Islamabad scrambles to prevent bankruptcy

Pakistanis protest against the International Monetary Fund as their government engages in talks with the organisation.

ISLAMABAD // Pakistan is clamping down on foreign exchange dealers in a bid to stem the flow of capital leaving the country as it teeters on the verge of bankruptcy. The government, led by the Pakistan People's Party, has taken controversial measures to restore international confidence in its economic policies before important meetings next week. Pakistan needs a rapid injection of US$4billion (Dh14.7bn) to prevent it defaulting on debts by the end of the month. Pakistan is facing a balance-of-payments crisis and has been in talks with the International Monetary Fund. Officials said they hope to avoid having to go to the IMF for money and are trying to secure help from allies and other multilateral lenders who are expected to meet in Abu Dhabi next week. Shaukat Tarin, Pakistan's economic chief, whose official title is adviser to the prime minister on the economy, gave warning yesterday that Pakistan's economy was in dire condition and that the country has to "swallow the bitter pill of financial help". He said the stock exchange's market value had fallen by 40 per cent and that inflation was running at 25 per cent. He blamed the economic crisis on "excessive borrowing" from the central bank by the previous government of Pervez Musharraf. The central bank's reserves are equivalent to a little more than October's import bill of $3.46bn. Big payments for oil and wheat have been major factors behind Pakistan's widening trade deficit. Pakistan's ambassador to Washington, Hussain Haqqani, told The Boston Globe this week that the United States must bail out Pakistan for it to continue its expensive military operations in the US-led "war on terror". Mr Tarin said Pakistan would strike a final deal with the IMF within 10 to 15 days. He added that Pakistan needs the IMF's endorsement if not its financial support, to restore confidence of the international institutions. Mr Tarin said this week that the IMF's conditions were "not too tough". The IMF is reported to be demanding that the Pakistan raise interest rates by 100 basis points to 150 basis points, set a fiscal deficit target of 3.9 per cent of gross domestic product and raise the bar on tax revenue collection. The Friends of Pakistan group is meeting in Abu Dhabi on Monday. Originally a meeting on the security issues that dog Pakistan, it is likely to become a forum for discussion on how to help Pakistan strengthen its economy. Britain, one of the group's members, has announced that it will offer help to ensure Pakistan's bid for IMF support is successful. "We have announced a £12.4 million [Dh71m] tax-reform package designed to reduce tax evasion, increase low levels of tax revenue and increase confidence in the Pakistani government from its people," said a spokesman for Britain's department for international development. "This package will include the creation of new tax collection centres and the increase of random spot checks on large companies to encourage them to fully declare their tax liabilities," he added. Pakistan instigated a crackdown on foreign currency flight by suspending the licences of a prominent foreign exchange company this week. It was part of an investigation into illegal transfers abroad that comes as the country faces a sharp fall in foreign reserves. Police said last weekend that investigators had arrested four foreign currency dealers on suspicion of illegally sending money abroad. Among the four were two of the top officials of Khanani and Kalia International, police said. Newspapers have reported that $10bn had been illegally transferred out of the country in one year. In May, the state bank of Pakistan stopped exchange companies from sending cash abroad in euros, US dollars, UK pounds sterling and UAE dirhams in an effort to stabilise the rupee. Officials say that the activities of Munaf Kalia and Javed Khanani - arrested in Karachi and Lahore respectively - may have contributed to a big reduction of the country's foreign exchange reserves, which have depleted to below $7bn today from more than $16bn in Oct 2007. The authorities say the flood of money out of the country has also caused an enormous drop in the value of the rupee. At the beginning of the year it was trading at 65 rupees to the US dollar. Last month it fell to a record low of 90 to the dollar. However, the foreign exchange association of Pakistan has raised objections to the arrests. "The firm swooped upon is Pakistan's biggest and most reputable. When the trial opens, the claim made by FIA [Federal Investigation Agency] will be put to the test," stated an editorial in The Daily Times. The Pakistani newspaper pointed out that the country's currency exchange business has become paralysed. "Other 'currency dealers' have closed their shops out of fear and even the legally allowed 'currency exchange' is mostly shut down," it added. [e-mail]