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Sunday, 28 September 2008

Friends of Pakistan - Well done, Zardari.

MAKE no mistake about it — this is Pakistan’s hour of economic reckoning. We need every friend we have ever had and every dollar we can possibly get. It seems then that the Friends of Pakistan forum, which will hold its first meeting in Abu Dhabi next month, could be the right tonic for our economic ills. But caution is in order. Pakistan is running out of dollars at an alarming rate. According to Agost Benard, an associate director at Standard & Poor’s, “The external liquidity position which is now the key concern is continuing to deteriorate rapidly.” What Mr Benard says matters because his agency can dramatically affect Pakistan’s ability to do business in the international market.

Economic analysts are worried by Pakistan’s current account deficit — last year it stood at $14bn, while in just July and August it ballooned to $2.6bn. With foreign exchange reserves standing at a paltry $8.8bn last week, Pakistan simply does not have the foreign currency to sustain the current account deficit. In the medium term, a current account deficit can be turned around by exporting more and importing less. In the short term, foreign aid is the only realistic chance of improvement. The problem is that foreign aid will likely come with strings attached — which will impose wrenching change on the average Pakistani. Through US Secretary of State Condoleezza Rice, the Friends of Pakistan forum has indicated that it is not keen to give Pakistan quick money on easy terms. “We are engaged with Pakistan through international financial institutions,” Ms Rice told the news media, and also mentioned the need for economic reform.

The IFIs have a fairly basic recipe for Pakistan: strip away subsidies, increase tax revenues and cut down the budget deficit. These are good, necessary steps that Pakistan must take in order to improve its long-term economic outlook. The problem is — and experience bears this out — that steps such as these taken in a panic follow a fairly predictable pattern: the cost of living for the poor is driven up, development expenditure is slashed and meaningful reform is shelved once the worst has passed. However, there are several reasons to give Pakistan the benefit of the doubt for now. First, there are international factors involved in Pakistan’s economy going sour — most notably the price of oil and food. Second, the economy is seized by the worst level of inflation in decades. Third, Pakistan has already done away with most subsidies and has planned to slash expenditure. Fourth, Pakistan is struggling to come to terms with a militancy threat that could destabilise the very foundations of the state. Surely the Friends of Pakistan must realise how much more costly it would be to rescue Pakistan later were money to be delayed right now. (Dawn)

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