In an article last week, the UK Telegraph‘s Isambard Wilkinson wrote, “Pakistan’s foreign exchange reserves are so low that the country can only afford one month of imports and faces possible bankruptcy.” The news agency added, “Officially, the central bank holds $8.14 billion (£4.65 billion) of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion – enough to buy about 30 days of imports like oil and food.” In comparison, Pakistan had $16 billion in coffers just nine months ago. The Pakistani rupee has lost more than 21 percent of its value so far this year and inflation now runs at 25 percent. Moreover, the rise in world prices has driven Pakistan’s food and oil bill up by a third since 2007.
Why is this significant? According to the Telegraph,
Given the country’s standing as a frontline state in the US-led “war on terrorism”, the economic crisis has profound consequences. Pakistan already faces worsening security as the army clashes with militants in the lawless Tribal Areas on the north-west frontier with Afghanistan…The economic crisis has already placed the future of the new government in doubt after the transition to a civilian rule.
Today, the AFP also framed Pakistan’s bankruptcy threat in light of these security fears. Pakistan, the news agency wrote, “has been forced to seek 10 billion dollars from western backers to stave of the threat of going bankrupt as early as February 2009.” The AFP added, “The biggest impact of Pakistan’s economic problems could be on its battle against extremism near the Afghan border…The country is still reeling from the bombing last month of the Islamabad Marriott Hotel, one of the few remaining symbols of foreign investment.” Talat Masood, a retired general and leading security analyst told the AFP,
Economic hardship and the militancy are directly linked…People become more vulnerable to exploitation by militant forces, who always take advantage of public deprivation…Also, for Pakistan’s huge army, economic problems make it impossible to sustain and upgrade the necessary equipment to wage counter-insurgency and counter-terrorism operations.
For now, the government denies that Pakistan is even facing a balance of payments crisis, although they do admit “outside help is necessary to stabilize a crucial nexus of fears over Islamic extremism and atomic proliferation.” Syed Naveed Qamar, Pakistan’s finance minister until this past Friday [when he was moved to the shipping and privatisation portfolios], stated, “The present economic situation is a difficult challenge for us but we’ll certainly overcome it soon…Friends of Pakistan are also helping us.” Both state bank governor Shamshad Akhtar and financial advisor to PM Gilani, Shaukat Tareen have traveled to Washington “to secure the 10 billion lifeline,” reported the AFP. So far, reported the Daily Times, “The World Bank has pledged to provide $1.4 billion support for Pakistan in the current year, which can be used to expedite investment projects and budgetary lending.” The news agency added, “Tareen urged donors to support Pakistan’s efforts to pull itself out of the economic crisis.”
Qamar said the government had adopted a “multi-pronged strategy”, adding that it was benefiting from the recent fall in oil prices and was also getting record remittances from Pakistanis living abroad. However, much like many other countries right now, a lot will be required to pull Pakistan out of this financial crisis, [also see related post on the crisis], and stave off bankruptcy fears. Let’s hope the burgeoning security issues aren’t increasingly complicated in the process. As Newsweek’s Fareed Zakaria aptly put it,
Pakistan’s resolve against terrorism will be severely tested if the economy continues to weaken. The government, which is seeking $100 billion in aid and soft loans for the next five years, has organized the Friends of Pakistan forum and received commitments from several quarters, including the U.S. Congress, that will bring in capital easing pressure on both the government and the public. Many hope that Zardari, who has proved to be a savvy dealmaker, will be able turn things around. But, as the S&P notes in its report, “multilateral and bilateral aid, including deferred oil-payment schemes, may not be timely enough.”
[Image from Dawn]