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Pakistan may need IMF bailout

Pakistan may have to accept politically unpopular aid from the IMF to ward off possible economic meltdown if wealthy nations turn it down, the finance minister said.

Battered by high inflation and a plunging currency, nuclear-armed Pakistan needs up to US$5 billion to avoid defaulting on sovereign debt due for repayment next year.

Shaukat Tareen, the finance official leading the country’s efforts to secure the money it needs, said he was confident Pakistan would not default.

He predicted the country would soon receive more than US$4.5 billion through the acceleration of planned development loans and direct assistance from rich countries.

But he said that the IMF may be needed as a “plan C.”

“We can go to the fund if we want, but only as a backup,” he told reporters on Saturday.

The crisis comes as the country’s new civilian leaders struggle against Islamist militants in the northwest blamed for soaring violence at home and in neighboring Afghanistan.

Seeking help from the IMF would be political difficult for the government because the agency’s help is often on condition of deep cuts in public spending that can affect programs for the poor.

Pakistani President Asif Ali Zardari returned on Friday from China with no public commitment of help.

Pakistan hopes its front-line status in the war on terrorism will mean the international community will not have the stomach to see it default. But its plea for help comes as many countries are distracted with the global economic crisis.

“Countries are busy with their own housekeeping, but they will not leave Pakistan in the middle of the road,” said Muzammil Aslam, chief economist at the Pakistani security firm KASB. “It is the world’s first line of defense against Taliban and al-Qaeda.”

Others economists are not so sure, and predicted IMF funds will be needed.

Through much of its history, Pakistan has struggled with chronic economic instability and foreign debt, but the current crisis comes at an especially dangerous time.

The country has seen more than 90 suicide blasts since last July.

Last month, a suicide bomber struck the Marriott Hotel in Islamabad, killing 54 and leading the UN and foreign embassies to withdraw the families of foreign staff.

Pakistan’s overwhelmingly poor population of 160 million is already suffering from skyrocketing food and fuel prices and enduring daily power cuts caused by energy shortages.

Defaulting on debt risks shattering any remaining local and foreign investor confidence in the battered economy. It could escalate into an economic meltdown with out-of-control price increases, fewer jobs, more power shortages and a general breakdown in law and order.

“Bankruptcy, should it happen, could unleash a massive tidal wave of social unrest,” the US-based intelligence risk assessment agency Stratfor said in a report. “Exactly what the jihadists on both sides of the Afghan-Pakistani border would like to see to advance their goals.”

The financial crisis was caused in part by the previous administration of former Pakistani president Pervez Musharraf, which subsidized fuel and food even as international commodity prices soared last year.

That created a big hole in public finances, meaning the new government had to borrow heavily from the central bank, stoking inflation that this month reached 25 percent.

The total amount of foreign currency in Pakistani banks has fallen by more than half since last year, largely because of a yawning trade deficit exacerbated by the high price of imported fuel.

Flows of foreign investment into the country’s once booming domestic economy that used to bridge the gap have dried up amid political instability and rising insecurity.

The Pakistani rupee has lost about a third of its value this year. The benchmark 100-stock index had already fallen more than 40 percent from a record high in April when its board of directors put a floor under it at the end of August.
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