Cash-strapped Pakistan seeks bailout

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Musharraf partly to blame
The crisis is due in part to the Musharraf administration, which subsidized fuel and food even as international commodity prices soared last year,

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

Pakistan's financial crisis has been caused by a sustained plunge in its currency reserves, leading to fears it won't be able to repay dollar-denominated debts to international investors holding government-issued bonds.

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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. The reserves stand at $7.75 billion, down from $8.32 billion a week earlier, although that unusually steep drop is explained in part by end-of-quarter debt servicing payments.

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.

That has seriously undermined the Pakistani rupee, which has lost about a third of its value this year and on Friday touched a new low of more than 84 to the dollar.

Stocks down 40 percent
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.

Earlier this month, Standard and Poor's, which evaluates lending risk, slashed its credit rating for Pakistan to CCC-plus from B, saying the thinning reserves cast doubt on the country's ability to make debt payments, the first of which is due in February 2009.

Pakistan's finance chiefs can find some cheer in the fact that the country is not directly exposed to the fallout from the global banking crisis. Because it is not a great exporter, it may also be shielded from some of the worst effects of any global recession.

But no one expects the militant attacks to stop, and there is a little confidence the government can push through the structural reforms needed to get the economy back on track even if it does secure the money to pay its debts.

"I have my doubts," said Yousuf Nazar, a leading economist. "The government does have broad based political support, but I am not sure about its capacity as related to economic affairs."