President Asif Zardari has made trips to Saudi Arabia, USA and China in search of money to bridge the yawning balance of payments gap of US$10 billion in the next two years and beef up Pakistan’s dwindling forex reserves of only US$ 8 billion (equivalent to six weeks import bill) so that the slide of the Pakistani rupee by 27 % in the last few months from around Rs 63 to Rs 84 to the US dollar is halted, inflation of around 25% is brought under control and the fiscal deficit of about 10 per cent of GDP is reduced. A sovereign default is staring Pakistan in the face when its US$500 million Euro-bond matures for payment next February. The government needs to deposit a couple of billion dollars into the state bank quickly to restore confidence in the economy. Unfortunately, nothing concrete seems to have materialized so far.
The Saudis are dragging their feet on a Pakistani request for UDS$5.9 billion deferred-payment oil facility. The Chinese are disinclined to give us a huge loan – it is not normal Chinese economic practice to loan money to any state, even if the state is a “strategic” ally like Pakistan. The last time such a loan was granted to us was in 1996 when Pakistan’s forex reserves were about US$300 million only and we asked for US$500 million but got a measly $150 million for a few months. And the US has linked injections of up to US$1.5 billion a year in economic assistance for ten years (the aid bill is yet to be passed by Congress) to progress on the war against terror in FATA and Afghanistan. Indeed Mr Richard Boucher, the US assistant secretary of state for South Asia, has made it clear that there is no prospect of cash in advance from the US. Consequently, Mr Zardari is now scheduled to make another trip to Saudi Arabia to try and persuade the Saudis that this is a make or break moment for Pakistan and the Kingdom must bail out its old friend.
An umbrella organization by the name of “Friends of Pakistan” has been mooted. This includes members of the international community – many of whom previously used to rub shoulders in the Aid to Pakistan Consortium – as well as potential private foreign investors. The first meeting in the US last month during President Zardari’s trip to New York laid the agenda and another is scheduled in Dubai soon. But the prospects are not bright. The international community is in no mood to give handouts to Islamabad. And foreign investors are not sanguine that their money will be both safe and productive in Pakistan, given its unstable and violent political environment and the meltdown in the international economy. Of course, the flight of Pakistani capital to safe havens abroad – which is leading to a depreciation of the rupee – is hardly conducive to building and demonstrating confidence in the economy.
President Zardari and his new finance advisor, Shaukat Tarin, say they are ready to move to Plan B and ask the IMF and World Bank and Asian Development Bank to step in and save the situation. Mr Mohsin Khan, an IMF director, says the IMF is happy to consider a request from Pakistan for up to US$10 billion in bailout funds but warns that Pakistan is running out of time. What’s the problem? Why doesn’t Islamabad grab an IMF program to stabilize the economy and get it back on track? Mr Nawaz Sharif, Ms Benazir Bhutto and General Pervez Musharraf all had to clutch at an IMF program when they stepped into office, the only difference between them being that Mr Sharif and Ms Bhutto didn’t abide by the programs and therefore brought the economy to the brink of default twice each while General Musharraf tightened belts all round in the first few years of his regime and then ditched the IMF when the money inflows began to gush and the economy started to soar at over 6.5 per cent. What does it take to set things right?
Pakistan must fight the war on terror for its own sake to protect and strengthen its state and economy. But this policy will fetch billions from Washington and various financial institutions. It must also get the IMF to provide breathing space to avoid default. That will persuade the Chinese and Saudis that their money won’t go down the tube. The dropping price of oil – from a height of US$150 a barrel some months ago to US$ 70 a barrel now – should facilitate the economy and the budget, especially since the subsidy has already been withdrawn and the people have learnt to cope with the pain of transition.
Yet it all seems so distant. There is talk of meltdown, capital flight, galloping inflation, imminent default. Meetings with the IMF are being held in Dubai and not Islamabad because of security concerns. This is the crux of the issue. If Pakistan confronts and puts down terrorism, the international community will back it financially to the hilt. But if it dithers, then economic meltdown will hasten the process of anarchy and invite a different sort of foreign intervention.