Cash-strapped Pakistan seeks bailout

updated 8:12 p.m. ET Oct. 17, 2008

ISLAMABAD, Pakistan - Pakistan's new leaders are scrambling for foreign cash to ward off a possible economic meltdown at a time when they are trying to contain soaring violence by Islamic fundamentalists.

Battered by high inflation and a plunging currency, the nuclear-armed country hopes global powers and financial institutions will not want to see it further destabilized and hand over the dollars it needs.

But the plea for help comes as potential donors in the West are distracted by the global financial crisis and deepening fears of recession in their own economies.

Pakistan requires an immediate commitment of at least $2 billion to restore confidence in the country after an alarming slump in its foreign reserves, economists say. Up to $8 billion more will be needed to repay sovereign debts due to mature in 2009, they say.

President Asif Ali Zardari returned Friday from neighboring China with a promise of assistance from an "all-weather friend," but no specific public commitment.

Officials in search of funds
Pakistani finance officials have also visited Washington and Middle Eastern capitals in search of funds.

"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-Qaida."

Others are not so sure. Some predict Pakistan will have to seek assistance from the International Monetary Fund, a last resort given that such help is often conditioned on the politically unpopular economic medicine of even deeper cuts in public spending.

The financial help will likely take the form of low-interest loans from countries such as the United States, China and the United Arab Emirates, and institutions such as the World Bank, or on deferred payments on oil imports from Middle Eastern countries.

Since 2001, the United States has given Pakistan around $10 billion in aid, most of it to the military to help it pay for operations against militants near the Afghan border.

How much money Pakistan receives and when should become clearer next month, when leading donors gather in Dubai for the second meeting of the "Friends of Pakistan," a group formed recently to help it avert an economic crisis.

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.

Rising violence
Militants sheltering along the border region with Afghanistan are blamed for the rising violence in that county as well as a string of bloody attacks at home. Osama bin Laden and other top al-Qaida leaders are thought to be hiding in the frontier region.

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

Pakistan's overwhelmingly poor population is already suffering from skyrocketing food and fuel prices and are enduring daily power cuts due to energy shortages.

Defaulting on its debt risks shattering any remaining local and foreign investor confidence in the battered economy as well as its government. 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 in the country of 160 million people.

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

Any outbreak of widespread social unrest brings with it the prospect of Pakistan's armed forces being brought onto the streets and possible imposition of martial law in the country just months after former President Pervez Musharraf was ousted.

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