On the surface, it seems that Pakistan is making a comeback into the good hooks of the international financial community. In the third week of January, it received a USD 575 million "bailout package" from the International Monetary Fund to improve its balance of payment situation. Following the IMF loan, came a separate credit of USD 350 million from the World Bank for reforms in the banking sector. Islamabad has also sought a rescheduling of its loans servicing with the Paris Club, a consortium of donor countries and subsidiary organisations of the IMF, and a relief of USD 3.5 billion is likely from that direction.

Earlier, in September 1998, sensing the gravity of Pakistan's economic mess and a possible default in payments to lending institutions, the US government had eased the economic sanctions for one year. (It is believed that this was due to Pakistani assurances that it would sign the CTBT during 1999, a fact denounced, by right-wing religious parties led by the radical Jamat-e-Islami, as a rollback of the country's nuclear programme.)

For a country facing economic sanctions after the nuclear tests of May 1998, said the government's economic managers, the credits from the Fund and the Bank would provide relief to the economy. However, independent economists, bankers and businessmen see them only as a further burden on the ailing economy. Pakistan already owes about USD 30 billion to various lending agencies and these packages, intended to avoid an immediate default, would provide but a brief respite. Moreover, these short-term benefits will not count for much as the time will come when the country will have to pay back the money.

Neither the government nor the IMF has revealed all the conditions tagged to the latter's package, but experts believe they may include stringent economic demands such as raising power and oil prices, devaluing currency, and broadening the revenue base. The declared conditions call for a growth rate of 5 to 6 percent over the medium term, reduction in annual inflation rate to 6 percent by 2001-02 against the present rate of 9 percent, reduction in the external current account deficit from about 3 percent of GDP in 1998-99 to less than 1.5 percent of GDP by 2001-02, and improvement in social indicators.

Given Pakistan's declining exports and the drying up of new investments after the nuclear tests, it will be very difficult for the government to fulfil all it has committed to. The current IMF credit consists of two programmes: i) extended structural adjustment facility (ESAF) and ii) compensatory and contingency financing facility (CCFF), which is commercial credit at market interest rates. The major portion of this package is the CCFF loan aimed at offsetting the shortfall of export earnings during 1999. it is ridiculous to make up for export earnings by taking costly loans," said Shahid Hassan Siddiqui, senior banker and chairman of the Research Institute of Islamic Banking and Finance in Karachi.

In an attempt to prevent movement of foreign exchange out of the country after the nuclear blasts, the government had taken some unpopular decisions including the freezing of all foreign currency bank accounts and imposing restrictions on imports. Importers were asked to deposit 30 percent of the import letter of credit amount in advance and directed to purchase dollars at market rates. (Only the import of essential items like food, oil and drugs were exempted.) For this, the central bank introduced a dual exchange system, which provided for an inter-bank exchange rate reflecting the market situation, besides the official rate of exchange.

To encourage exports, the government allowed exporters to sell 50 percent of their hard currency earnings at inter-bank rates and surrender the remainder to the government at official exchange rates. (This ratio was recently increased to 80 percent; earlier, all export earnings had to be given to the government at the official rate.) Unfortunately, these steps had no impact on exports: export figures for July-December 1998 reveal that earnings fell by over 12.5 percent over the same period the year before.

Government control over the foreign currency accounts shook the confidence of investors and the common people as a whole. Over half a million account holders were deprived of their money overnight in the wake of the state of emergency imposed just after the nuclear blasts. Although the government later defroze the accounts, allowing withdrawal in Pakistan rupees at the official exchange rate, the public's confidence is still not restored. "That confidence can be restored only by spending on development of infrastructure and the social sector, which would create employment and bring investment," said Asad Saeed, an economist with the Karachi-based Pakistan Institute of Labour, Education and Research (PILER).

Pakistan's foreign exchange reserves, which stood at USD 1.26 billion before 28 May, had plunged to USD 400 million by October 1998. The injection of USD 346 million —reimbursement of the purchase price of F16 fighter jets held by the US—brought the reserves up to USD 1 billion at the beginning of the new year. But the economic crisis is far from being over. Cautioned banker Siddiqui, it has just been deferred till September, after which we will see a very difficult situation."

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