Is Pakistan going towards default?

In the back drop of the global financial crisis there are bold indications of Pakistan’s default on foreign debt repayment. To avert the likely threat of default, the country needs foreign aid/IMF inflow of 10 billion dollars before February 2009. President Asif Ali Zardari recently visited the United States with a begging bowl for acquiring a large amount of loans from the potential donors. His efforts have materialized in the formation of Friends of Pakistan Consortium which consists of the United States, Canada, Italy, Australia, United Kingdom, Germany, France, E. U, Turkey, China, Japan and Saudi Arabia. Appreciating Pakistan’s role as a front line state in the war against global terrorism, the Consortium has agreed in its first meeting to provide 5 billion dollars as emergency financial assistance to Pakistan to save it from economic melt down. However, it is pre-mature to assume that the full amount of foreign aid that is pledged by the Consortium members will actually be disbursed to Pakistan. There are media reports that the next meeting of Friends of Pakistan Consortium has been delayed by one month which is bad news for a foreign exchange starved country. The unabated downward slide of the Pakistani rupee against the US dollar and other major world currencies has only benefited the money changers alone, whereas the weakness of local currency has shattered the confidence of home and foreign investors in the viability of Pakistan’s economy. Hence, the flight of capital has intensified. The depreciation of local currency against the dollar and other hot currencies is not a recent phenomenon. The down turn of the rupee which started in the early 1970’s has continued till date. The exchange rate was Rs4.70 to 1 US dollar during the Zulfiqar Ali Bhutto’s government in 1972, which fell down to a new parity rate of Rs9.90 to 1 US dollar in 1977.

This slide of local currency continued, and the exchange rate came down to Rs13.17 for a dollar in 1983 during General Zia’s regime. It further went down to Rs17.70 to a dollar in the succeeding years. The exchange rate tumbled to Rs24 to 1 US dollar in the first tenure of Benazir’s Government of 1988-1990. The local currency further dipped, and the rate of exchange reached to Rs25.10 for a dollar. The decline in the value of rupee went on and it reached to Rs40.39 to 1 US dollar during the second tenure of Benazir’s government with a further slide to Rs53 to 1 US dollar in the second tenure of Nawaz Sharif’s government.

The rate of exchange during the rule of General Pervez Musharraf remained at Rs60-62 for a dollar. All the previous governments remained oblivious of the steep fall in the value of local currency and even the present democratic government has failed to take appropriate measures for a stable exchange rate. The depreciation in the value of rupee gained momentum in the present PPP led government and the exchange rate nose dived to the lowest level of Rs47 for a dollar. The strict conditionality’s that are attached with the disbursement of foreign loans have affected the quantum of foreign investment and the depreciation in the value of rupee has pushed up the budgetary deficit. If the current economic situation continues then Pakistan will not be in a position to meet its foreign debt liabilities and the default will become a better reality. The tremendous loss in the value of rupee has substantially increased the import bill and the foreign trade imbalance is going to be unmanageable incase monetary and fiscal measures are not taken to enhance the value of the local currency against the US dollar and other world currencies. The falling oil prices and a record increase in home remittances and quick disbursement of loans from the Asian Development Bank and G-8 countries, which have provided some fiscal and financial space for measures to reverse the declining trend in the value of the rupee. The global financial turmoil will take a heavy toll on the economy and will further aggravate the current wave of recession.

It has now become clear that United States 700 billion dollar bail out package has done little to end uncertainty in the stock markets of Europe and Asia. The bearish trend still prevails on the stock exchange of Japan, China, South Korea, Hong Kong and Thailand. The Central Bank of Japan has flouted, and emergency fund of 1 trillion Yens to shower up the credit position in the market. The Japanese investors are shy of selling shares because of the recession in US stock market. The index in the capital market of Japan has dropped by 225 points which is the lowest during the past four years. The trading of shares of export companies in the stock market of Japan has increased.

The global financial upheaval has accelerated the recession in the stock market of the country. Moreover the unrealistic increase in the POL prices and electricity tariff has vitiated the economic environment for domestic and foreign investment. A meaningful reduction of taxes on POL and lowering of electricity tariff can help in boosting the stock market and reducing the cast of production for exportable goods. The upsurge in industrial activity will save the manufacturing sector from stagnation and eventual collapse. The current global financial crises necessitate the setting up of economic warning system for the protection of investors as they have already lost 40 billion dollars on account of financial turmoil in the past due to the indifference of regulatory authorities, who now want a financial alarm system setup.

It is now time to learn from our mistakes and introduce a greater degree of transparency in the financial management and utilization of foreign aid.


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