Pakistan Says Yes to the IMF

Posted November 17, 2008

As Pakistan slips toward financial crisis, with foreign exchange reserves looming dangerously low, the International Monetary Fund has moved in to help. On Nov. 15, amid protests against IMF assistance, the Fund announced it will extend a loan of at least $7.6 billion to help stabilize the Pakistani economy.

Pakistan has seen its foreign exchange reserves dip from about $20 billion in November 2007 to under $4 billion at the end of last month. Partly to blame were the rise in oil prices but analysts say that the country has suffered from a crisis of confidence which in turn caused a rise in external payments.

Rising import payments have also put pressure on the rupee which lost about 20% against the dollar in the past two months, trading at 81 rupee to $1 at the end of October. De facto finance minister Shaukat Tarin, appointed as the financial crisis came to a head in October, admits that the unchecked purchase of dollars in the kerb market as well as import of luxury items only worsened the balance of payments position.

Just a few weeks ago, with the price of food and oil reaching alltime highs, Mr. Tarin told a gathering of foreign investors that he's confident things will get better as the slide of the rupee against the dollar comes to an end. While details of the IMF plan are still unlcear, indications are that wasteful government spending will be curtailed, the rupee with be reinfocred, and a package will be put together to rescue ailing sectors of the economy.

On Nov. 15, despite protests against IMF assistance, Mr. Tarin announced that Pakistan will receive a loan of at least $7.6 billion from the Fund. Mr. Tarin said the financial crisis had severely impacted the country's foreign exchange reserves and the funds were aimed at staving off a balance of payments crisis.

Pakistan, like other Asian countries, is suffering from the international financial crisis with many donors backing out of commitments and exporters expecting a drop in orders. But it’s also dealing with a law and order crisis at home. Repeated terror attacks and a deteriorating security situation has driven away investors or stopped them from bringing in more investment. This has hurt the economy.

Despite this, the government of President Asif Zardari was reluctant to accept all the Fund’s conditions. It has long argued that it will not cut its defense expenditure, and this was a sticking point in negotiations. Other popular programs and rescue packages may also have to be cut or slashed and President Zardari is unhappy as this prospect.

However, as things get more desperate, it appears as if the government is increasingly willing to give in to the Fund’s key demands. In the long run, this may help in strengthening the Pakistan economy and, with luck, stabilizing the security situation.

Kamal Siddiqi is editor of the reporting desk at the News International in Karachi, Pakistan.