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Pakistan facing bankruptcy
Pakistan’s foreign exchange reserves are so low that the country can only afford one month of imports and faces possible bankruptcy.

By Isambard Wilkinson in Islamabad
Last Updated: 10:28PM BST 06 Oct 2008

Officially, the central bank holds $8.14 billion (£4.65 billion) of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion – enough to buy about 30 days of imports like oil and food.

Nine months ago, Pakistan had $16 bn in the coffers.

The government is engulfed by crises left behind by Pervez Musharraf, the military ruler who resigned the presidency in August. High oil prices have combined with endemic corruption and mismanagement to inflict huge damage on the economy.

Given the country’s standing as a frontline state in the US-led “war on terrorism”, the economic crisis has profound consequences. Pakistan already faces worsening security as the army clashes with militants in the lawless Tribal Areas on the north-west frontier with Afghanistan.

The economic crisis has already placed the future of the new government in doubt after the transition to a civilian rule. President Asif Ali Zardari has faced numerous but unproven allegations of corruption dating from the two governments led by his wife, Benazir Bhutto, who was assassinated last December.

The Wall Street Journal said that Pakistan’s economic travails were “at least in part, a crisis of confidence in him”.

While Mr Musharraf’s prime minister, Shaukat Aziz, frequently likened Pakistan to a “Tiger economy”, the former government left an economy on the brink of ruin without any durable base.

The Pakistan rupee has lost more than 21 per cent of its value so far this year and inflation now runs at 25 per cent. The rise in world prices has driven up Pakistan’s food and oil bill by a third since 2007.

Efforts to defer payment for 100,000 barrels of oil supplied every day by Saudi Arabia have not yet yielded results, while the government has also failed to raise loans on favourable terms from “friendly countries”.

Mr Zardari told the Wall Street Journal that Pakistan needed a bail out worth $100 billion from the international community.

“If I can’t pay my own oil bill, how am I going to increase my police?” he asked. “The oil companies are asking me to pay $135 [per barrel] of oil and at the same time they want me to keep the world peaceful and Pakistan peaceful.”

The ratings agency Standard and Poor’s has given Pakistan’s sovereign debt a grade of CCC +, which stands only a few notches above the default level.

The agency gave warning that Pakistan may be unable to cover about $3 billion in upcoming debt payments.

Mr Zardari is expected to ask the international community for a rescue package at a meeting in Abu Dhabi next month.

This gathering will determine whether the West is willing to bail out Pakistan.

Pakistan seeks US funding to avoid bankruptcy

Pakistan has dispatched its top finance officials on a mission to raise billions of dollars from its closest allies in a last ditch bid to stave off bankruptcy.

By Isambard Wilkinson in Karachi and Damien McElroy in Dubai
Last Updated: 3:47PM BST 10 Oct 2008

Shaukat Tareen, the prime minister’s finance adviser, and Shamshad Akhtar, the governor of the central bank, have travelled to Washington to secure a £6 billion American and British-backed lifeline.

Oil-rich Gulf states have been lined up to match Western funds with extra billions to ensure that the country, which until recently touted itself as the next Asian Tiger, avoids a balance of payments crisis.

Mr Tareen, a suave former banker, was appointed this week to spearhead the last ditch bid to after it was revealed that state reserves had halved since democratic elections earlier this year. He has given himself four weeks to salvage the economy. High oil prices have combined with endemic corruption and mismanagement to push Pakistan to the brink of bankruptcy.

The country’s middle class shifted massive amounts of capital overseas as a crisis of confidence in Pakistan’s long term future took hold following the assassination of former Prime Minister Benazir Bhutto last December.

A leading Pakistani private banker in Dubai, who has acted as handmaiden to the exodus, said the collapse and replacement of former President Pervez Musharraf’s regime had amounted to a devastating double blow. “Capital flight has got be stopped if the country is to be turned around,” he said. “But people take their cues from the leaders. The looters are back in charge and if they won’t repatriate their money from Swiss bank accounts why should we keep our money in Pakistan?”

While Pakistan’s economy has repeatedly been on the brink since independence in 1947. the stakes have never been higher. The nuclear armed state has failed to contain an Islamic insurgency despite mobilising its army.

The new President Asif Ali Zardari, Miss Bhutto’s widower, had hoped to raise a cash infusion at a ‘friendly states’ summit in the United Arab Emirates next month. But the economy has unravelled too quickly to wait.

“We have been here in the past but now Pakistan urgently needs balance of payments support,” said the treasurer of a leading international bank in Karachi. “We need some action this month.”

Saudi Arabia and the conservative Arab monarchs have signalled their willingness to divert part of their sovereign wealth funds to shore up Pakistan. Gulf support will come at a price with the Emirates determined ensure its own food security by buying up huge tracts of Sindh and Punjab provinces.

Islamabad will be expected to grant blanket exemptions on exports from its farms to the Gulf in return – an unpopular move when 25 per cent inflation has forced the poor to assemble in huge crowds for government subsidised wheat.

Pakistan has fallen a long way from the golden years of the Musharraf government, which appeared to have found a formula for success. His regime provided six years of currency stability as the economy grew six per cent a year, doubling the gross domestic product.

Wholesale bank privatisation boosted the spending power of the middle class but the money poured into a property and stock market boom that has now evaporated.

Karachi, the country’s economic capital, has borne the brunt of the collapse. From its highs last year when it attracted almost $1 billion of foreign investment, the stock market has been practically shuttered.

Its youthful mayor, Mustafa Kamal has had to scrap grand plans for large scale projects that would improve the infrastructure for its 18 million people. “First it was inflation, then Musharraf’s political problems, then Zardari’s election and now security,” he said. “People are looking for things to settle down.”

The flaws in substituting a consumer-led boom for broad-based growth are summed up in the lamentable state of Karachi’s electricity network. It was privatised in 2005 in a widely-criticised auction that failed to secure pledges of extra investment.

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