Post a Comment On: China Matters

One might wonder why the world community seems intent on torturing Pakistan’s civilian government over the terms of a bailout to cover its current account deficit.

Musharraf got blank checks.

Asif Zardari gets a brusque push into the unwelcome embrace of the International Monetary Fund.

The answer seems to be that the PPP-led government’s bargaining position is so weak there’s only one kind of deal it can make—a raw deal.

A little background.

For years, Pakistan, exporting food products and textiles and importing petroleum products and equipment for its industry and military, has run a chronic current account deficit of about S$4 billion per annum.

A combination of worker’s remittances, foreign investment, foreign aid, and foreign loans has made up the shortfall.

Last year, before the subprime meltdown was even a gleam in Wall Street’s eye, Standard & Poor’s downgraded Pakistan’s sovereign foreign currency debt to CCC+ with a negative long-term outlook because of the unrest and uncertainty surrounding Musharraf’s divisive and ultimately unsuccessful efforts to short-circuit civilian rule and give himself a third term as president.

S&P considered Pakistan especially vulnerable because “the political turmoil exposes the sovereign to external pressures if foreign direct investments and other equity inflows, which have funded about two-thirds of the country’s large current account deficit (estimated at just under 20% of current account receipts in fiscal 2006-2007), diminish significantly.”

Things did not get better in 2008.

Asif Zardari’s PPP government squandered the goodwill of the parliamentary elections that returned Pakistan to civilian rule by leaning on the United States for political backing, playing footsie with Musharraf, and alienating the lawyers and PML-N party leaders who were the PPP’s electoral allies. As a result, virtually all of Pakistan’s political players are happy to watch a not-particularly-capable Zardari flounder ineffectually as the country’s political and economic rot intensifies.

Participation in the aggressive US strategy against Taliban on both sides of the Afghan border exposed Pakistan to a harrowing series of terrorist attacks and discouraged foreign investment.

Then the oil and food bubbles ruinously increased the cost of Pakistan’s imports and added high inflation to the economic mix.

Finally, the world financial crisis guaranteed that there would be no excess supply of foolishly optimistic capital for the Karachi Stock Exchange, which slumped 35%.

So Pakistan has a simple but pressing problem.

With imports chugging along and its sources of capital inflows dwindling, the central bank has only enough cash on hand to finance imports for about six weeks.

Pakistan has declared it needs about $4-$6 billion to make it through the next two years while it gets its house in better order and waits for an improvement in the world economy that should boost exports and increase capital inflows.

US$6 billion is not an awful lot of money.

It’s about the cost of two weeks’ operations in Iraq.

It’s about 1/3 of 1% of China’s forex reserves.

It’s about 4% of Saudi Arabia’s annual net oil export revenues.

But nobody has stepped up to the plate.

Saudi Arabia has so far declined to provide a deferral of payments on oil sales—a facility it had extended to Pakistan in the past.

Zardari went hat in hand to China, Pakistan’s close ally and “all weather friend” who had deposited $500 million into Pakistan’s central bank last year at President Musharraf’s request to help with a similar problem.

But all he came back with was a rather opportunistic proposal that the Chinese would send a team to research the purchase of a 26% share in the National Bank of Pakistan, Pakistan’s biggest commercial bank. Back of the envelope guesstimating indicates that the Chinese are talking about putting in less than $300 million for a stake that would have been valued at about $1 billion back in 2005. Ouch!

As for the West, the U.S. and Great Britain corralled the world community into an ad hoc “Friends of Pakistan” talking shop, with the pressing objective of…well, not doing very much, apparently, except to keep Pakistan twisting in the wind.

At a press conference in Islamabad on October 20, Richard Boucher, Assistant Secretary of State for South Asia, squelched any idea that Pakistan would be seeing a quick and easy answer to its forex problems (emphasis added):

The Friends of Pakistan group -- how can I say it? It’s a group that’s a strategic group. It’s a way of combining the Pakistani Government efforts and the Western -- not Western -- and the Friends efforts: government like Saudi Arabia, the United Arab Emirates, the United States, China, the United Kingdom. And you saw, you know, in New York there were at least a dozen countries there and we’re always hearing from more who would like to be part of this.

So the goal is not…I mean, it’s not to throw money on the table. The goal is to put money where it belongs to support really concrete and positive goals. So it’s going to be a systematic process. It’s going to be a strategic process that looks at problems, looks at what the Pakistani Government is doing, looks at their approach and what effort that they’re making, and then looks at how we need to support and supplement those efforts, so that we really cover some of these problems comprehensively and we don’t leave things undone or leave holes.

You know, is that going to produce more money? Yes, it probably will in the long run. But it’s not a…it’s not a cash advance. There are other steps being taken, you might say, somewhat parallel on the fiscal and monetary problems. Those things are coordinated with treasuries, finance ministries, international institutions. And…but Friends is more devoted to making sure that on the strategic level that we understand Pakistan’s plans and that we’re putting our programs to support them.

With “Friends” like this, one might say…

The unmistakable intention of the United States and its allies is to force the Pakistan government to endure the shame of “Plan C”—the humiliating and politically dangerous recourse of turning to the International Monetary Fund.

Today, the IMF, according to accounts leaked to the Pakistan media (H/T to Reuters' Pakistan blog) is insisting on some astounding conditions:

Pakistan’s The News, citing an internal document, sets out what it said were extremely tough conditions.

1) a 30 percent cut in the defence budget between 2009 and 2020
2) reduce government pensionable jobs from 350,000 to 120,000
3) a new taxation structure to raise revenues including tax on wheat production and other crops
4) Revenue collection reports/analyses to be submitted each quarter to the IMF down to the provincial level
5) Six IMF directors and two from the World Bank to monitor preparation of the federal budget

One might wonder why, with Pakistan tottering on the brink of collapse, the IMF is adding onerous terms that will a) antagonize the military by slashing its budget and b) infuriate its hardpressed citizens—especially in the PPP’s political base, the agri-intensive province of Sindh--by increasing taxes while the economy is flat on its back and c) increase political unrest and make the PPP government even more unpopular by throwing tens of thousands of bureaucrats out of work.

Actually, it is quite possible that the IMF never made these extreme demands, and the Zardari government—which has never been shy or particularly subtle in shading the truth—prepared this monstrous list to demonstrate its fearsome negotiating prowess to the Pakistani public and lessen the shock when it reveals the actual, lesser concessions that the IMF has demanded in return for granting the loan.

Nevertheless, it’s puzzling that the United States is pushing the IMF on Pakistan at this particular juncture.

Pakistan’s economy, though not an exemplar of transparency or efficiency, is in this case the victim of many unfavorable external events and a worldwide financial crisis precipitated by the same kind of overpaid, overreaching financial bureaucrats that oversee the IMF.

So it seems rather unfair that the IMF is taking advantage of Pakistan’s difficulties to impose some of that notorious IMF meddling medicine that has made it despised throughout the developing world.

And, considering that the U.S.-led adventure in Afghanistan is tottering despite uncounted and unaccountable billions of dollars of expenditures and thousands of lives, and Pakistan is standing on the abyss of anarchy, now is an odd time for the U.S. to insist that the IMF be allowed to peddle its deeply unpopular and destabilizing free-market nostrums to Zardari’s government in return for a bridge loan.

Not surprisingly, the Pakistanis see the IMF working as a tool of the U.S. government and Western security priorities for Pakistan.

Quoting unnamed analysts, Syed Fazl-e-Haider wrote in Asia Times:

The United States is using the Washington-based and largely US-financed IMF as a tool to impose its own terms and conditions related to the "war on terror", in which Pakistan has been declared by the US as a major theater of war, the analysts said.

Much to its chagrin, Pakistan has been negotiating with the IMF in Dubai and, according to an October 31 report in Pakistan’s The Nation has apparently reached agreement on a $9 billion loan.

The first disbursement of money from the IMF, which is likely to be for $3 billion to $4 billion, will only come after Pakistan has filed a formal request and the IMF has approved the aid. Shaukat Tarin, Adviser to the Prime Minister on Finance, told Daily Telegraph that the money was needed urgently as confidence levels in Pakistan’s nosediving economy was ‘fast deteriorating’.

Tarin said that first payment was needed in 20 days. He added that the IMF should finalise the agreement by November 15 ahead of a fund raising conference to be held two days later by the Friends of Pakistan, a forum which includes the US, UK, China and Saudi Arabia, in Abu Dhabi.

He said that Pakistan’s allies were “looking for an endorsement from the IMF” of the country’s economic plan before they committed to offering more money.


Pakistan is loathe to confirm that it has struck a deal with the IMF and is still holding out hope that a face-saving offer of assistance from Saudi Arabia and/or China will emerge.

Zardari is making a swing to Saudi Arabia for oil aid, the AP reported:

Economist Muzammil Aslam predicted Zardari would ask for $3 billion in deferred oil payments from the Saudis, but warned that Pakistan should prepare for IMF assistance.

"If you miss the IMF now, you will need it again some months later, and that time you will have to accept more tough conditions," he said.

Pakistan hopes that its front-line role in the war on terrorism will nudge its allies to prevent its economic downfall. But Saudi Arabia, the U.S. and other nations may condition any aid they give on Pakistan submitting to an IMF package, which would come with strict spending rules, said Shahid Hasan Siddiqui, a top economist.

Pakistan Finance Ministry chief Shaukat Tareen has said that if he does not get indications of a forthcoming bailout from allies by Nov. 10 "there is no other option but to go to the IMF."

A meeting of the “Friends of Pakistan” is scheduled for November 17 in Abu Dhabi. That’s a little late for a rescue mission for a government that’s running on fumes, financially--though the timing is just right to force Pakistan to deal with the IMF. In fact, it’s assumed that the Zardari government will have already knuckled under to the IMF come November 17.

"I assume that by the date of the (Friends of Pakistan) conference the negotiations with the IMF will have been concluded," [German Foreign Minister] Steinmeier said. "This assumes that there is agreement on the conditions. We are both confident that this will happen in the next few days."

Even if Saudi Arabia and China show up at the “Friends of Pakistan” conference with public announcements of funding, the damage, as far as the PPP is concerned, is already done.

Being forced to resort to the IMF is a conspicuous failure for the Zardari government. Three years ago, when Pakistan got out from under the IMF’s thumb, Pervez Musharraf triumphantly announced, “We have broken the begging bowl.” Now Zardari, the man who drove him from office, has to highlight his growing political isolation inside and outside the country and his reliance on the United States by playing the role of mendicant to the West.

With understandable frustration, Pakistan’s Prime Minister Gilani is wondering why Pakistan’s deep-pocketed foreign friends are unwilling to come up with the money to help his country, ostensibly the keystone of the world struggle against Islamic extremism.

It’s a rather telling fact that India is more enthusiastic about the IMF bailout (see the Times of India report India may help Pakistan get bailout) than Pakistan, especially since the United States would make sure that any defense cuts (which Pakistan’s defense minister has already defiantly declared to be off the table) would come at the expense of Pakistani forces on the Pakistan-India border, while maintaining or increasing military efforts against America’s bete noire, the Pakistani Taliban, on the Afghan border.

Mr. Gilani, I would characterize your situation as a perfect storm of unfavorable events.

First, it’s quite likely that the U.S. government is trying to control the provision of financial aid to Pakistan in order to exert pressure on your government to support and implement pro-U.S. policies more enthusiastically. And don’t be surprised if the United States is close to giving up on Pakistan’s civilian government and wouldn’t mind fomenting a national crisis that forces Army Chief of Staff Kiyani or some other military savior to step up and take over for the good of the nation.

At the very least, by ostentatiously distancing itself from financial aid to Pakistan through the dual cut-outs of the “Friends of Pakistan” and the IMF, the United States is publicly declaring that, post-Musharraf, the special relationship with the civilian government is not really all that special—especially if Nawaz Sharif takes over-- and is taking this opportunity to yank the leash of a wayward and not particularly capable client.

Second, the reason that neither China nor Saudi Arabia have stepped up to help out is because they feel that the Zardari government’s policy of acting as a U.S. client and signing on to the whole counter-insurgency package in Pashtun areas of Pakistan is catastrophically wrong-headed and contrary to their best interests and they wouldn’t mind your government falling either, to be replaced either by a new government headed by Nawaz Sharif and the PML-N, or some general.

I suspect that the Saudis and the Chinese will hold the winning hand here.

Zardari’s government is tottering because his pro-U.S./aggressive anti-Taliban policies are extremely unpopular within Pakistan. Propping him up with an IMF loan is going to accelerate the political rot.

If the PPP government falls—especially if it collapses because of U.S. manipulation of its current account deficit crisis—any new civilian government will be headed by Nawaz Sharif and the PML-N, a prospect that gives Washington the collywobbles because of Sharif’s extremely popular pro-Saudi/Taliban-accommodating stance.

But even if a general can be found to rescue Pakistan from the catastrophe of Nawaz Sharif and a civilian government attuned to the popular will, America’s problems will be far from over.

The Pakistani populace is now politically energized, and any new military regime will have to take into account its vocal desire for a security policy decoupled from U.S. strategy and emphasizing negotiation and reconciliation with the Pakistani Taliban.

Furthermore, the United States has terminally fouled up its relations with Pakistan’s armed forces by its overt tilt toward India as its preferred South Asian partner and counterweight to emerging superpower (and Pakistan best buddy) China—both by concluding a concessionary bilateral nuclear agreement with New Delhi and shepherding it through the international non-proliferation process, and by providing cover for India to establish a strategic alliance with the Karzai government in Afghanistan, Pakistan’s traditional back yard.

Pakistan’s PPP government is caught in the middle. It can’t deliver unstinting support to the United States in its struggle in Afghanistan, and it can’t deliver a non-aligned policy that reduces U.S. influence and boosts Saudi and Chinese presence in the region.

That’s why nobody is willing to offer Pakistan anything—except a raw deal.