Pakistan faces rising capital flight to Gulf economies

The current political and judicial crises in Pakistan is triggering heavy plight of capital to the Gulf, while the country's rupee witnessed its history's biggest depreciation to reach almost Rs70 against US dollar by Friday. Last Monday, less than a week ago the rupee had traded at 65 against the dollar.

According to Karachi-based analysts, businessmen are shifting their capital outside, mainly to the Gulf, investing in the region's booming real estate market.

The rapid capital outflow from Pakistan to the Gulf and other countries, according to Karachi market sources, is triggered by a number of issues.

Some of the hottest issues are judiciary impasse, high oil prices, law and order situation in North West Frontier Province and Balochistan, where a nationalist insurgency is boiling, and the uncertainty shrouding the provincial and federal coalition governments.

Another core reason for the capital outflow and currency depreciation is the country's widening current account deficit, which has reached $9.5bn (Dh34.8bn) during the first nine months of the fiscal year of 2008.

The fast and historic deprecation of the rupee has also forced the State Bank of Pakistan (central bank) on Friday to impose a ban on the outflow or the export of the euro and the British pound sterling for an unspecified period of time to help stabilise the currency.

"There is uncertainty among the business community due to the political crisis, the issue of the judges' restoration and the law and order situation in the country. People are selling their equities and leaving the country due to these crises," said Saeed Sarbazi an analyst affiliated with Pakistan' leading Business Recorder daily.

Talking to Emirates Business from Karachi, he said at least 25 top builders and real estate companies have already decided to shift to the Gulf as a result of seeing little hope for the business environment to improve.

"Billions of dollars are being moved to the region through different channels. There are no official figures of the current outflow of investment from the country as most of the transactions are being made through the unauthorised hawala, a parallel banking networking system. According to a Geo TV report, more than $15bn have been shifted to the region for real estate investment," he added.

He said the country has also been witnessing a massive dip in foreign investment. "This was again mainly due to foreign investors' shaken confidence over the country's political situation on judges' issue as well as the over all law and order situation, specifically in NWFP and Balochistan. On the other hand, the government did not launch Global Depositary Receipts (GDRs) or Euro Bond in the international market this year," Sarbazi explained.

A senior official of a leading Karachi-based real estate company, who wished not to be identified, said there are other serious reasons as well, which are forcing them to sell their business and invest outside the country.

He said the most serious was the bureaucratic red-tapism that is eating away their businesses and profits. He said: "For instance take the Karachi Building Control Authority (KBCA). We have to pay the officials Rs20 million for the approval of a realty project.

"There are other regulatory authorities as well where we have to pay them huge amounts of money."

The real estate company official said they have decided to shift their businesses to the Gulf due to these circumstances and political crisis.

Another segment of the country's economy hard-hit in recent weeks was the stock exchanges. Karachi Stock Exchange (KSE), which was going to become the best Asian bourse, witnessed a massive loss of more than 1,000 points during these two weeks.

Commenting on the KSE's performance, Ovais Siddiqui, head of international sales at First Capital Equities Limited, said: "The share market witnessed a massive correction due to uncertainty on political front."

Tough rules

Pakistan's Central Bank has modified laws of exchange companies, asking them to close their accounts abroad, ban the export of foreign currencies and only deal through their accounts in local commercial banks. The move follows a drop to the lowest level in the value of the rupee this week. A Central Bank spokesman said the ban will continue indefinitely.

The numbers

$9.5bn: The current account deficit in Pakistan during the first nine months of the fiscal year of 2008. The widening deficit is the main reason behind the currency depreciation

25: The number of builders who have shifted to the Gulf from Pakistan

1,000: The points Karachi bourse lost in two weeks

Follow Emirates 24|7 on Google News.