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Economists Cautiously Optimistic As Pakistan Negotiates IMF Bailout

Asif Ali Zardari (right) in Beijing on October 15 to ask Chinese President Hu Jintao for help
Asif Ali Zardari (right) in Beijing on October 15 to ask Chinese President Hu Jintao for help
Inflation and the ongoing economic crisis have hit hard for Paujan Khan, a daily-wage laborer in Pakistan's northwestern city of Peshawar.

He worries that he will be unable to look after his many children, who live in a small mud home in a village outside the city. With every passing day, his hopes for a better tomorrow diminish.

"The prices of flour, sugar, and vegetable oil have gone up and now they are too expensive," he says. "It's impossible for the poor to look after themselves in these hard times. There is no value left in the money we earn. In these times, we are unable to feed our children."

Khan's fears are confirmed by Akmal Hussain, a professor of economics at Beaconhouse National University, located in the eastern city of Lahore. Hussain says that he has no doubt Pakistan is going through the "gravest economic crisis" in its six-decade history.

"It's a particular challenge, in view of the historical context in which this economic crisis is occurring, because the country is at war with the terrorists and is fighting a war of survival, as our prime minister put it," Hussain says.

"At the same time, this war is being prosecuted by the newly established democratic government and the whole democratic structure is in nascent, fragile condition," he adds. "And so the context of the economic crisis is particularly important to understand."

Growing Economic Strain

Economists say the main cause of Pakistan's financial crisis is relatively easy to understand -- it imports much less than it exports.

To help make up the difference -- which currently stands at $7 billion per year -- Pakistan has traditionally relied on foreign aid and investment, which has become scarce as investors flee.

Remittances also contribute, but these have dwindled as Pakistanis abroad become increasingly doubtful that the funds will reach their destination due to rising violence and political uncertainty.

This comes as the Central Bank's own dollar reserves have also dried up, a result of the meteoric rise in global oil prices and Pakistan's dependence on foreign oil -- in the past six years its oil-import expenditures have risen from $3 billion to $9 billion a year.

The situation has also affected the country's currency, with the rupee losing 25 percent of its value against the U.S. dollar in the past six months.

Hussain explains that Pakistan has historically been unable to maintain sustained economic growth after receiving international assistance, although from 2003-06 its economy grew at a nearly 7 percent a year.

Hussain adds that Pakistan's trade deficit, its crumbling infrastructure -- particularly its aging irrigation system and electrical grids, and small skilled labor force -- are "structural" constraints to sustainable economic growth.

Looking For Support

Among other things, Pakistan has failed to tax wealthy landowners and many of its rich evade paying taxes, which prevents the country from generating enough domestic revenue to fund its expenses.

But addressing fundamentals does not appear to be on the minds of Pakistani policymakers. Instead they are currently holding emergency talks with the International Monetary Fund (IMF) to secure a bailout loan that could help them avoid an economic collapse that could come within weeks.

And at the same time, Pakistani media has reported that President Asif Ali Zardari is visiting Saudi Arabia this week to ask for a $10 billion to $15 billion financial package -- one that would spare Pakistan from accepting an IMF loan that would come with strict conditions.

Pakistan's earlier attempts to solicit similar help from the United States and China failed.

Mushtaq Khan, a London-based economist for Citigroup who follows the economies in the Middle East and Pakistan, says that, given the fact that the IMF is the only global institution capable of helping Pakistan out of its economic mess, a deal with it might save the country from economic collapse.

"We are optimistic. And I think that Pakistan has seen the worst and, going forward, they will get some assistance not just from the IMF but also from other bilateral lenders and other international financial institutions like the World Bank and the ADB [Asian Development Bank]," Khan says. "I think 'light at the end of the tunnel' is definitely a good way to put it."

Since the attacks of September 11, 2001, the United States has given Pakistan more than $10 billion in assistance and compensation for its role in the war on terror. In a recent interview with RFE/RL, Eric Edelman, U.S. undersecretary of defense for policy, said an arrangement with the IMF would be the right course to follow.

"It is crucial, of course, because without a functioning economy [Pakistan's government is] not going to be able to do all the other things that we think they need to do -- both on the civilian and the military side -- to deal with the challenges that they face," Edelman said.

"We believe it's a very positive thing that they are in discussions with the IMF. They probably need to be in an IMF program. And we have counseled them to that effect," he added.

Hussain the economist recently contributed to a proposed Pakistani government economic renewal plan.

He said they want the IMF to understand Pakistan's unique circumstances, which to him means the IMF loan should not come with too many strings attached, allowing the government to continue subsidies for those most in need.

RFE/RL correspondent Ron Synovitz contributed to this story
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    Abubakar Siddique

    Abubakar Siddique, a journalist for RFE/RL's Radio Azadi, specializes in the coverage of Afghanistan and Pakistan. He is the author of The Pashtun Question: The Unresolved Key To The Future Of Pakistan And Afghanistan. He is also one of the authors of the Azadi Briefing, a weekly newsletter that unpacks the key issues in Afghanistan.

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