Pakistan economy may turn corner post-Musharraf

By Koh Gui Qing

KARACHI (Reuters) - Recovery could in sight for Pakistan's economy as it finally gets attention from a government distracted by a power struggle with President Pervez Musharraf, who resigned on Monday, but there is no guarantee.

Pakistan's ruling coalition government had vowed to turn its attention to the economy once Musharraf left.

After six years of healthy growth under Musharraf's rule, the economy is wrestling widening trade and fiscal deficits, soaring inflation, and falling reserves depleted by high oil prices at a rate that has alarmed investors.

The economy now needs to borrow billions from abroad to stay afloat. Analysts and investors are even talking about Pakistan returning once again to the International Monetary Fund for a loan as a last resort.

"The government can now focus on the economy, which is a refreshing change," said Mushtaq Khan, a London-based analyst at Citi. "The squabble with Musharraf has created a system of paralysis."

The government needs to restore investor confidence, battered by Pakistan's political turmoil, by taking concrete steps to turn the economy around, Khan said.

These include shrinking the trade deficit by banning imports of non-essential items such as luxury consumer goods, and cutting government spending by abolishing all fuel subsidies, he said.

Political turbulence and a wobbly economy have roiled Pakistan's financial markets. Stocks are hovering at a two-year low, and the Pakistan rupee has weakened to a near record low against the dollar.

Musharraf's resignation lifted Pakistan shares on Monday in their biggest one-day rise in eight weeks, and helped the rupee recover slightly. But analysts said the rebound is temporary.

"It's a major victory for the new government but there is still a lot of uncertainty going forward," said Sayem Ali, an economist at Standard Chartered Bank.

OLD RIVALS

Even with Musharraf out of the way, analysts said it is not clear the coalition government can focus on the economy as it promised, or stay in power for long.

That is because the two main parties in the coalition, the Pakistan People's Party (PPP) of assassinated former prime minister Benazir Bhutto and former prime minister Nawaz Sharif's Pakistan Muslim League (Nawaz) (PMLN), are old rivals.

They have bonded together over their opposition to Musharraf but will compete in the next election, and have differences over key issues, including the restoration of judges deposed by Musharraf last year.

"Even though (Musharraf's resignation) removes uncertainty, the new team has started on a very poor footing as far as the economy and investors go," said Mark Matthews, a strategist at Merrill Lynch in Hong Kong.