While the government looks to bring more guns into the restive regions of Pakistan's Northwest Frontier Province (NWFP) and Balochistan, its ability to import vital goods is dwindling. The months of political wrangling that preceded Mr Zardari's election in September have led to an full-blown economic crisis in Pakistan. Inflation is up to 25% (and in triple digits on basic food items), Pakistan's currency (the rupee) has lost 75% of its value this year, and foreign currency reserves are plummeting. Reports indicate that Pakistan has just $4.03b in cash, which can finance no more than 6 weeks of imports.
To this point, the financial crisis has drawn attention to Iceland, Ukraine, and emerging markets in Eastern Europe. Nevertheless, investors now regard Pakistan's debt as the riskiest in the world. Both Moody's and Standard & Poor's cut Pakistan's credit rating this month, citing fears that the country would default on its debt.
Local officials deny such a possibility, and claim that Pakistan will roll out an economic stabilization plan in the next few days. The country is expected to turn to the IMF (an unpopular option) and the Friends of Pakistan group (including Saudi Arabia, the US, Britain, and China) for help. Shaukat Tarin, Pakistan's finance advisor to the prime minister, told lawmakers that the country had 15 to 20 days to secure some $4b to service its debt and other payments.
Pakistan's economic predicament is the result of a high national debt (about 57% of GDP), a yawning trade deficit on account of high food and oil prices, and a decline in foreign direct investment. The country already received a $500m loan from the Asian Development Bank in early October, but is in desperate need of additional international assistance. With the global financial slowdown freezing credit lines, Mr Zardari's options are limited.
An IMF loan is particularly unpopular because it would likely carry conditions to cut spending and crack down on Taliban forces. Earlier this year, the Zardari government introduced several poverty alleviation schemes that would likely be scrapped under such budget-tightening stipulations. What is more, any escalation in the war against the Taliban carries a huge political cost for Mr Zardari. Last week, Pakistan's parliament unanimously adopted a resolution that would jump-start negotiations with Taliban fighters, and move to end military operations.
Pakistan has been faced this sort of economic squeeze before. After the oil crisis in 1974, Paris Club creditors had to restructure its national debt, left over from the secession of East Pakistan (Bangladesh). In 1999, the IMF began loans to Pakistan after the country faced international sanctions stemming from its 1998 nuclear test. Money is much tighter now, and Pakistan is considered a major player in the ongoing war against Islamic militants. Whatever rescue package emerges, it is sure to have several strings attached.
Wednesday morning brought more bad news to Pakistan. Before dawn, an earthquake in the southwestern city of Quetta killed more than 150 people and destroyed more than 20 villages. The country is literally on shaky ground.
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2 comments:
Interesting article--does Pakistan have any options other than the IMF? What does Zardari need to do to get Pakistan moving in the right direction?
As for Pakistan's financial options, they are somewhat limited. The country has historically turned to countries like China, the US, Britain, and oil-states in the Middle East. So in a sense, the alternative to the IMF is sovereign governments across the globe.
The problem is, many of these governments are the same ones that extend lines of credit to the IMF. That is to say, the difference between borrowing from the IMF and, say, the US is almost academic. And with a slew of countries lining up before the IMF to get loans, its available reserves of about $250b (compare that to the trillion dollar bailout in the US) will be swallowed up very quickly.
If I could answer the second question, I would probably have a job in Islamabad. I honestly think that the structure of the Pakistani economy is not viable. The country basically imports everything needed for survival. Sure, commodity prices are coming down somewhat, but that's more a sign of the global economic contraction than any real price relief.
The fix is probably longer term. Deepen democratic roots, build up a rule of law that can support private enterprise, tamp down insurgent violence, and then attract foreign investment with high interest rates. None of these ideas are really surprising, but their execution is the main problem.
If you have any personal experiences from life in the country I would love to hear how they might relate. Thanks for reading!
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