The Pakistani rupee recovering slowly

Almost a year ago in August 2008, Pakistan was on the verge of default. Its foreign exchange reserves, melting rapidly at a rate of $250-330 million per week, were at a low of $4 billion, barely enough to cover one month’s imports. Pakistan’s debt and bonds, having passed the 45 billion euro mark, were most risky. The Pakistani rupee had depreciated by 23%. The trade deficit was widening at an alarming rate. Legal and social instability frightened investors. Financial analysts predicted that Pakistan was on the verge of insolvency and explained the situation as a natural consequence of Pakistan’s support for the US-led war on terror.

Times were tough for the new Pakistan People’s Party (PPP) government. Pakistan pleaded with Saudi Arabia and China to avoid the looming default but got nothing of consequence. For lack of any other solution, Pakistan then knocked on the IMF’s door in desperation. Despite strong opposition, Pakistan signed a Stand-By agreement in November 2008 for $7.6 billion. A recent report in The Economist magazine on April 23, entitled “Full fear and credit: Pakistan political instability brings macroeconomic calm”, claims that Pakistan is the only country not suffering from the effects of the global recession and that, under the program signed with the IMF, it has only one thing to do: reduce its fiscal deficit to $7 billion, or 4.3 per cent of GDP. The report gives the impression that thanks to the IMF’s indulgence, Pakistan is regaining economic stability, which is completely false. And a long list of conditionalities is yet to follow.

IMF imposes conditions

The Stand By agreement calls for, for example, an end to fuel and electricity subsidies, exemptions from income and agricultural taxes, further privatization and cuts in social spending. The only area where the IMF has not called for spending cuts is the military budget.

The Pakistani government has complied: in addition to privatizing industrial units, Pakistan has put a million hectares of arable land up for sale [1]; it has eliminated fuel subsidies and increased electricity tariffs, which has provoked strong protests. In order to meet its commitments to reduce the budget deficit, the government was also forced to terminate about 125 projects under the Public Sector Development Program and postpone 432 others. Budget cuts in this program are now estimated at 100 billion Pakistani rupees. Spending in the higher education sector has been cut by 73%. There are unconfirmed reports that Pakistan is seeking an additional $4.5 billion from the IMF. It is not clear at this time how much would be released, in what time frame, under what conditions and for what specific purpose.

As part of the IMF’s conditionalities, Pakistan’s Federal Board of Revenue has implemented a tyrannical tax structure. Progressive until 1990, Pakistan’s tax system became regressive in 1991 with the massive introduction of indirect taxes. As a result, over the past 19 years, the tax burden on the poorest households has increased by 17.4 percent while that on the richest households has decreased by 15.9 percent. In addition, the imposition of additional tax burdens in agriculture may well ruin the sector.

The macroeconomic stability temporarily restored by the IMF’s strict conditionalities has not been accompanied by production-oriented growth. Under these conditions, economic fundamentals will remain fragile.

As a result of the energy crisis, some 300 production sites have been closed and 700,000 jobs lost in the textile sector in the space of two years. Until 2007, this sector accounted for 60% of the country’s exports, employed 38% of the workforce and represented 8.5% of GDP, according to the daily The News on April 26.

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