Times getting harder in Pakistan, regardless of IMF

By Sahar Ahmed - Analysis

KARACHI (Reuters) - Pakistan faces more austerity whether or not its government keeps the promises made to the International Monetary Fund in return for a $7.6 billion bailout from a balance of payments crisis.

The cash-strapped country expects the first $3-4 billion tranche of the IMF loan, spread over 23 months, by the end of November, saving it from almost certain default on an international bond maturing in February.

Pakistan has entered several IMF programmes in the past, but the only one it completed was during the tenure of former army chief Pervez Musharraf, who retired in September, and the country has a reputation for falling short on commitments to the Fund.

"The IMF is a live-saving injection to a patient, but then you have to go into proper rehabilitation in order to regain health, so that's the analogy here," said Asad Saeed, an independent economist.

"There can be no two ways about stabilization in a situation where your external and fiscal deficits are completely out of sync."

The IMF's patience is likely to be tried once again as the eight-month-old civilian government struggles to hold a firm policy line.

"The bottom line is that the IMF programme will be tested severely from the beginning as the economy continues to face unrelenting pressure from many directions," Deutsche Bank economist Taimur Baig said in a note on Wednesday.

ENORMOUS CHALLENGES

The coalition, led by President Asif Ali Zardari's Pakistan People's Party, has been at pains to say it went to the IMF on its own terms, even though the only alternative was to default.

The IMF, it says, backed policies for economic adjustment needed to correct unsustainable external and fiscal deficits that have put Pakistan on the verge of bankruptcy.

"Even with an IMF programme now finally announced, the challenges facing Pakistan beyond the 23-month term of the SBA (stand-by agreement), indeed, even beyond the next few months are enormous," said David Fernandez, head of emerging Asia economic and sovereign research at JPMorgan in a note.

While IMF funding provides a short-term answer to Pakistan's external debt problems, its balance of payments will remain stressed without serious structural reforms.

Pressures on its foreign currency reserves and on the rupee exchange rate will resurface by the end of the fiscal year next June if efforts are not made to bridge the trade gap, said Asad Farid, economist at AKD Securities Ltd.

If the IMF had its way interest rates would have gone up by far more than the 200 basis point hike in the central bank's discount rate to 15 percent announced last week. Most analysts expect another rate hike of up to 200 basis points in January.

A panel of economists on Tuesday presented a stabilization policies labeled "economic stabilization with a human face" which was endorsed by Prime Minister Yousaf Gilani.