IMF PRESCRIBES BITTER PILLS FOR AILING ECONOMY
Nov 10 - 16, 2008
Pakistan is reluctant to swallow the bitter pills prescribed by the International Monetary Fund for the health of the country's ailing economy and is still looking to Saudi Arabia and 'Friends of Pakistan' forum for bailing it out of the financial crisis. Prime Minister Yousuf Raza Gilani and President Asif Ali Zardari have agreed that the government would not waste a moment to avoid IMF loan if it would be against Pakistan's national interest. "Pakistan will not need IMF support if our 'friends' start supporting us immediately" the two leaders recently announced. For its $6 billion stabilization programme, IMF has reportedly prescribed the country to curtail government expenditures, devaluation of local currency, tax increases, slower economic growth and big increase in discount rate.
Final decision regarding IMF funding would be taken on the conclusion of President Zardari's visit to Saudi Arabia and 'Friends of Pakistan' meeting in Abu Dhabi this month. Analysts however believe that IMF agreement is a prerequisite for any debt rescheduling. The talks between Pakistan and the IMF concluded in Dubai towards the end of the last month, and some thorny issues are yet to be settled. Pakistan has failed to obtain timely assistance from Saudi Arabia, China, the US and other friends. Local analysts believe that it is not romance but economic realities, which determine relations with other countries and international financial institutions. Presently, rapidly depleting foreign currency reserves, sliding rupee, alarming numbers of current account and fiscal deficits, soaring inflation and slumping financial markets are the hard economic realities being faced by the south Asian country.
Pakistan will reportedly get $3 billion as first tranche of IMF programme worth $6 billion. About eight years back, the country had entered a nine-month stand-by agreement with the IMF. Then it negotiated a three-year poverty reduction growth programme with the Washington based institution in 2001, but it completed that programme within the period and did not take up the last two tranches. Officials say that the country would deal with IMF according to its own programme because IMF did not have the same behavior as it had in 80s or 90s.
Local analysts believe that IMF's bitter prescriptions for Pakistan ailing economy would further weaken it instead of making it healthy pushing over 5 million more people in the south Asian country under the poverty line and rendering 1.5 million people jobless. IMF prescriptions are exactly the beggar-thy-neighbor policies that sent Thailand, South Korea and Indonesia reeling in 1997-98, said a recent editorial of the Wall Street Journal. Depreciating the rupee vis-‡-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 raising taxes in the middle of the financial crisis", according to the American journal.
IMF wants to bring high government borrowing from central bank under control.
While IMF team is insisting on a 4 percent hike in the central bank discount rate (which is presently at 13 percent), Pakistan is asking for a pause in further hike in discount rate.
IMF wants further tightening and wants the budget deficit is reduced from 4.7 to 3.5 percent. The two sides have agreed to contain the fiscal deficit at 3.9 percent of GDP for current fiscal year, reported Business Recorder.
Amid depletion of its foreign currency reserves at a rate of nearly $1 billion a month, the country is scrambling to borrow funds to provide it with some breathing room. With $4.04 billion foreign currency reserves, the central bank can hardly cover five weeks of imports. The rupee has slumped 24 percent this year against the US dollar. The country's trade deficit witnessed a rise of $5.55 billion during the first quarter (July-September) of current fiscal year and inflation has soared at 25 percent. Islamabad needs $10 billion to $15 billion of support from foreign lenders to cover its current account financing gap and undertake economic adjustments over the next two years, according to Shaukat Tareen, advisor to Pakistan's prime minister on finance. Pakistan immediately needs $4 to $6 billion to avoid default on its international debt and to avert a run on its currency, according to analysts.
Moody's Investors Service has cut Pakistan's credit rating on October 28 by one level to B3, and also warned of further cuts given the depletion of the country's foreign exchange reserves. Moody's retained a negative outlook which it had imposed last month after Pakistan's rapidly deteriorating external liquidity position accompanied a stalling of economic reforms and mayhem in its domestic politics. Moody's has made a hasty decision despite the fact that 'everyone knows we are negotiating with the IMF, said Tareen while giving his reaction. Earlier last month, retaining the negative outlook, Standard & Poor's Ratings Services has already cut the country's rating to CCC-plus, one notch below Moody's.
Western countries and media consider a financial chaos in the nuclear armed country as inimical to the US-led war on terror. Pakistan must secure a loan from the IMF within a week, the German foreign minister Frank-Walter Steinmeier said last week. He said, "Without help, the fight against terrorism in the nuclear-armed nation could be complicated by out-of-control price increases, fewer jobs and rising public anger in the country of 160 million people". Pakistan's economic well-being matters not only for its 165 million citizens, but also because it's a key country in the worldwide war on terror, according to the Wall Street Journal.
President Zardari recently said the government could ill-afford financial assistance from IMF with tough conditions. "Time is running out and there is an urgent need for the Friends of Pakistan to extend a helping hand", the President Zardari told Advisor to the British Prime Minister Simon McDonald who called on him in Islamabad last month. He said that the war on terror had now become Pakistan's war and the country and its people were paying a very heavy price that needed to be acknowledged by the international community. Zardari clarified that Pakistan was not looking for aid but trade, economic and investment opportunities.
Critics blame the former government of Prime Minister for not properly managing the economy from the beginning of 2007, particularly in terms of reducing unsustainable subsidies that chocked off the entire payment system of the country. Present government is also blamed for ignoring the economy and giving more importance to narrow political considerations and political wrangling rather than sound economic management which has landed the country in trouble.