The drawdown of the North Atlantic Treaty Organisation forces from Afghanistan combined with sectarian violence could increase insurgency activities in Pakistan, posing serious risks to the country’s already flagging economy, said the International Monetary Fund in its newest report.
The report came on the heels of the IMF Executive Board’s approval of a $6.7 billion three-year loan aimed at averting a balance of payment crisis.
The likelihood of heightening risks posed by the security situation was “high-medium”, according to the IMF. The security concerns could increase economic risks, it added.
“Pakistan faces significant insurgency problems in the regions bordering Afghanistan, which could intensify with the drawdown of Nato forces there,” said the report.
Such blatant comments by the IMF on the country’s security and political situation have surprised many analysts who study and understand Pakistan-IMF relations. They said it was the weakness of the Ministry of Finance that allowed the IMF go “deep-down” in assessing the country’s political affairs.
It assessed the security situation as part of its overall assessment of the country in order to check the level of crisis before approving the bailout programme. The report has been prepared by the IMF staff that stayed in Pakistan from June 19 to July 7.
Even the directors of the IMF’s Executive Board recognised the highlighted risks to the new programme from a delicate security situation, revealed the report. It went on to state that sectarian violence in Balochistan and other provinces has been another source of unrest, while street crime in Karachi adds to security concerns. The IMF’s assessment seems true as far as the Karachi situation is concerned.
The IMF observed, “The expected withdrawal of NATO troops from Afghanistan could increase the activities of the Taliban’s Pakistan wing.”
The United States has announced to largely scale down its activities in Afghanistan by December 2014. Many believed in Pakistan that despite a spotty track record of the county the approval of yet another programme by the IMF was a result of Washington’s desire to withdraw its troops by sustaining minimum casualties. These views have been expressed by two former Governors of State Bank of Pakistan, Shahid Kardar and Mohammad Yaqoob.
The report warned of a depreciating rupee due to a heightened security situation and pointed to the already weak private investment and Foreign Direct Investment in the country. Due to an arrangement between Pakistan and the IMF, the rupee has already significantly shed its value against the greenback.
The IMF observed that under unreformed policies, Pakistan’s economic situation will continue to deteriorate and risks of near-term crisis are high. It said that low and declining State Bank reserves leave the country vulnerable to a balance of payments crisis from even relatively minor external or domestic shocks.
The IMF further noted that domestic risks also emanate from the fiscal imbalance with the attendant high government debt rollover requirements, estimated at 30 percent of Gross Domestic Product (GDP).
The IMF said that if the new government did not introduce reforms in the current fiscal year, the budget deficit will remain at 8.1 per cent of the GDP. And to finance such a huge budget deficit the government would continue borrowing money, which will likely increase inflation to the double digits in the coming months.
The IMF has projected that over the medium term, Pakistan’s economy will continue to underperform.
A reform package including significant fiscal consolidation, a more flexible monetary and exchange rate policy, and comprehensive structural reforms would reduce crisis risks stemming from unsustainable fiscal and balance of payments positions, said the IMF.
Pakistan has already agreed to reduce the budget deficit by Rs655 billion or 2.5 per cent of the GDP this year.
The IMF conceded that there were risks to the programme and the reforms that the government promised may not be implemented. “Pakistan’s track record is spotty on sustained adherence to IMF programs, and this will be a relatively high-risk arrangement.”
Published in The Express Tribune, September 13th, 2013.