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Floods leave Pakistan in dire economic straits

Already dealing with a debt of $55 billion and a stagnant economy, Pakistan must now deal with the costs of relief reconstruction even as the nation's main sector, agriculture, may not recover in time for the crucial fall wheat season.

September 19, 2010|By Alex Rodriguez, Los Angeles Times

After Pakistan's longtime military leader, Gen. Pervez Musharraf, left office in 2008, Zardari took over an economy reeling from the worldwide financial crisis and on the verge of default. A $7.6-billion bailout loan issued in November 2008 by the International Monetary Fund was later ramped up to $11.3 billion.

That loan came with strings attached, including a condition that the government institute tax changes in a country where most people do not pay income taxes. The government has yet to make any inroads in improving its tax base, a failure that experts say has hampered the country's ability to cope with the recovery tasks ahead.

Unable to tackle reconstruction without outside help, Pakistan is hoping for another helping hand from the IMF and other international financial institutions. The terms attached to that assistance, says Samina Ahmed, South Asia project director for the International Crisis Group, will help determine whether Pakistan's economy can hold up during post-flood recovery. On Wednesday, the IMF said it would provide relief in the form of an emergency $451-million loan with an interest rate of 1.28%.

"It's important for the international financial institutions to understand that increasing the debt burden of Pakistan won't pay any dividends," Ahmed said.

Even if new loans come with soft terms, Pakistan still must repay its existing IMF loans, a tall task for a country facing economic stagnation.

"Unless the economy really starts growing and exports start moving again, I really don't see us having the capacity to repay this debt," said Pasha, the economist. "So in that sense, we've already reached an unsustainable level of debt, particularly after the floods. I'm not sure we have the capacity to borrow more."

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