Cash-strapped Pakistan finds few friends in time of economic need

Pakistan asked the IMF for a loan Wednesday, after allies rebuffed its requests for aid.

With Pakistan forced to ask the International Monetary Fund (IMF) Wednesday for help avoiding bankruptcy, its government is learning that having friends in high places doesn't always pay.

Pakistan, a frontline country in fighting global Islamic militancy, counts wealthy nations like the United States, China, and Saudi Arabia among its friends – all of whom understand that Pakistan's shortage of funds will severely handicap its already weak government.

Yet its tumbling economy has caused even its strongest allies to so far resist bailing it out.

"If the economy is out of line," says Haroon Sharif, a senior adviser for the British Department for International Development in Islamabad, "any lender will think twice before handing out cash."

Pakistan, a country that had boasted some of the highest GDP growth rates in the world since 2004, now requires up to $5 billion in immediate cash injections to avoid defaulting on sovereign debt due for repayment next year.

"The government may have been counting on a bailout for a while and now that it's nowhere to be seen they're caught off guard," says Ali Cheema, the head of the economics department at the Lahore University of Management Sciences.

As late as last week Shaukat Tarin, economic adviser to the prime minister, called turning to the IMF for a loan a last resort "plan C."

This week the "Friends of Pakistan" – a group of representatives from the US, Saudi Arabia, the United Arab Emirates, Britain, France, and Japan, among others – met with President Asif Ali Zardari in Islamabad for the second time in as many months to discuss ways to keep the sinking Pakistani economy afloat.

Richard Boucher, the US assistant secretary of State for the region, who attended the meeting, warned that the US "wouldn't throw money on the table" and that there was "not going to be a cash advance for Pakistan."

President Zardari's first-ever visit to Pakistan's longtime ally China concluded last week on a similar note, as have Pakistan's talks with Saudi Arabia and the United Arab Emirates, countries that have pulled Pakistan out of similar economic trouble in the past.

Mr. Cheema says the Pakistani government might have been counting on a "democratic dividend" that didn't deliver. The government assumed that the international community would support the new democratic regime because of its security needs and regardless of its economic performance.

Pakistan has been spending far more on imports than it has been making on exports for several years. As global fuel and food prices spiked, Pakistan's foreign currency reserves have fallen by more than half since 2007 to $7.75 billion.

The current government, which took office this spring, cut down on some spending – such as food and fuel subsidies – but did not boost its revenues by increasing taxes, Mr. Zaidi points out.

The Pakistani rupee also plunged by 30 percent since the beginning of the year, and the Pakistani stock exchange has seen its value drop by a third in recent months.

Part of the problem is lack of expertise, says Mosharraf Zaidi, an independent political-economy consultant in Islamabad.

The Musharraf regime, which ruled from 1999 until August of this year, followed a policy of heavy borrowing and ran up the national debt, he says, while shutting out dissenting voices. The new government, he adds, has largely continued this approach.

Internationally, the Pakistani government has also found itself politically ill positioned in its quest for cash. Relations with the US have frayed this year over how much Pakistan is contributing to the fight against Islamic militants in the country's northwest, bordering Afghanistan.

Former Prime Minister Nawaz Sharif, who remains very close to the Saudi royal family, broke away from the present coalition government in August.

"If the coalition had stuck together they might have been able to convince multiple powers to chip in together," says Cheema."

Corruption is also a concern. Zardari – who took control of the ruling Pakistan People's Party after his wife, former prime minister Benazir Bhutto was killed last year – is widely known as Mr. Ten Percent for his reputation for skimming money off contracts when he served as minister of investments under his wife.

Regardless of who is to blame for the tanking economy, the new government will likely have to cut back on spending. It had introduced many poverty alleviation schemes upon coming to power earlier this year. It might be forced to roll back some of them now, particularly if required to meet certain economic benchmarks by the IMF as conditions to loans.

"If these programs are cut," says Cheema, "it could hurt the social fabric of the country." Large-scale dissatisfaction could lead to more people losing faith in the state, he continues.

"At a time when Pakistan is fighting this war to establish the power of the state," he says, "the last thing you want is another blow to its authority."