Pakistan wary of IMF demands

Posted in Pakistan | 28-Oct-08 | Author: Syed Fazl-e-Haider| Source: Asia Times

A Pakistani trader counts coins at his roadside stall in Karachi. The IMF says Pakistan has sought its help to deal with a financial crisis.

QUETTA, Pakistan - Pakistan officials in talks with the International Monetary Fund (IMF) for a rescue package aimed at helping the country resolve balance of payments difficulties will face harsh demands rather than negotiating points, according to local analysts.

The United States is using the Washington-based and largely US-financed IMF as a tool to impose its own terms and conditions related to the "war on terror", in which Pakistan has been declared by the US as a major theater of war, the analysts said.

An IMF-assisted program is seen as essential before Islamabad, which failed last week to win financial support from China, can secure assistance from other donor countries and international financial institutions.

Islamabad has come out strongly against the US launching air strikes and ground operations against Taliban militants in Pakistani territory. Army chief General Ashfaq Parvez Kiani recently said that Pakistan would not allow any incursion by the United States or other allies inside its territory and vowed to protect Pakistan's borders at all costs.

Islamabad wants to handle the terrorist threat by itself within its borders and is seeking to deter the US from mounting cross-border raids on al-Qaeda and Taliban targets.

"The IMF does not negotiate but dictates its terms and this time the US has in fact pressurized Pakistan to turn to the IMF by not giving much-needed cash to the country in the meeting last month of the Friends of Pakistan," economist Shahid Hasan Siddiqi said on a private TV channel.

The United States and Britain jointly launched an initiative to form Friends of Pakistan last month as alarm grew over the country's gradual economic meltdown, with fears increasing that financial chaos may allow terrorists to deepen their roots in Pakistan. The "Friends" delegation included representatives from the United States, Australia, Canada, Italy, Germany, Saudi Arabia, China, the United Kingdom, the United Arab Emirates (UAE) and Turkey. The group's first working session will be held in Abu Dhabi in the UAE next month.

Islamabad claims it has not yet formally asked the IMF for a loan facility, but that it would borrow money from the IMF as its last option on its own terms and conditions.

The government "should negotiate safely with the IMF and not succumb to their tough conditions", Agence France-Presse on Sunday quoted leading Pakistani investor Aqeel Karim Dhedhi as saying.

While talks with the IMF continue this week, the government is trying to build public opinion in favor of an IMF program. An IMF-assisted plan may require Islamabad to cut defense, development and other current spending and raise taxes, which could hurt the poor. The government has already decided to bring non-taxpayer sectors into the tax net and to increase the tax-to-gross domestic product ratio to 15% from the present 10.5%.

The IMF has not asked Pakistan to cut military spending by a third, although it has urged the country to take a number of painful economic measures, Dawn newspaper reported at the weekend, citing an unnamed senior Pakistani diplomat. The US did, however, want Pakistan to "refocus its military strategy on fighting the militants" instead of devoting most of its resources on confronting India, the diplomat was quoted as saying.

Zardari recently returned from China without a commitment for much-needed aid. Pakistan is struggling to combat inflation, which has risen past 25% and is heading towards 30% and a collapsing currency. The central bank, meanwhile, holds barely enough foreign currency to cover five weeks of imports. Owing to the fast depleting foreign exchange reserves, local traders have canceled import orders worth as much as 5.5 billion rupees (US$67 million).

Worsening external liquidity may imperil the country's ability to meet about $3 billion in upcoming debt obligations, as foreign reserves held by the central bank have slumped to $4 billion from a record high of $16.5 billion last October. The country's total foreign exchange reserves (held by the central bank and commercial banks) plunged by $426 million to $7.3 billion during the week ended October 18.

Smuggling of US dollars to Afghanistan is helping to drive down the value of Pakistan's currency, the rupee, which has tumbled to a historic low of more than 82 against the dollar. In Peshawar, the provincial capital of North-West Frontier Province, adjoining Afghanistan, and an important center for exchanging currencies with as much as $4 million to $5 million smuggled to Afghanistan each day, the rupee has fallen to 86 to the dollar.

Not all the smuggled funds are for immediate use in Afghanistan, with large amounts being transferred to Dubai in the UAE, according to a recent Business Recorder report. The government has blamed the present decline in the currency on the policy of its predecessor administration under prime minister Shaukat Aziz, saying it maintained an artificially high rate of 60 and 62 rupees to the dollar.

Islamabad needs foreign capital inflows in the shape of loans, grants and investment to cover the ballooning gap in its current account. About $4 billion is needed immediately, while the balance of payments financing gap for the year to June 30, 2009, is projected at about $7 billion.

Slow foreign inflows and rising imports have already widened the current account deficit by 74% to $3.9 billion during the first quarter of the current fiscal year (July-September) against $2.27 billion during the corresponding period last year. The trade deficit rose 52.65% to $5.55 billion in the three months to September, from $3.63 billion a year earlier, according to the Federal Bureau of Statistics.

The current global financial crisis has limited Pakistan’s options as many donor nations, including the United States, are embroiled with their own financial crises.

The IMF at the weekend announced an outline $16.5 billion loan agreement with Ukraine, after Iceland secured a $2 billion IMF loan last week. Hungary is also seeking an IMF deal as it reels from the impact of the global financial crisis.

Syed Fazl-e-Haider ,, is a Quetta-based development analyst in Pakistan. He is the author of six books, including The Economic Development of Balochistan, published in May 2004 .