Pakistani coalition free to focus on problems

By Robert Birsel

ISLAMABAD (Reuters) - Leaders of Pakistan's coalition government on Tuesday set about seeking a replacement for President Pervez Musharraf and tackling pressing economic and security problems.

Musharraf, former army chief and key ally of the United States in its campaign against terrorism, resigned on Monday to avoid impeachment nearly nine years after taking power in a coup.

Speculation he would resign had mounted since the fractious coalition government, led by the party of assassinated former prime minister Benazir Bhutto, said this month it planned to impeach him on charges of violating the constitution.

Prolonged wrangling over Musharraf's position hurt financial markets in the nuclear-armed country of 165 million people, and raised concern in Washington and elsewhere that it was distracting from efforts to tackle militants, especially in areas bordering Afghanistan.

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

Mushtaq Khan, a London-based analyst at Citi, said the government could now focus on the economy, taking concrete steps to restore investor confidence shattered by the political turmoil.

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, Khan said.