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.) Read more »

The International Monetary Fund yesterday ordered Pakistan to cut military spending by almost a third as fears grew that the nuclear-armed nation’s economic crisis was now so bad that its role in the war against al-Qa’ida and the Taliban was imperilled.

The secret IMF demand - one of several measures that the bankrupt country is being asked to agree to for a bailout of its tanking economy - was disclosed as President Asif Ali Zardari prepared to go cap in hand to Saudi Arabia for help.

Also yesterday, it was announced that US General David Petraeus would travel to Islamabad next week for talks.

Amid reports that General Petraeus was planning the same strategy for Pakistan and Afghanistan that he used in Iraq, it emerged that the boss of Islamabad’s spy agency, the ISI, General Ahmed Shuja Pasha, was in Washington to mend fences over his organisation’s double-dealing with the militants.

A senior military source in Islamabad told The Weekend Australian last night:

“A cut to military spending of anything like that magnitude - even 10 per cent, let alone the more than 30 per cent that is being demanded - would rip the heart out of the army and its ability to operate effectively in a situation where it is in the front line of the battle against al-Qa’ida and the Taliban … If we go, al-Qa’ida wins. Is that what the IMF wants to see?”

The country is now rated as among the worst credit risks in the world, ahead of only the Indian Ocean Seychelles islands in the Standard & Poor’s index. Read more »

Provided by a contributor to Take Back Pakistan

Recent reports in the western media indicate that Pakistan needs as much as $10 billion to avoid an economic meltdown and Pakistan’s foreign currency reserves are:

• falling fast and if forward liabilities are included, the real reserves may go down to $3 billion. This cannot meet the import bill of one whole month*.
• Out of total reserves of $8.467 billion, the reserves held by the commercial banks stood at $3.461 billion on September 23. From September 22, the reserves fell by around $180 million, as there were no receipts while the government made heavy payments for oil and other imports.
• This week, Moody’s Investors Service lowered Pakistan’s credit outlook to negative due to the risk of “missed repayments” on the nation’s debt.

Pakistan’s “gradual economic decline, which started last year”, alarmed the United States and Britain as they feared that financial chaos could allow terrorists to deepen their roots in the country.

To avoid such an eventuality, they decided to launch a new group of donors.

Read more about our dismal state here: ‘Friends’ unveil initiative to avert collapse: Over $15bn needed

It is interesting to note that former President Musharraf inherited a far more fledgling Pakistan in 1999, a Pakistan which was on the verge of being declared a terrorist, bankrupt and a failed state. Musharraf inherited a Pakistan which had less than a billion dollars as foreign reserves, with an economy the mere size of $75 billion, and with 65% of our GDP used for debt servicing. Although currently our economy is fast deteriorating due to the incompetency of the new regime (who looted Pakistan in the past), the situation in 1999 was FAR WORSE than what it is now.

And despite not receiving the above level of support and commitment from the international community, Musharraf and his team were still able to deliver, with Pakistan’s situation improving prior to September 11, 2001. For example, Pakistan’s foreign reserves had risen up to $3.2 billion by September 10 2001.

To quote Dr.Ishrat Husain:

“In 1999, the ratio of foreign reserves held by India was 40 times that of Pakistan. “By June 2002 this ratio has declined to 8 times while the size of Indian economy is about 6 to 7 times that of Pakistan.”

Dr. Ishrat Husain goes on to say:

“It may be relevant to point out that the biggest quantum jump in our reserves had taken place between July 2000 and June 2001 i.e. well before September 2001. During this one year period the reserves increased by 138 percent to $ 3.1 billion. The rate of increase during July 2001 and June 2002 was 105 percent.”

Consider the improvement of a variety of indicators prior to September 11, 2001. We read:

“While acknowledging the salutary impact of the external account improvement, however, it is worth stressing that the trend improvement was visible well before the seminal September 11 events. Interest rates were already on the way down; foreign currency reserves were edging up; the exchange rate was relatively stable; the inflation downtrend was well defined, and the government’s continuing fiscal discipline and commitment to reforms had already set the stage for the IMF PRGF, and the subsequent re-profiling of external debt. Nonetheless, the pre-existing positive trends did gain invaluable momentum in FY02, post-September 11. However, despite these major positives, the economy was not unscathed in FY02.” Read more »