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Pakistan Battles Inflation, Not Just Militants

Thursday, 24 Jan 2008 | 12:59 PM ET

After the assassination of Pakistan opposition leader Benazir Bhutto the concern of government turmoil in Pakistan causing even more stability in the region heightened.

Pakistan President Pervez Musharraf.
Geert Vanden Wijngaert
Pakistan President Pervez Musharraf.

Much of the recent focus has been on the upcoming elections and President Pervez Musharraf ability to crack down on terrorists. But the health of the Pakistani economy could be crucial as voters head to the polls.

An increase in poverty could further erode faith in economic reforms that Musharraf has said are crucial to the country's progress. On Thursday he told attendees that poverty and illiteracy are "at the core of suicide bombing

So far, the Pakistan economy has taken the political problems in stride, but investors and the business community will be hoping for a "good outcome from the election that can take the economy forward," continuing growth and brining in stability, Pakistan's Minister for Finance and Revenue Salman Shah said in Davos.

"The reconciliation among the different (political) parties is very critical going forward," Shah told me. "Whoever comes into power will have to take the reform programs forward."

The country is dealing with two economic phenomena that hit the poor particularly hard: food and energy inflation.

Food is more than 40 percent of headline inflation and global food prices have risen 50 percent in the past year, Shah said, adding that core inflation, excluding food and energy, is under control.

"The main challenge would be to ensure that we are able to pass on the fuel costs to the consumer in a gradual manner without stoking too much inflation and be able to make sure our fiscal deficit is within our target," Shah added.

He expects the U.S. economic slowdown to be mild because of the actions of the Fed and an expected fiscal stimulus package, but if there was a sharp slowdown then a significant decline in oil prices would be very positive for Pakistan, he said.