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Pakistan: A forced marriage to the IMF?

By M Ilyas Khan
BBC News, Karachi

A poor family cooking in Rawalpindi
The poorest have been hit hardest by food inflation

There was great hope earlier this year that Pakistan would enter an era of peace and plenty following the return of democracy.

There is now a realisation that peace and plenty require strict discipline, careful planning and loads of hard work.

Until now, these benchmarks of success have been in short supply.

The military is yet to deal a decisive blow to the Islamist militants who control large swathes of territory on the country's western border with Afghanistan.

The new civilian government has used up more than half of the country's meagre foreign exchange reserves without enhancing its own capacity to generate income.

After the elections in February the country had pinned hopes on a "democracy dividend" from its Western allies in the "war on terror".

It is now contemplating an unpopular bailout by the International Monetary Fund (IMF) which is likely to cut growth, worsen the employment situation and perhaps even affect the size of the government, including that of its powerful military.

How has all this come about?

'Not sustainable'

Over the last few years, the Pakistani economy has grown 7-8% annually, mainly because of the resources that became available when it agreed to side with the US after the September 2001 attacks in New York and Washington.

Finance adviser Shaukat Tarin
Finance adviser Shaukat Tarin says Pakistan needs up to $5bn fast

One independent economist, Dr Asad Sayeed, estimates that nearly $70bn (45bn) flowed into the Pakistani economy in the six years after 2001, on top of aid and assistance from Western governments and financial institutions - including $10bn from the Bush administration.

But growth mostly took place in the services sector, especially consumer financing. No significant assets were created in the industrial and agricultural sectors.

"It was not sustainable growth, and as a result economic imbalances started to re-emerge in 2006," a former finance minister, Sartaj Aziz, said in a recent television interview.

The new government took power at a time when international food prices had already started to soar, and oil prices were to hit the high mark weeks later.

By June the country's trade imbalance had become unsustainable, and the gap between its income and expenditure rose to over 6%, making local markets extremely nervous.

Twice the central bank, the State Bank of Pakistan, injected dollars from the reserves into the currency market to prevent a freefall of the Pakistani rupee.

In addition, the government had to take measures in the stock market to prevent share values from nosediving.

The government, which remained largely embroiled in political problems during its first six months in office, has now awakened to an increasingly bitter reality.

Correcting distortions

According to Shaukat Tarin, finance adviser to prime minister, the country needs $4-5bn within a month to cover its trade gap and to pay off debts on bonds and loans from multilateral creditors.

The US seems to be keen to push Pakistan towards the IMF
Sartaj Aziz
former finance minister

It needs up to $15bn over the next 24 months, he says, to stabilise the economy and correct distortions, such as a move from import-based consumer policies to those focusing on import substitution through domestic production.

To achieve this it needs sustained foreign assistance and investment in the agricultural, industrial and energy sectors.

The country has plenty of long-term commitments from a group of countries called the Friends of Pakistan, but any default on international obligations in the short term may hurt its ability to attract future investment.

A US commitment to allow non-military assistance of up to $1bn per year for five years will have to wait until the US Congress has done the requisite legislation.

Commitments made by the European Union, the UK's Development Fund for International Development (Dfid), the World Bank, the Asian Development Bank and the Islamic Development Bank are also likely to take time to mature.

Meanwhile, two of Pakistan's closest allies, China and Saudi Arabia, have apparently declined to provide cash for an immediate bailout. China has expressed intent in providing relief through investment. Saudi Arabia is talking about deferring oil bills.

Reluctant

Only one short-term window remains open, that of the IMF, with its strategy of achieving stabilisation by cutting growth.

People made homeless by fighting in the district of Bajaur
Displaced by fighting: militancy has played havoc with the economy

Pakistan has been reluctant to go to the IMF because of its various conditions to reduce the size of the government, cut development expenditure, reduce or eliminate politically important subsidies etc, and also because of its strict monitoring regime.

But perhaps this is what the international community wants before it commits funds to Pakistan.

"The US seems to be keen to push Pakistan towards the IMF," says Sartaj Aziz.

Analysts in Pakistan generally agree with him.

"The world has moved in a concerted way to hold back their commitments until Pakistan submits to the monitoring regime of IMF," says one government economist, requesting anonymity.

The reason is not hard to explain.

"Everybody is weary of a state and a nation that has become a danger to the world," he says.

"While an economic bailout is essential to prevent it from passing into the hands of the militants entirely, the world would also like to see it does its best to curb militancy, which it has not done in the past despite consuming huge amounts of international assistance."



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