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The departure of Pakistan’s President Pervez Musharraf was greeted with cheers by financial markets yesterday. The $40bn Karachi stock market, which has been hammered for most of the year, rose 4.5 per cent. Even the long-suffering rupee bounced from record lows last week to manage a 2 per cent spurt against the dollar.

Alas, this has all the hallmarks of a flash-in-the-pan relief rally. Mr Musharraf, who seized power in a 1999 coup, had been a lame duck president since his allies lost elections in February.

Going quietly gives a dose of stability to the crisis-racked country but does not end political battles. The two parties that make up the ruling coalition are uneasy bedfellows. The issue of the Supreme Court, the genesis of Mr Musharraf’s downfall after he sacked the then chief justice on vague charges of misconduct, has yet to be resolved – and the two parties are at loggerheads as to how to go about it.

Hopes that Mr Musharraf’s departure leaves the government free to concentrate on the tattered economy are thus optimistic. More’s the pity. Privatisation and deregulation petered out a couple of years ago. Foreign portfolio investors took fright at the unfolding political drama and turned net sellers in November. External factors, specifically inflation, exacerbate domestic weaknesses.

Pakistan shares with its neighbours a propensity for subsidies, and higher commodities prices burn a hole in the state coffers. In the year to June 30, the fiscal deficit surged past 7 per cent of GDP, almost double the targeted level. An elevated import bill (one-third of which goes on oil) resulted in a ballooning of the trade deficit. Economic growth, which had been running at about 7 per cent, decelerated to less than 6 per cent last year. Inflation is above 20 per cent and the central bank is horribly behind the curve. Unemployment will almost certainly rise.

The Musharraf era is over but foreigners will want to see more than a new face before cranking up the investment.

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