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Pakistan's Other Crisis

Author: Jayshree Bajoria
October 24, 2008

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The International Monetary Fund says Pakistan may need $10-$15 billion from donors over the next two years to avoid defaulting (Bloomberg) on its debts. The country's currency reserves have dipped to $4 billion, enough only to cover payments for oil and other imports for the next several weeks. Islamabad is hoping for more than $4 billion from international financial institutions like the World Bank, the Asian Development Bank, and some others. But without more assistance, analysts say, the future seems perilous.

The IMF also has reportedly offered a $6 billion loan (Dawn) package. The Pakistani government is considering IMF help. However, since the IMF loans come with conditions, including strict requirements on monetary and fiscal policy, experts say such funding may be politically difficult for a government already unpopular because of cuts in oil and food subsidies. The best hope, says the Financial Times in an editorial, is an IMF loan, augmented by individual countries, "that is flexible on conditions without compromising on the most vital of reforms." Islamabad is also rallying potential donor governments of the newly formed "Friends of Pakistan" group-including the United States, Britain, China, Saudi Arabia, and the UAE-for aid. The group will work with Pakistan's government for stability and development.

Pakistan's leadership attributes the balance of payments crisis to the rise in food and oil prices over the last two years. Terrorist attacks and a weak government have added to economic woes; foreign investment has declined, and ongoing fighting between the army and the militants in northwest Pakistan have left nearly 200,000 people displaced. Pakistani officials cite these troubles to make a case for urgent international assistance amid a global economic downturn. Pakistan's ambassador to the United States, Husain Haqqani, argues in a new interview with CFR.org that Pakistan's importance in the fight against militant Islamic terror groups should make the collapse of its economy unthinkable.

Washington Post columnist Anne Applebaum warns of many, including the jihadists, who have an interest in ruining Pakistan economically. "Eventually, one of them will," she writes. Pakistan faces tough going in soliciting aid in the current global environment. Close ally China has refused (NYT) so far to lend hard cash, while another important ally, Saudi Arabia, declined to offer concessions on oil. The preliminary meeting of Friends of Pakistan group also failed to bring immediate respite. A senior U.S. State Department official, Richard Boucher, said the group's goal was not to "throw money on the table." He said donor countries will try to provide support on the strategic level, and will supplement the efforts of Pakistan's government to tackle the crisis.

U.S. financial troubles may also slow down pending legislation in Congress for economic aid for Pakistan, say experts. A Senate bill co-sponsored by Sen. Joseph Biden (D-DE), the Democratic vice presidential candidate, seeks $7.5 billion in nonmilitary aid over five years starting next year. It was introduced in the U.S. Senate in July but was still pending when Congress ended its session this month.

The Pakistani government's own steps include eliminating subsidies for food and oil , working to bring down the fiscal deficit from 9 percent of GDP to 3 percent, and privatizing state-owned enterprises. But these measures "have not been accompanied by the support from our development partners that was needed to fully meet the needs of the economy," Shaukat Tarin, the recently appointed financial adviser to the Prime Minister, told an IMF-World Bank joint conference (PDF) in Washington earlier this month.

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