It’s been a decade since the International Monetary Fund preached its damaging elixir of currency devaluation and tax hikes to Asian nations in financial crisis. As Pakistan’s economy teeters, the IMF is once again on the scene with familiar policy prescriptions. This is no time to recycle past mistakes.

Like Ukraine and Iceland, Pakistan is in a balance-of-payments crisis. The country imports large quantities of food and fuel and pays for it in U.S. dollars. As the price of these commodities rose over the last year — thanks to the U.S. Federal Reserve’s easy money policies — Pakistan spent down its foreign exchange reserves, as the nearby chart shows. Government officials estimate Pakistan needs $3 billion to $4 billion to cover its foreign-currency debt obligations over the next month alone. Islamabad could ask for as much as $15 billion from donors.

Pakistan’s new government could have mitigated this pressure earlier this year had it moved quickly to stabilize the country’s security situation and court foreign investment. Instead, Asif Ali Zardari’s ruling People’s Power Party focused on domestic political battles, such as the reinstatement of judges fired under former President Pervez Musharraf. Domestic terrorism re-emerged in major cities, investors fled and the local currency, the rupee, fell 25% in value, fueling inflation and making imported fuel and food relatively more expensive.

Now Islamabad has few good options. Its traditional partners — Saudi Arabia, China and the U.S. — have declined so far to provide additional short-term capital. (The U.S. has given Pakistan more than $10 billion since the 9/11 attacks.)

A “Friends of Pakistan” donor conference is scheduled for next month in Abu Dhabi, but Pakistan’s time is running short. And the IMF, which hasn’t had much to do since governments cleaned up their balance sheets after the Asian financial crisis, is peddling its services.

The IMF was set up for just this kind of crisis. Its charter aims to promote exchange-rate stability and “correct maladjustments” in balance of payments “without resorting to measures destructive of national or international prosperity.” Yet its prescriptions today would do just the opposite. A Pakistan Ministry of Finance spokesman confirmed last week that the Fund wants Pakistan to reduce its government expenditures, maintain a “flexible” exchange-rate (translation: further depreciation), and “increase” its tax-to-GDP ratio. The IMF declined comment.

These are exactly the beggar-thy-neighbor policies that sent Thailand, South Korea and Indonesia reeling in 1997-98. Cutting subsidies is necessary but politically impossible right now, with inflation running at 25% and daily power cuts. Depreciating the rupee vis-à-vis the dollar might benefit the country’s crony capitalists who make money by selling cheap exports, but it would hurt the vast middle class that has seen its savings inflated away. Raising taxes in the middle of the financial crisis — no one is talking about cutting them — would drive away foreign investment, which already sees Pakistan as an expensive and dangerous place to operate.

Shaukat Tarin, an economic adviser to Mr. Zardari, has described tapping the IMF facilities as Pakistan’s “Plan C,” behind raising money from friendly countries and other multilateral institutions such as the Asian Development Bank and the World Bank. (The ADB ponied up $500 million last month.) Longer term, Pakistan could also raise funds by opening up trade further with India, as it did last week.

Pakistan’s economic well-being matters not only for its 165 million citizens, but also because it’s a key country in the world-wide war on terror. Pakistan needs market-oriented reform along the Chilean and Irish models, not the IMF’s austerity prescriptions.

Source: Wall Street Journal online

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