ISLAMABAD, May 9 (Reuters) - Whoever wins Pakistan's
elections has a fight on their hands - not just against the
Taliban, but negotiating with international backers to provide a
multi-billion-dollar bailout for a country that has habitually
used aid as a crutch to avoid reform.
Pakistan is gambling that the international community will
not allow a nuclear-armed country of 180 million people to go
bust, especially one that is a hot-house for anti-Western and
anti-Indian Islamist militants.
Unless the International Monetary Fund (IMF) provides
another transfusion Pakistan's finances could hit the wall in
the next six months or so. Talks have already begun.
"If they don't get an IMF loan and happily muddle along the
way things are, you could be facing a default later this year,"
said economist Sakib Sherani.
"But it depends on the counter-measures the government would
The loan probably will come through, though the IMF may make
the government that wins Saturday's vote sweat over the
The IMF may stump up around $5 billion, Pakistani officials
say, just enough to repay the outstanding debt on an earlier $11
billion package that was suspended in 2011 after economic and
reform targets were missed.
The new IMF loan would likely spread repayments over five to
10 years, said Shahid Amjad Chaudhry, financial adviser to the
pre-election interim government.
Pakistan requires between $6-$9 billion to avoid a balance
of payments crisis, the Asian Development Bank said.
"A program is needed. That is universally recognised by all
the parties," said ADB country director Werner Liepach.
For the extra money, Islamabad will have to turn to the ADB,
World Bank and other multilateral lenders, along with countries
with whom it has compelling foreign policy ties like the United
States, China and Saudi Arabia.
All sides have much at stake; Western forces need Pakistan's
help to make an orderly withdrawal from neighbouring
The United States committed to providing non-military aid,
not all of it government-to-government, amounting to $1.5
billion annually between 2010 and 2014.
Payments of military aid have been more erratic, often held
up at times when ties between Washington and Islamabad were
strained. In July 2012, Pakistan received $1.1 billion from the
United States through the Coalition Support Fund, the first
payment received since December 2010.
RESERVES RUNNING LOW
The election is a milestone for democracy. A civilian
government has served a full 5-year term for the first time
after decades of sporadic coups and elections.
The outgoing government, led by the Pakistan People's Party
(PPP) of President Asif Ali Zardari, has been quietly holding
talks with the IMF for a new loan.
But there is a strong chance that negotiations will be
completed by a government led by rival Nawaz Sharif, who have
said they may take longer to negotiate a loan. The former prime
minister's Pakistan Muslim League (PML-N) is regarded as the
frontrunner in the polls.
The winner will inherit a rupee currency that has
lost almost 40 percent of its value against the dollar since the
last election in 2008, and a fiscal deficit that the ADB thinks
will balloon to nearly 8 percent of gross domestic product
compared with 5.3 percent two years ago.
Official reserves held by the State Bank of Pakistan have
slumped to $6.7 billion, down from around $12 billion a year
ago, providing cover for just five weeks of imports.
Debt repayments have depleted reserves, but central bank
intervention to stop the rupee currency weakening beyond 100 per
dollar has also played a part. The IMF estimates State Bank has
spent an average of $250 million a month since last October to
prop up the rupee.
State Bank spelt out its worries in a policy statement last
month that noted a cumulative net capital and financial inflow
of $34 million during the first eight months of the 2012/2013
financial year ending in March was insufficient to finance a
current account deficit of $700 million for the same period.
RICH WON'T PAY
Pakistan has been a regular client of the IMF since the
1970s. It has entered nearly a dozen loan programmes since 1988,
but only successfully completed a handful.
The IMF wants Pakistan to reduce its fiscal deficit by
cutting energy subsidies that consume 2 percent of gross
domestic product per year and mainly benefit the wealthy elite.
Pakistan sells its power for 9 rupees per unit. They cost 12
to produce. The problem is worsened by "line losses", often a
euphemism for influential people refusing to pay bills, that
account for around a fifth of total power generated.
The opposition PML-N says the rich must pay before tariffs
"Reform is not even on the table," said a visibly frustrated
Nadeem Ul Haque. He was deputy chairman of the government-run
Planning Commission, which oversees policy and major projects,
until he was fired last week for criticizing the government.
Pakistan needs to generate 3 million jobs a year to absorb
its growing population. Instead, said Haque, it has been losing
about 1 million annually, mostly due to the power crisis.
Pitifully weak tax collection is another cause of the gaping
hole in Pakistan's finances.
The IMF wants Pakistan to broaden its tax base, yet under
the PPP government tax compliance fell to a point where only
around 0.5 percent of Pakistanis paid income tax.
President Zardari's foster brother and PPP candidate Owais
Muzaffar paid an average of $140 in annual tax over the past
three years despite listing assets worth $8.1 million on his
The new Pakistan Tehreek-e-Insaf Party, headed by former
cricketer Imran Khan, says it will tackle tax evasion as its
first priority, though records show that many of party
officials have paid negligible tax.
The PML-N says it will collect agricultural taxes that
provinces now ignore, a move that risks strong opposition from
the powerful and wealthy landowners in Sharif's own party.
Some reforms may be beyond government control. Would-be
investors are frightened by erratic intervention in contracts by
activist judges, said ADB's Liepach, citing several examples of
multi-million dollar deals gone awry.
"Investors want stable policies and a predictable legal
framework," he said. "They don't have either."
While Pakistan's politicians repeatedly demonstrate a lack
of commitment to economic reform, frustrated donors also lack
leverage to force change. They seem resigned to providing just
enough cash to let Pakistan lurch from one crisis to the next.
"There's a mentality here that (donors) are just going to
let Pakistan muddle through, that they (Pakistan) will get the
cash anyway," said an international financial analyst.
"You just get half-hearted reforms that don't really fix the
problem and are then abandoned."