IMF to Pakistan’s rescue?

It looks like Pakistan will have to go in for an IMF rescue package to stave off a sovereign default. The countries who used to historically come to its aid—the United States, Saudi Arabia, China and the UAE—might even prefer it this way. In fact, according to one (rather inspired) news report, the United States made its support for even an IMF package conditional on Pakistan staying on the course in the war against the Taliban and al-Qaeda. The United States and Saudi Arabia are co-chairing the Friends of Pakistan club—but judging by the Richard Boucher’s comments, this forum will kick in to support the Pakistani economy after it is rescued by the IMF.

The Pakistani government is left with little choice but to negotiate an arrangement with the IMF (and such is the state of affairs that the IMF team has refused to travel to Islamabad due to fears over its security, choosing to meet in Dubai instead). After the post-rescue condition of the economies it rescued in the 1990s, the IMF’s rescues are something that economies, and most certainly their leaders, shudder to even think about.

Now it is possible that the IMF might have learnt from its previous mistakes and is today more sensitive to the political side-effects of its economy policy prescriptions. But beyond the hyperventilations of the Pakistani media about the ignominy of it, the Pakistani government is unlikely to want the IMF’s straitjacket—or any straitjacket—to constrain their hand, so that they could go about business as they have always done. But the straitjacket might hurt Pakistan in other ways:

A commitment to economic reform is the precondition for more money; Pakistan has been asked to reduce its fiscal and trade deficits, reduce its current and development expenditure, reduce its subsidies, and increase its tax-to-GDP ratio. These are all good, sensible measures that Pakistan needs to achieve stable medium-term growth. However, they are not enough. Pakistan must think long and hard about economic reforms that will incur the displeasure of western governments and the IFIs. Consider the case for capital controls. Dismantling barriers to the entry and exit of capital made Pakistan an attractive investment destination in the 21st century. While the world was awash in liquidity and investors were looking far and wide for opportunities to earn money on their capital, Pakistan basked in the glow of foreign money. However, the same mechanism that made it easy to quickly attract money has become a millstone around our necks now that the economic tide has reversed. So while reform is certainly needed, the government must avoid the temptation to simply follow foreign dictates once again. [Dawn]

Related Link: Simon Cameron-Moore explains the situation; Mosharraf Zaidi has an interesting op-ed on the role of bankers and bureaucrats in this context. And Ikram Sehgal calls for capital controls…on the hawala channel.

2 thoughts on “IMF to Pakistan’s rescue?”

  1. Well, the Chinese promised three nuclear plants. That should solve any hard currency issues for LoP.

    US tightens screws on LoP….but far can it push? LoP could always use the N.Korean model!! Support us without onerous conditions or else!

    One wonders, if the Chinese can so easily sign that paper to supply new nuclear plants, why were we jumping through all those hoops! Now Iran clearly knows what path to follow. So does the Sunni Arabs….

  2. Chandra,

    Yes, the North Korean model is something to be deeply worried about. It’s not for nothing that China joined the six-party talks alongside Japan, South Korea and the United States, who are the targets of North Korean missiles. In the case of Pakistan, thanks to those “high Himalayas” China will have some insulation, but hey, Xinjiang is already in deep ferment. Of course, we will have our own worries.

    The nuclear relationship between Pakistan and China, as the Daily Times put it delicately, is in the penumbra of the international non-proliferation regime. Due to some deft footwork by Beijing (they signed the Pakistan deal just before they signed on to their non-proliferation commitments) the Chashma deal was grandfathered.

    I don’t think Iran and the Gulf Arabs can squeeze into the penumbra anymore. But they’ll find other ways.

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