This is from the NY Times. This article is in conflict with an earlier one in the Financial Times that indicates that China was coming to the rescue for Pakistan. The conditions imposed by an IMF loan are not just embarassing for Pakistan they are likely to increase unrest and threaten government stability. The situation does not look promising for Zardari's government. Perhaps we will see the military intervene as has happened before.
October 19, 2008
Rebuffed by China, Pakistan May Seek I.M.F. Aid
By JANE PERLEZ
ISLAMABAD, Pakistan — President Asif Ali Zardari returned from China late Friday without a commitment for cash needed to shore up Pakistan’s crumbling economy, leaving him with the politically unpopular prospect of having to ask the International Monetary Fund for help.
Pakistan was seeking the aid from China, an important ally, as it faces the possibility of defaulting on its current account payments.
With the United States and other nations preoccupied by a financial crisis, and Saudi Arabia, another traditional ally, refusing to offer concessions on oil, China was seen as the last port of call before the I.M.F.
Accepting a rescue package from the fund would be seen as humiliating for Mr. Zardari’s government, which took office this year.
An I.M.F.-backed plan would require Pakistan’s government to cut spending and raise taxes, among other measures, which could hurt the poor, officials said.
The Bush administration is concerned that Pakistan’s economic meltdown will provide an opportunity for Islamic militants to capitalize on rising poverty and frustration.
The Pakistanis have not been shy about exploiting the terrorist threat to try to win financial support, a senior official at the I.M.F. said.
But because of the dire global financial situation, and the reluctance of donor nations to provide money without strict economic reforms by Pakistan, the terrorist argument has not been fully persuasive, he said.
“A selling point to us even has been, if the economy really collapses this is going to mean civil strife, and strikes, and put the war on terror in jeopardy,” said the official, who declined to be identified because he was not authorized to speak to the news media.
“They are saying, ‘We are a strategic country, the world needs to come to our aid,’ ” he said.
Pakistani officials said they had received promises from the Chinese to help build two nuclear power plants, and pledges for business investment in the coming year.
But Pakistan had also hoped China would deposit $1.5 billion to $3 billion in its central bank, according to senior officials at the I.M.F. and Western donor countries.
The infusion of cash would have helped with payments for oil and food as currency reserves dwindle, officials said.
Shaukat Tareen, the new Pakistani financial adviser who accompanied Mr. Zardari to China, began to prepare the public for an I.M.F. program on Saturday, saying for the first time at a news conference that if Pakistan could not stabilize its economy within 30 days, it “can go to the I.M.F. as a backup.”
“We may have to go to Plan B,” he said.
Economic hardship has been mounting across Pakistan for several months. Electricity shortages have become so dire that even middle-class families in big cities have to ration supply, with power cuts for 12 of every 24 hours, with one hour on, and one hour off.
Food prices have soared, making some basics, even flour, too expensive for the poorest to afford. No large-scale riots have occurred, but concern is mounting that such protests are not far off.
The new government has reduced subsidies on fuel and food, and the central bank moved on Friday to ease an intrabank liquidity crisis.
In addition, new rules were imposed several weeks ago on the Karachi stock exchange to stop sell-offs.
But none of those steps have stanched the crisis in confidence.
The central bank’s currency reserves have dipped to $4 billion, enough to cover payments for oil and other imports for about two months. As it became clear over the past two days that the Chinese were not going to provide a cushion for Pakistan, the rupee slumped to a record low.
The thin results from the China trip were of little surprise to Western donors.
Asked about the likelihood of Pakistan winning the direct cash infusion it was seeking, a senior Chinese diplomat was reported by Western officials to have said, “We have done our due diligence, and it isn’t happening.”
“What we needed is $3-to-$4 billion,” said Sakib Sherani, a member of the government’s economic advisory panel and chief economist at ABN Amro Bank in Pakistan. That amount was necessary “to build confidence,” he said.
The central bank governor, Shamshad Akhtar, said in a telephone interview on Saturday, “We are very open to all kinds of financial support.” She added, “We’ve taken a lot of corrective actions, and we plan to take more.”
But Zubair Khan, a former commerce minister and a critic of the government’s economic management, said confidence would improve once Pakistan arranged an I.M.F. rescue package. Mr. Khan said that the alternative would be the imposition of controls on imports and capital flows that could do long-term harm to the economy.
Meanwhile, the American financial crisis is also expected to hurt ordinary Pakistanis.
Remittances from Pakistanis living abroad to their relatives in Pakistan were expected to be about $7 billion this year, about $3 billion of that from Pakistanis living in the United States. But those remittances are likely to dwindle, affecting real estate values in Pakistani cities and families who live in poorer rural areas.
Mr. Zardari had approached the China trip with considerable fanfare, saying he was looking forward to visiting a country that had enjoyed a warm relationship with Pakistan, particularly during the rule of his father-in-law, Zulfikar Ali Bhutto.
His visit to Beijing followed a trip there by the chief of the army, Gen. Parvez Kayani, and came at a time when the relationship between Washington and Pakistan was strained over how to deal with the escalating threat from the Taliban and Al Qaeda.
Javed Burki, a former Pakistani finance minister, said China had provided $500 million in balance-of-payments support in 1996, when Pakistan was on the brink of default. He had flown to Beijing to ask for the money and his request was fulfilled.
But those days are over, he said, because China is no longer inclined to grant cash outright without structural reforms from the receiving government, he said.