

As goes the security situation here, so goes the economy. In the days after Benazir Bhutto was assassinated, protestors firebombed banks, markets and businesses. The losses ran into the billions of rupees. The stock market tanked 15 percent almost immediately, though enough people saw bargains to push it back up in the following weeks. The economy, people were reminded, was fragile.

Over the last five years "the barometer of the economy that was being shown to the public and the West was not correct," says Mizra Mahmood Ahmad, a lawyer, businessman, and a client at Foundation Securities. "We were looking at the stock market, we were looking at our foreign exchange reserves… which were not expenditures into development or infrastructure. So it was a disaster waiting to happen. This economic 'miracle' is unraveling right before our eyes."

In a country where 40 million people live on less than $1 a day, there never was any miracle. And the extra money they have to spend now can break a family's budget.

"Look at the price of everything. Rice, for 70 rupees a kilo, used to be sold for 35 rupees a kilo," says Matiur Rahman, who mans a general store booth at the market in Islamabad. "People used to buy 5 kilos yesterday. Today they're buying 2.5 kilos… If they're buying rice, they'll buy the low-grade rice, not the more expensive rice. There are no customers. All day long, we're just sitting idle."

Most Pakistanis, rich or poor, shake their heads at how bad it's become.

"Financially I have benefited from the Musharraf era," says Ahmad, who has invested every penny he has in Pakistan. "And that's the tragedy. Even people like us realize that that benefit is very fragile. It can go away within months, not years."