Books on Pakistan
Update No: 033 - (22/10/08)
Dumped by friends
Pakistan appeared at serious risk of default as the end of October approached,
as its requests for help towards the governments of China, USA and Saudi Arabia
were rejected. Although the Chinese promised to intensify their economic
cooperation with Pakistan and to build two nuclear power stations, they refused
to inject US$1.5 -3 billion into the country’s central bank, as requested by
Islamabad, in the absence of structural reforms. They only conceded a US$0.5
billion loan. The Saudis refused to offer discounts on their oil. The
government, which needs US$10 billion to meet short term liabilities, is now
considering to apply for IMF help, a move which is considered as the last resort
as it would imply, if successful, a tightening of its economic policies: removal
of subsidies, tighter monetary policy and steps toward reducing the fiscal
deficit, all of which are expected. In mid-October the government already
announced its intention to completely abolish subsidies on fuel, a move in a
direction which must please the IMF. The World Bank and some donor countries
will cover part of the bill too.
Default on the horizon?
The economic situation gets rapidly worse, with electricity one hour on and one
hour off. The central bank has foreign currency reserves for just two months of
imports, after they have fallen by 75% in a year. The failure to secure Chinese
aid led to a further drop in the value of the rupee, which has now lost almost a
third of its value, making vital imports even more expensive. The economic
crisis in America is also likely to affect Pakistan negatively, as remittances
(forecast initially at US$7 billion) are expected to fall this year. Both
Standard & Poor's, and Moody have been rapidly downgrading Pakistan’s
rating, which is now one of the lowest in the world, and hint that they are
considering downgrading again. The balance of payments deficit, worsened
markedly in the last quarter (to end September), from US$2.3 billion to US$3.95
billion. The current-account deficit is now at US$14 billion. Capital flight
reached US$1.2 billion a month over the last few months. Foreign investment in
Pakistani shares has already more than halved and is expected to dive further.
The banking system is in deep crisis, with liquidity drying up despite the
injection of cash by the central bank. The country’s indebtedness is rising
twice as fast as one year ago. Economic forecast are constantly being revised
downwards: the IMF estimates now a 5.4% GDP growth this year and 3.5% next year.
The allocation of resources to the deprived classes, a key feature of the
government’s programme, is already being curtailed, while the focus is now on
rescuing the banking sector and offering bank ‘holidays’ to foreign
investors. The government is now re-launching the privatisation programme, in
the hope of raising some cash. The Pakistani government seems to be counting on
the support of Western and conservative Gulf states to help preventing its
economic collapse, but the crisis has arrived at the wrong time. Pakistan’s
allies will meet in November to see what they can do, but cash suddenly is short
these days, particularly in the West.
The Nawaz-Saudi axis
The Saudi, among others, are certainly worried by what is happening in Pakistan.
Their sponsorship of talks between representatives of the Taliban and of the
Afghan government in September in Mecca was clearly more motivated by concerns
for the South Asian country, than for its Central Asian neighbour. That Nawaz
Sharif attended those talks might also be a hint of Saudi Arabia’s view of a
stabilisation plan for Pakistan. Nawaz might in their eyes be a better candidate
for a negotiated settlement with the Taliban and is unquestionably closer to the
Saudis than the PPP. In the parliament, Nawaz’s PML is already arguing in
favour of talks with the Pakistani militants. Zardari’s aggressive approach
towards the militants, adopted recently under American pressure, is losing
support even within the government coalition, as the Jamiat-Ulama-I-Islam
denounces the alliance with Washington.
Prospects are bleak, not least for the incoming US administration! This a
nuclear armed state. Can it also be allowed to become a failed state?