Highlights
– Economic meltdown comes at a time when Pakistan is dealing with rising violence
– Pakistan has turned to China for financial aid, but falls short in reaching a deal
– The most likely option for Pakistan involves seeking a loan from the International Monetary Fund (IMF)
Battered by record high inflation and a plunging currency, Pakistan’s new leaders are desperately seeking foreign loans to ward off a possible economic meltdown that would have dire consequences for the country and region as a whole.
Pakistan requires an immediate commitment of at least US$2 billion to restore confidence in the country after an alarming slump it its foreign reserves. However, Pakistani economists claim that the country will need up to an additional US$8 billion to repay sovereign debts due to mature in 2009.
Efforts by Pakistani leaders to ward off a potential economic meltdown comes at a time when the country is trying to contain and quell rising violence by Islamist fundamentalists largely operating out of the North-West Frontier Province (NWFP) and Federally Administered Tribal Regions (FATA). Because of the soaring violence, it raises the stakes and consequences if the nuclear-armed country were to face an economic collapse.
Despite the major consequences sure to follow an economic meltdown in Pakistan, the country’s plea for help from potential donors in the West is unlikely to produce results in the near-term. The West is largely distracted by the global financial crisis that has hit most developed countries, furthering fears of recession in their own economies and hampering their ability to loan money to other struggling countries. Unlike in the past where the United States (US) was a prime donor of military and economic aid to the Pakistani government, in the near-term, Islamabad will increasingly look to China and potentially Russia for aid, a step that will likely lead to enhanced economic, trade, and possibly military ties between the countries.
Looking Toward China
On October 17, 2008 Pakistan’s President Asif Ali Zardari completed his first state trip to China, where both nations signed at least 11 deals on trade and economic cooperation, infrastructure projects, agriculture, mining rights, and telecommunications. In addition, China and Pakistan aimed to double bilateral trade by 2011, which presently stands around US$7 billion.
While the two nations have had a rocky and unpredictable relationship over the years, President Zardari’s visit comes at a pivotal moment because Pakistan’s struggling democracy is not only being threatened by an Islamic insurgency, but also bankruptcy. The country’s inflation rate has reached 25 percent, which has cut deeply into Pakistan’s foreign exchange reserves at a rate of US$1 billion a month and also risks defaulting on debt repayment loans.
With the West distracted by the global economic crisis, China, which has amassed nearly US$2 trillion in foreign currency holdings, is in a position to grant immediate soft loans. However, despite the multiple trade and cooperation agreements, President Zardari was unable to receive a guarantee from China for an immediate cash injection of between US$1.5 billion to US$3 billion. With China unlikely to grant Pakistan the financial capital it needs to stem nationwide bankruptcy in the near-term, Islamabad will be forced to seek much-needed cash from other sources.
Looking Toward the IMF
Pakistan is largely left with no alternative but to appeal to the International Monetary Fund (IMF). However, Shaukat Tareen, the financial official leading the efforts to secure funding, claims he is confident Pakistan can receive the assistance needed to avoid taking a loan from the IMF.
Seeking help from the IMF would be politically difficult for the government because the agency’s help is often preconditioned on austerity measures – deep cuts in public spending – that can affect programs for the poor. Accepting the rescue package from the IMF would be seen as humiliating for President Zardari’s government, as it would encompass several unpopular domestic policy changes, including cuts in social programs and a significant increase in taxes.
However, with Pakistan running out of options, it is looking more likely that the country will have little other choice but to turn to the IMF for help.
Outlook
If bankruptcy were to happen, it would likely lead to massive social unrest. It would also shatter any remaining local and foreign investor confidence, leading to out-of-control prices, fewer jobs, and possibly a general breakdown in law and order.
Pakistan hopes its front-line status in the war on terrorism will mean the international community will not allow the country to default because of the dangerous consequences sure to follow. However, this is unlikely to be the case, as most of the developed world remains preoccupied with resolving domestic economic troubles. The global economic turmoil has not only limited Pakistan’s options in resolving its financial crisis, but also ultimately hampered the ability of developed countries to aid the country that is now seen as the central front in the war on terrorism.
In the near-term, Pakistan’s economic situation will continue to deteriorate. In addition to quelling the Islamic insurgency, Islamabad’s primary goal in the near-term is to secure enough funds to keep its economy functioning. However, as Pakistan’s options are limited, the country is most likely to look toward the IMF for a near-term solution.
