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Now that Pakistan is again an IMF borrower, it must enforce strict discipline, practise careful planning and do loads of hard work to come out of its current economic miseries. The International Monetary Fund has granted a loan of $7.6 billion loan to Pakistan. The loan will allow the country immediate access to about $3.1 billion, while the remaining will be forked our after quarterly reviews.
This is a 23-month standby facility and is part of a broader international package that is being put together to help Pakistan deal with its severe balance-of-payment crisis. The country needs about $4 billion without much loss of time to pay for its imports and debt. It is being hoped the IMF program will help restore the confidence of domestic and foreign investors since now there will a tightening of fiscal and monetary policies. Pakistan’s economic growth is expected to slow down to 3.4% in the current fiscal year, from last year’s 5.8%. Economists expect it to recover to 5% in the next fiscal year. It is also expected that the country’s budget deficit will be reduced to 4.2% of GDP in the current fiscal year and 3.3% the following year. It was 7.4% at the end of June, 2008. The State Bank of Pakistan, which recently conducted a two-percentage-point hike in the discount rate, will continue to tighten as necessary to bring down inflation and shore up reserves. It is also expected to stop financing the government An indication of the current state of affairs is that the new civilian government has already used up more than half of the country’s meagre foreign exchange reserves without enhancing its own capacity to generate income. After the elections in February the country was hoping to reap a “democracy dividend” from its Western allies in the “war on terror”. What it has got instead is the unpopular bailout by the International Monetary Fund (IMF) which will lead to cuts in growth besides worsening the employment situation and perhaps even affecting the size of the government, including that of its powerful military. Over the last few years, the Pakistani economy grew at 7-8% annually, mainly because of the resources that became available when it agreed to side with the US after 9/11. One independent economist, Dr Asad Sayeed, estimates that nearly $70bn flowed into the Pakistani economy in the six years after 2001, on top of aid and assistance from Western governments and financial institutions - including $10bn from the Bush administration. But growth mostly took place in the services sector, especially consumer financing. No significant assets were created in the industrial and agricultural sectors. “It was not sustainable growth, and as a result economic imbalances started to re-emerge in 2006,” former finance minister, Sartaj Aziz, said in a recent television interview. The new government took power at a time when international food prices had already started to soar, and oil prices were to hit the high mark weeks later. By June the country’s trade imbalance had become unsustainable, and the gap between its income and expenditure rose to over 6%, making local markets extremely nervous. Twice the State Bank injected dollars from the reserves into the currency market to prevent a freefall of the Pakistani rupee. In addition, the government had to take measures in the stock market to prevent share values from nose-diving. All through this, the government, remained largely embroiled in political problems during its first six months in office, though it now appears to awakening to the bitter reality. According to Shaukat Tarin, finance adviser to the prime minister, the country needs $4-5bn within a month to cover its trade gap and to pay off debts on bonds and loans from multilateral creditors. It further needs up to $15bn over the next 24 months, he says, to stabilise the economy and correct distortions, such as a move from import-based consumer policies to those focusing on import substitution through domestic production. To achieve this it needs sustained foreign assistance and investment in the agricultural, industrial and energy sectors. The country has plenty of long-term commitments from a group of countries called the Friends of Pakistan, but any default on international obligations in the short term may hurt its ability to attract future investment. A US commitment to allow non-military assistance of up to $1bn per year for five years will have to wait until the US Congress has done the requisite legislation. Commitments made by the European Union, the UK’s Development Fund for International Development (Dfid), the World Bank, the Asian Development Bank and the Islamic Development Bank are also likely to take time to mature. Meanwhile, two of Pakistan’s closest allies, China and Saudi Arabia, have apparently declined to provide cash for an immediate bailout. China has expressed intent in providing relief through investment while Saudi Arabia is talking about deferring oil bills. Therefore the only short-term window available to Pakistan is that of the IMF, with its strategy of achieving stabilisation by cutting growth. Pakistan was reluctant to go to the IMF because of its various conditions to reduce the size of the government, cut development expenditure, reduce or eliminate politically important subsidies etc, and also because of its strict monitoring regime. But perhaps this is what the international community wanted before it commits funds to Pakistan. “The US seems to be keen to push Pakistan towards the IMF,” said Sartaj Aziz and analysts in Pakistan generally agree with him. “The world has moved in a concerted way to hold back their commitments until Pakistan submits to the monitoring regime of IMF,” said one government economist. The reason is not hard to explain. “Everybody is weary of a state and a nation that has become a danger to the world,” he said. “While an economic bailout is essential to prevent it from passing into the hands of the militants entirely, the world would also like to see it does its best to curb militancy, which it has not done in the past despite consuming huge amounts of international assistance.” 
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