When Pakistan’s newly-elected prime minister Nawaz Sharif arrives in Islamabad this week he may take heart from the country’s surging stock prices.

But a reality check will quickly make him realise the tough task ahead in turning around an increasingly vulnerable economy. A country without regular electricity supplies can’t put too much faith in something as fickle as a stock market rally. 

As far as investors on the Karachi stock exchange are concerned, the result of Pakistan’s parliamentary election on May 11 is already a done deal.

They’ve driven the market to record highs on the prospect that opposition leader Nawaz Sharif will be returned to power. On Tuesday the exchange’s KSE-100 broke through the 19,000-level for the first time and more record highs are expected before the election’s over. 

Is Pakistan’s political transition in danger of succumbing to its economic woes? That’s a question increasingly making the rounds among the country’s businessmen as pro-democracy activists look towards the first-ever transfer of power from one civilian administration to another without at least some military involvement.

Almost two weeks have passed since prime minister Mir Hazar Khan Khoso took charge to oversee parliamentary elections due on May 11. While he has named a 14-member cabinet, Khoso still does not have a finance minister. 

Pakistani stockbrokers talk on their phones as they watch the latest share prices during a trading session at The Karachi Stock ExchangeThe decision by Pakistan’s central bank on Friday to cut its discount rate by 50 basis points to 9.5 per cent was a widely-anticipated move – a measure meant to give an impetus to new investments, and part of an easing cycle of 250 bp this year. The interest rate cuts are helped by falling inflation which is forecast to stay below 10 per cent for the financial year to June 2013, down from 12-14 per cent a year ago.

But long term watchers of Pakistan’s economic trends are eager to note that new investments have plummeted in the past four years since president Asif Ali Zardari led the country back to democracy. 

With elections looming in Pakistan by summer 2013, prime minister Raja Pervez Ashraf has ordered officials from the ministry of petroleum and natural resources to make certain that there are no shortages of gas this winter.

Ashraf’s order follows some of the shortages of electricity earlier this year which prompted angry street protests. Any repeat of demonstrations over gas shortages as winter temperatures get near freezing in parts of Pakistan – as happened last year (pictured) – would hardly help the prospects of Ashraf’s ruling Pakistan People’s Party (PPP) returning to rule the country for another five years. 

What’s a finance minister to do when his own cabinet colleagues disbelieve his figures?

Abdul Hafeez Shaikh, Pakistan’s finance minister, is finding out the hard way. The respected former World Bank economist has had his inflation data challenged by other ministers, with one of them saying the figures are “out of tune with reality”.

It’s not that his colleagues are interested in statistics. But they are very interested in the parliamentary elections due to be held by the middle of next year – and they’re scared the voters will be angry with the official data. 

The plight of Malala Yousafzai, the Pakistani schoolgirl shot by the Taliban for publicly demanding the right of women to be educated, has shone a global spotlight on the failings in the country’s social development. 

Pakistan appears to have warmed up to the idea of allowing fuel imports from India, following this week’s visit to Delhi by Asim Hussain, the country’s petroleum minister.

The move adds to the growing push in both nuclear armed south Asian countries for closer economic ties. In October 2011, Pakistan announced its intention to grant the most favoured nation status to India, reversing years of resistance from Islamabad on this count, while in April this year, India decided to allow foreign direct investments from Pakistan

Pakistan’s businesses should be celebrating this month’s interest rate cut of 50 basis points, which brought down the rate down to a maximum of 10 per cent.

But many critics argue it will take more than rate cuts to pull Pakistan’s economy out of trouble. 

Pakistan’s equity investors are eagerly awaiting news from the country’s central bank when it reveals its policy on future interest rates on Friday.

On Thursday, the Karachi Stock Exchange’s main index, the KSE-100, reached an all-time high of 15,815 points, comfortably overtaking the previous peak reached in April 2008. In part, the enthusiasm was driven by falling interest rates. But would further cuts finally get the economy moving? 

pakistani military attempt to curb violencePakistan’s main stock market may have given some comfort to equity investors on Monday when the main KSE-100 index rose just below one per cent on its first day of trade following the post Ramadan holidays marking the ‘Eid’ festival.

But Karachi’s investors were more anxiously watching the beginning of proceedings that the supreme court has launched to examine the underlying causes of this year’s bloody violence.  

Step one, achieved in late 2009, was getting the Taliban out of the Swat valley and reasserting control from Islamabad. Step two – in this spectacular haven of lush pastures beneath towering mountains near Pakistan’s border with Afghanistan – will be to get the tourist business humming again.

Given the widespread fear that remnants of the Taliban will try to take charge again one day, maintaining calm is a tall order. A revival of domestic tourism would be a major step towards restoring confidence. 

Pakistan ’s equity investors initially chose to ignore the death of Osama bin Laden as no more than a flash in the pan, even though many across the country of 180 million were shocked by his discovery in the country’s northern city of Abbottabad.

Shares barely moved on the news and in the three weeks since his killing by US special forces on 02 May, the Karachi stock exchange’s 100 index has fallen by just below two per cent. A reality check seems to be settling in among the equity investors after initial hopes of a bin Laden windfall of increased US support. 

Asif Ali Zardari, president of PakistanPakistan’s president Asif Ali Zardari has finally ordered fresh measures to raise badly-needed government revenue – a necessary step to rescue a faltering relationship with the International Monetary Fund.

But after a late-night announcement on Tuesday, the new steps threw up more questions than answers. 

General Ashfaq Kayani, Pakistan army chiefPakistan’s decision this week to begin negotiations with China to buy six  submarines coincided with confirmation of figures showing that foreign direct investment is down 21 per cent to just $1bn in the first eight months of the financial year ending in June.

Clearly, worsening economic realities have been ignored by ruling politicians and powerful generals who seem convinced that the threat to Pakistan’s shipping lanes is greater than the multiple economic, social and political challenges faced on land.