Oct

Pakistan: an economic crisis needs to be averted

Brian Butler on October 22nd, 2008

GloboTrends columnist Bio: Brian Butler is a specialist in “global-macro” economic analysis. As a global-macro analyst, Brian founded “GloboTrends“, an online site for macro-economic trend analysis, with a focus on providing this analysis to global investors. The highly popular “GloboTrends blog” is prominently displayed on Thunderbird’s MBA website , and has been featured as syndicated content on Nouriel Roubini’s RGE Monitor, Emerginvest.com, Business Week Exchange, Wikinvest.com, and other reputable news outlets.

The “most dangerous country” in the world is about to become more dangerous, as Pakistan slides into an economic crisis as a result of the global credit crunch.

It is really important to pay attention to Pakistan now, while the economic crisis is still in its infancy (and might still be avoided). It would be a shame if the world didn’t pay attention to this problem and help Pakistan avert economic disaster. We have to remember that the seeds for German aggression in WWII were planted in the economic collapse after WWI (and the great depression / trade wars of the 1930s). While Pakistan is clearly not Germany, it is important to recognize the threat that a nuclear-armed Pakistan plays to global security.

The problems for Pakistan’s economy are numerous: the current account is in deficit over 8% of GDP, which means that they are importing way more than they are exporting. Inflation is running sky-high, and is hurting the purchasing power of the poor. The currency is crashing, and foreign investors are pulling money out of the country, leading to rapid depletion of the foreign currency reserves. The budget deficit is over 7% of GDP, and the IMF is being called in to offer assistance.

While the IMF (and others) may be successful in stabilizing Pakistan in the short term with lots of cold hard cash ($10-$15 billion needed now to avert a balance of payments crisis), it is important to see how the “bail-out” of Pakistan is structured. Normally the IMF funding comes along with conditionalities that dictate internal economic policies, which are deeply unpopular and normally lead to popular backlash against the IMF (and the USA) as a scapegoat down the road.

While the US and Europe are busy fighting to contain a very serious economic crisis at home, Im afraid that they will take their eye off of the importance of keeping stability in Pakistan. If Pakistan goes down as a result of this crisis, Im fearful that in a few years from now, we may be looking at military action, and looking back wondering how we got into this trouble. Well, if the world ever does get to that point (and I sincerely hope not), I think we may look back to this month (September 2008) as the key event that made the “most dangerous” country in the world…even more dangerous.

Final note: In addition to the economic troubles, don’t forget that Pakistan has recently transitioned through a deep political crisis, and is fighting an internal battle against the Taliban along the border with Afghanistan.

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