July 27, 1998

With the country on the verge of defaulting on its foreign debt repayment, the country's economy faces an unprecedented collapse--unless the US bails it out.

By Zahid Hussain

On July 14, when Nawaz Sharif advertised in major national dailies the sale of the newly built Prime Minister's Secretariat to tide over Pakistan's economic crisis, his desperation was showing. The minimum bid for prospective buyers of the 400-room palatial secretariat, built only eight months ago, was put at Rs 100 crore (Indian Rs 75 crore). The move, part of the prime minister's austerity drive, only goes to illustrate Sharif's struggle to keep his government afloat as Pakistan moves perilously close to an economic meltdown.

There is a growing indication that Pakistan may not be able to fulfil its foreign debt repayment commitment of an average of $700 million a month beyond the third week of July as the stoppage of aid from western countries begins to bite. In a desperate attempt to stave off an imminent economic collapse, Prime Minister Nawaz Sharif has sent distress calls to the IMF and the oil-rich Muslim countries for help. But the monetary support from them seems to be in a short supply. Saudi Arabia and some Gulf countries have reportedly promised to provide oil on deferred payment. The concession may give breathing space, but it cannot bail out Pakistan.

The country has pinned its hope on the meeting of the IMF board of directors on July 27 to discuss Islamabad's plea for a bail-out. But there appears little hope of resumption of aid unless Pakistan yields to US pressure and signs the Comprehensive Test Ban Treaty (CTBT). However, the US Senate's decision last week to give President Bill Clinton the option of putting economic sanctions on hold for a year should be of some comfort to Pakistan. The move would not only give Clinton a lever to drive a hard bargain with Pakistan, but also prevent it from going down under economically.

If a US bail-out doesn't materialise, then Pakistan will find it difficult to pull itself out of the current economic mess. Finance Minister Sartaj Aziz has already said the government would have no choice but to stop external debt repayment if the IMF did not respond positively. Economic analysts warn that such a move would have a disastrous consequence on foreign trade and investment. A default will surely lead to a massive devaluation of the Pakistani rupee, import restrictions and further cut in development expenditures. These measures will shoot up inflation and add to the economic hardships of the people.

Already, the fear of an economic breakdown has sent prices spiralling and fuelled social unrest. Just seven weeks after the nuclear tests, which had catapulted him to the height of his popularity, Sharif faces the most serious challenge yet to his 18-month-old government. Worse, political observers doubt his ability to weather the biggest economic crisis in the country's history.

As widespread rumours about the government's plan to seize safe deposit boxes and devalue the currency triggered a panic, thousands of Pakistanis besieged banks to withdraw their savings. Fear of an economic meltdown has led to a mad rush to buy dollars from the open market causing the value of the Pakistani rupee to plunge to a record low. A day before the nuclear test on May 28, the kerb or unofficial rate was just slightly above the official foreign exchange rate of Rs 46 to the US dollar. A month later, the government was forced to devalue the rupee by 4.2 per cent against the dollar. The kerb rates fell even more dramatically. By July 10, the exchange rate had dropped to an alarming Rs 63 to a dollar before climbing back to around Rs 56 last week.

Pakistani officials fear the country faces insolvency without a bail-out plan from the IMF and other multilateral agencies that have stopped all lending to Islamabad following the sanctions announced by the G-8 countries last month. Aziz has said that the embargo may deprive the country of $1.5 billion in foreign aid this year. For the past several years, the flow of funds from the IMF, World Bank and the Asian Development Bank had helped Pakistan prevent default on the repayment of $30 billion in foreign debts. "The country's foreign exchange reserves are only good to pay for just four weeks of import and, without external assistance, these meagre reserves will be wiped out in no time," warns Shahid Kardar, a leading independent economist.

In a desperate attempt to avert collapse and a run on the banks, the government has frozen $11 billion in foreign currency accounts and banned issuance of foreign exchange for travelling abroad. But these measures have not stopped massive flight of capital from the country. According to Aziz, more than $1 billion have been transferred from Pakistan through informal channels over the last six weeks.

Meanwhile, reflecting the grim situation, the Karachi Stock Exchange (KSE) -- the country's premier bourse -- crashed to rock bottom following panic selling by foreign and local investors as Pakistan moved perilously close to a default on its external debt repayments. From 1,500 points before the Chagai tests, the KSE index dropped by almost half to 789 last week. "The investors are pulling out, dumping their stocks at throwaway prices," says Yasin Lakhani, KSE president. Expectedly, opposition leaders have accused Sharif of using nuclear explosions to conveniently cover up the failure of his government's policies.

"This situation is likely to exacerbate a rapidly growing social and political discontent," says an observer. Economy apart, the breakdown of law and order in Karachi and other parts of the country has also added to Sharif's woes. More than 200 people have been killed in political violence in Karachi over the last six weeks. With the euphoria over the nuclear tests subsiding, Sharif's popularity is rapidly eroding.

Growing polarisation on provincial lines, which has pitted the smaller provinces of Sindh, Baluchistan and the North-West Frontier Province against Punjab -- the biggest and Sharif's home province -- has further compounded the government's problems. A revolt is brewing in the three provinces against the government's decision to build a hydro-electric dam on the Indus river in Punjab. "Sharif is behaving like the prime minister of Punjab," says Nasim Wali Khan, leader of the Opposition in the NWFP Assembly and a former ally of Sharif. As if that weren't enough, widespread allegations of tampering with census figures have added fuel to fire in these provinces. While the country moves towards an economic, political and social meltdown, Sharif is relying on political gimmickry for survival. As political observers believe, populist rhetoric may have boosted Sharif's fortunes in the past, but in the present crisis it might just fall flat.

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