1. reserves began to shrink from US$15.6 billion

Last but not least, in FY 2000 a significant
improvement from a 90 percent of GDP, public debt remain as high as 55 percent
of GDP. External debt got down from 43 percent in FY1999 and makes up 27
percent of GDP in 2008.

However, a favorable external environment may aid better results of
the improvement in the country’s debt position. A big relief in public debt
amounting to about US$3.7 billion was result f Pakistan’s cooperation with the
United States in the “war on terror” , coupled with a rescheduling of Paris
Club debt which was  US$12.5 billion,
resulting in a substantially reduced debt service burden which was 12.8 percent
in FY2008, as compared to 28 percent in FY1999. To ease the burden on the
fiscal resources, the economic and military assistance by the United States
helped to some extent. Moreover. After the September 11 attacks , international
controls over informal money transfer and the liberalization of the capital
account resulted in increased remittances and investments. For borrowing the
external and internal environments have become less favorable since the start
of FY 2008. Consequently, due to the political turmoil at home and as a result
of the global financial crisis, the government failed to float planned
sovereign bond and global depository receipts. For all the above reasons, in
October 2007 the foreign exchange reserves began to shrink from US$15.6 billion
to less than US$3.5 billion in October 2008 in the face of maturing liabilities
which are merely enough to support four weeks of imports. As a result at the
end of September 2008 as a proportion of foreign exchange reserves, external
debt and liabilities, reached a staggering 900 percent against 300 percent a
year ago, making it impossible to fulfill international obligations.

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The war on Terror
and the Economics, Friends of Pakistan:

Pakistan turned to several friendly countries after failing to
mobilize capital from the international market. Pakistani government sources
claim that it received a ‘positive response’ from the United Kingdom. However,
a longtime friend of Pakistan which helped the country out of a similar crisis
in 1999 after the nuclear tests; Saudi Arabia, was less than enthusiastic about
Pakistan’s requests for deferred payments on oil imports. Another all-weather
friend of Pakistan with huge excess foreign reserves; China declined any major
cash infusion. In October 2008 President Asif Ali Zardari’s visit to China only
yielded US$500 million, in addition to promises of investments and trade
opportunities to help Pakistan. Beijing’s Its growing investments and cooperation
with Pakistan have already raised eyebrows in Washington and New Delhi. That’s
why it is likely that Beijing wants to keep a low profile. Furthermore, it is
only wise for China to let the Americans take care of their ‘front line ally’
in the ‘war on terror’ because after the India-United States nuclear deal there
have been suspicions that China and Pakistan may attempt a similar nuclear

The United States has been moving towards a multilateral approach in
tackling Pakistan’s crisis because it is wary of Islamabad’s capacity and
commitment to fight militants mounting insurgency in Afghanistan against United
States-led forces. Since the Great Depression the Bush administration bogged
down by the worst financial crisis. Furthermore, for Pakistan the Bush
administration has also dragged its feet on a bill promising US$1.5 billion
annual economic aid over a period of 10 years. But this aid is conditional upon
Islamabad’s ‘performance’ in the fight against militants. A Pakistani diplomat
privy said to the negotiations while talking to the daily Dawn, Washington
reportedly wants Pakistan to refocus its military strategy to fighting the
militants and normalizing relations with India.

Therefore, Washington wants to share its burden on the ‘war on terror’
by involving major stakeholders in regional stability. By developing a
comprehensive and coordinated approach to development, security and
institutional issues facing the country, Washington threw its weight behind the
formation of the Friends of Pakistan (FoP) 4 group to help Pakistan overcome
its economics and political challenges. To assure careful management of the
economy and provide greater investor confidence, the group reportedly demanded
Pakistan to get an IMF loan approval.

The IMF Arrangement
and its Implications:

Takatoshi Kato, an IMF Deputy Managing Director said, ” by providing
large financial support to Pakistan, the IMF is sending a strong signal to the
donor community about the country’s improved macro-economic prospects,”

Dominique Strauss-Kahn, the Managing Director of the Fund, urged the
donor community to “work together and act quickly to support Pakistan’s
programme in order to mitigate the impact of the current economic

A press release issued by the IMF stated , IMF aims to restore
macro-economic stability and investor confidence through a tightening of fiscal
and monetary policies, while simultaneously preserving social stability and
adequate support for the poor. The arrangement is part of a broader package which
involves other multilateral institutions and donor countries. The loan tranches
are subject to quarterly reviews by the IMF which has set forth certain
conditions. Nevertheless, during the FY2009 budget in June, most of the
“conditions” which are already part of the government’s economic agenda are



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