As recently reported by The Wall Street Journal, the stock market in Pakistan continues to see year-long lows, dealing a sharp rebuke to a new government struggling to gain the confidence of foreign and domestic investors.  As the article notes:

“…Financial authorities recently unveiled a variety of measures intended to help steady both the economy and the stock market. On Tuesday, Pakistan’s central bank moved to curb roaring inflation by raising interest rates. In late July, the government announced a fund of 20 billion rupees, or about $280 million, to prop up share buying.

Pakistan is also finalizing details on an agreement to defer payment on its ballooning oil bill from Saudi Arabia and other Arab suppliers, according to the government’s top finance official, Naveed Qamar. That could ease pressure from an estimated $6 billion short-term debt Pakistan owes Saudi Arabia and other suppliers for this year and staunch the outflow of foreign exchange.

Investors, however, haven’t been impressed. Since soaring to record levels following the euphoria of Pakistan’s democratic elections and transition to civilian rule in February, the stock market in Karachi has buckled.

…In 2007, Pakistan’s stock market was one of Asia’s star performers, as investors largely ignored the country’s political turbulence. The KSE 100 rocketed 40%.

But this year, unable to shake its political and economic uncertainty, Pakistan has been among the worst performers among regional markets.

Foreigners have fled. For the fiscal year that ended June 30, foreign portfolio investment in Pakistan — which includes equities and bonds — declined 99% from the year-earlier period, according to government figures.

Some investors say the woes are symptomatic of a Pakistani leadership that appears divided, distracted and out of its depth. The lackluster response contrasts with the previous Pakistani administration, whose prime minister was led by former Citibank executive Shaukat Aziz. He treated the stock market as a barometer for overall foreign sentiment toward Pakistan, according to Asad Iqbal, managing director at Ismail Iqbal Securities in Karachi.

When the Karachi market was “tanking” in recent weeks, Mr. Iqbal says, “nobody seemed to be paying attention.”

…Economically, consumer price inflation has climbed above 20%; the financial deficit has widened sharply and the rupee has lost about 20% of its value against the dollar since June 2007. Officials blame the previous government for stoking inflation by holding back needed price increases for fuel and food in order to improve its election prospects.

“It’s been a year of complete turmoil,” Mr. Qamar says in an interview. The official, given the finance minister’s job after his predecessor from the Pakistan Muslim League (N) left the cabinet over the judges spat, adds “We are now trying to stabilize things.”

Mr. Qamar says the priorities are to reel in government spending and bring the deficit under control. Some subsidy programs will be eliminated, he says, although the government is doling out up to 50 billion rupees in emergency cash payments for the poor.

The finance official also says the government is eager to revive Pakistan’s privatization program, selling strategic stakes in big state companies and possibly listing them on the stock market. He says Pakistan will return to the overseas bond market, although he declines to provide timing or details for these moves. “I see the sentiment [among investors] is changing,” he says.

But economic analysts continue to issue warnings. In July, the International Monetary Fund cautioned that Pakistan must tighten fiscal and monetary policy to contain inflation and reduce its current account deficit. In June, both Standard & Poor’s and Moody’s cut their ratings on Pakistani debt.

For some more bullish market watchers, the bright side is that Pakistani share prices are now at bargain-basement levels. Maheen Rahman, head of research for the Karachi-based brokerage BMA Capital Management, expects a market rebound once foreign aid begins to arrive and the government gets a handle on inflation. Aside from the expected debt relief from Arab oil suppliers, Pakistan would receive $7.5 billion in U.S. aid over five years under a recently proposed Senate bill.

As always, the wild card is Pakistan’s political scenario. “What’s difficult to estimate is political risk, and how much that’s priced in,” Ms. Rahman notes. But she adds, “I don’t think we are very far from the bottom.”

Others aren’t so upbeat. Mr. Iqbal of Ismail Iqbal Securities says the new government hasn’t shown it can manage the economy with enough skill and vision to reassure skeptical investors. In his view, the Pakistan People’s Party continues to act like it is an opposition party and not a ruling one, faulting the previous government for all the problems faced.

“They are still in blame mode,” Mr. Iqbal says of Pakistan’s current leadership. “They need to move on.”