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Pakistan on the Verge of Bankruptcy, Presses Allies for Support

By , Money Morning •

By Jason Simpkins
Associate Editor

Pakistan said Friday that it would seek $4 billion in financial assistance, mostly from the World Bank, the Financial Times reported. Pakistan, a nuclear power and neighbor to Afghanistan, is on the verge of bankruptcy and if it does not receive the assistance it requires, the economy could collapse resulting in political upheaval and social unrest.

Pakistan has been wracked by inflation, currently running at 25% and its foreign reserves are dwindling. The nation’s currency, the rupee, last week sank to a new low of 84.4 to the dollar and has tumbled more than 33% against the greenback this year. Pakistan’s foreign currency reserves have shrunk to about $4.5 billion, or just six weeks worth of imports, the FT reported.

Unchecked political spending and poorly designed tax codes have also contributed to the nation’s economic shortfall. Less than 1% of Pakistan’s population of 164 million pays income taxes.

At least $2 billion is required immediately if the country has any chance of restoring confidence in the economy, with up to $8 billion needed to repay sovereign debts due to mature over the next year, the government says.

Pakistan's President Asif Ali Zardari began a four-day state visit to China on Tuesday, hoping to drum up at least a portion of the required capital. A senior Pakistani official said China promised to help avoid defaulting on foreign debt and offered an initial soft loan of up to $500 million the FT reported.

"As a long friend of Pakistan, China understands it is facing some financial difficulties. We're ready to support and help Pakistan within our capability," said Chinese Foreign Ministry spokesman Qin Gang. However, Qin offered no specifics on the form of Beijing's financial help.

China is already a leading source of investment for Pakistan. Bilateral trade between the two countries topped $7 billion last year. China has sold conventional weapons and missile technology, and is suspected of helping Pakistan develop nuclear weapons. In 2006, China and Pakistan signed a pledge to increase bilateral trade to $15 billion a year by 2011.

Zardari also plans to appeal to the United States, United Arab Emirates, and Saudi Arabia, as well as other “Friends of Pakistan,” for support. Since 2001, the United States has provided Pakistan with more than $10 billion in aid, mostly to aid the “War on Terror” taking place on the country’s western front.

Representatives from Pakistan’s allies will meet next month in Dubai to discuss possible solutions to save the country from bankruptcy.

“Bankruptcy, should it happen, could unleash a massive tidal wave of social unrest," Stratfor, a U.S.-based intelligence risk assessment agency said in a report released Friday. "Exactly what the jihadists on both sides of the Afghan-Pakistani border would like to see to advance their goals."

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