Friday, December 31, 2010

Pakistan and the IMF

Guardian: Pakistan Takes $5bn IMF Bail-Out After Allies Refuse Funds
WSJ: IMF Chides Pakistan on Budget Gap
Daily News & Analysis: IMF Warns About Pakistan's Deteriorating Economy
The Telegraph: Pakistan Wins Reprieve from Financial Crisis

In an official letter to the President of Pakistan, Asif Ali Zardari, the IMF warned that Pakistan’s economy is in danger of crisis and urged immediate fiscal tightening. Implementing IMF reforms will be difficult as the government is unstable after ministers from Zardare’s coalition partners left this week. Also, many politicians are resisting austerity measures while Pakistan is still suffering from the devastating flood that occurred earlier this year.

The IMF, and the World Bank, in conjunction with influential members – the U.S., Japan, and European countries− worry that Pakistan’s economy will unravel through escalating inflation caused by poor tax revenue. Pakistan is financing the budget deficit by borrowing from the central bank, so Pakistan is printing money. If done on a large scale and continuously, borrowing from the central bank will lead to inflation as the money supply disproportionately expands.

The IMF became involved in Pakistan in 2008 with a balance of payments crisis. The IMF gave Pakistan $5 billion so it could make payments on foreign debts. Pakistan’s foreign exchange reserves were nearly depleted, making Pakistan unable to repay debts and functionally bankrupt. The IMF then gave Pakistan access to £7.5 billion from 2008-9, more than it had ever received since 1947.

In 2010 the IMF withheld $3.5 billion from its total $11.3 billion loan package to Pakistan to induce fiscal responsibility. The IMF has not disbursed any loans to Pakistan since May; the exception was the $450 million in IMF relief aid for the flood. The IMF wants to decrease the budget deficit of 6% of GDP, above the 4% target, as the government failed to decrease expenses and enact a general sales tax , both of which Pakistan promised in exchange from IMF financing.

In addition to budgetary concerns, Pakistan’s external debt is also a growing problem. The external debt is currently £35.5 billion, and will increase to over £47 billion in 2015. This has led the interior minister, Rehman Malick, to ask for Pakistan’s external debt to be written off. Financial analysts, and even some financing ministry officials in Pakistan, greeted his request with derision and warned it would frighten investors and thus slow economic growth.

The IMF projects that Pakistan’s economy will grow by 2.5% in the fiscal year through June 2011, lower than the 9.1% projected for India, and half the growth rate of Bangladesh. The IMF is also concerned the Pakistan’s central bank will be forced to raise interest rates to combat inflation at the same time the economy is suffering, which would make the economic situation more dire. There are also political implications of slow growth. Pakistan’s economy must grow between 8% and 10% a year to absorb the two million new entrants to the labor force and reduce poverty. However, the many unemployed are recruits for the Taliban, which use Pakistan as a base for the fight in Afghanistan.

1. Pakistan’s military is still producing nuclear weapons at the highest rate in the world. How could that money be appropriated to help the economy?
2. How do concerns about corruption in Pakistan and neighboring nations affect the fight against terror in those nations?
3. Agricultural elites generate a fifth of Pakistan’s GDP and pay less than 1% of taxes. Is there a legitimate economic reason for this, or, if not, how should Pakistan redistribute the tax burden?

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