1. reserves began to shrink from US$15.6 billion

1.                 Last but not least, in FY 2000 a significantimprovement from a 90 percent of GDP, public debt remain as high as 55 percentof GDP.

External debt got down from 43 percent in FY1999 and makes up 27percent of GDP in 2008. However, a favorable external environment may aid better results ofthe improvement in the country’s debt position. A big relief in public debtamounting to about US$3.7 billion was result f Pakistan’s cooperation with theUnited States in the “war on terror” , coupled with a rescheduling of ParisClub debt which was  US$12.5 billion,resulting in a substantially reduced debt service burden which was 12.8 percentin FY2008, as compared to 28 percent in FY1999. To ease the burden on thefiscal resources, the economic and military assistance by the United Stateshelped to some extent.

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Moreover. After the September 11 attacks , internationalcontrols over informal money transfer and the liberalization of the capitalaccount resulted in increased remittances and investments. For borrowing theexternal and internal environments have become less favorable since the startof FY 2008. Consequently, due to the political turmoil at home and as a resultof the global financial crisis, the government failed to float plannedsovereign bond and global depository receipts. For all the above reasons, inOctober 2007 the foreign exchange reserves began to shrink from US$15.6 billionto less than US$3.5 billion in October 2008 in the face of maturing liabilitieswhich are merely enough to support four weeks of imports. As a result at theend of September 2008 as a proportion of foreign exchange reserves, externaldebt and liabilities, reached a staggering 900 percent against 300 percent ayear ago, making it impossible to fulfill international obligations.

The war on Terrorand the Economics, Friends of Pakistan:Pakistan turned to several friendly countries after failing tomobilize capital from the international market. Pakistani government sourcesclaim that it received a ‘positive response’ from the United Kingdom. However,a longtime friend of Pakistan which helped the country out of a similar crisisin 1999 after the nuclear tests; Saudi Arabia, was less than enthusiastic aboutPakistan’s requests for deferred payments on oil imports. Another all-weatherfriend of Pakistan with huge excess foreign reserves; China declined any majorcash infusion. In October 2008 President Asif Ali Zardari’s visit to China onlyyielded US$500 million, in addition to promises of investments and tradeopportunities to help Pakistan.

Beijing’s Its growing investments and cooperationwith Pakistan have already raised eyebrows in Washington and New Delhi. That’swhy it is likely that Beijing wants to keep a low profile. Furthermore, it isonly 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 therehave been suspicions that China and Pakistan may attempt a similar nuclearcooperation. The United States has been moving towards a multilateral approach intackling Pakistan’s crisis because it is wary of Islamabad’s capacity andcommitment to fight militants mounting insurgency in Afghanistan against UnitedStates-led forces. Since the Great Depression the Bush administration boggeddown by the worst financial crisis. Furthermore, for Pakistan the Bushadministration has also dragged its feet on a bill promising US$1.5 billionannual economic aid over a period of 10 years.

But this aid is conditional uponIslamabad’s ‘performance’ in the fight against militants. A Pakistani diplomatprivy said to the negotiations while talking to the daily Dawn, Washingtonreportedly wants Pakistan to refocus its military strategy to fighting themilitants 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 acomprehensive and coordinated approach to development, security andinstitutional issues facing the country, Washington threw its weight behind theformation of the Friends of Pakistan (FoP) 4 group to help Pakistan overcomeits economics and political challenges. To assure careful management of theeconomy and provide greater investor confidence, the group reportedly demandedPakistan to get an IMF loan approval.The IMF Arrangementand its Implications:Takatoshi Kato, an IMF Deputy Managing Director said, ” by providinglarge financial support to Pakistan, the IMF is sending a strong signal to thedonor community about the country’s improved macro-economic prospects,”Dominique Strauss-Kahn, the Managing Director of the Fund, urged thedonor community to “work together and act quickly to support Pakistan’sprogramme in order to mitigate the impact of the current economicdifficulties”.A press release issued by the IMF stated , IMF aims to restoremacro-economic stability and investor confidence through a tightening of fiscaland monetary policies, while simultaneously preserving social stability andadequate support for the poor. The arrangement is part of a broader package whichinvolves other multilateral institutions and donor countries.

The loan tranchesare subject to quarterly reviews by the IMF which has set forth certainconditions. Nevertheless, during the FY2009 budget in June, most of the”conditions” which are already part of the government’s economic agenda areannounced.

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