firenze

It seems that Pakistan is just too big to fail. A glimmer of hope.. .from unexpected ways. Who say's miracles don't happened.

Full fear and credit
Source: Pakistan's economy stays warm | Full fear and credit | The Economist

PAKISTAN is one of the few countries in the world that enjoys more macroeconomic stability today than it did on September 14th, the day before the bankruptcy of Lehman Brothers turned the world upside down. In those prelapsarian days Pakistan’s currency was tumbling; its foreign-exchange reserves covered barely two months of imports; and the cost of insuring its sovereign debt against default was almost 1,000 basis points (10%). Worst of all, the IMF had landed in Islamabad.

In the months since, Pakistan’s government has in effect conceded the Swat valley, a picturesque tourist spot, to the Taliban. It has suffered savage terrorist attacks on a police academy and the visiting Sri Lankan cricket team. It has also handed the political initiative to its rivals in the opposition party. But despite all this turmoil, it has found some macroeconomic steel.

In April the IMF released the second tranche of the $7.6 billion loan it offered Pakistan in November. The government’s reserves were above target; its fiscal deficit was below; and its borrowing from the central bank was contained. Pakistan has also raised electricity tariffs and reduced energy subsidies, despite popular protests. Indeed, its levy on oil products has become a big contributor to the public coffers. Emboldened by the drop in inflation, on April 20th the new central-bank governor even cut interest rates for the first time in six years.

The worry is that Pakistan has achieved stability without growth. In other emerging markets, the new, crowd-pleasing IMF has advocated counter-cyclical policies to combat the ill effects of global contraction. But Pakistan has committed itself to narrowing its fiscal deficit to 562 billion rupees ($7 billion), or 4.3% of GDP, by June. This target was set in October before the full horror of the world economic crisis had become apparent. Given the subsequent slowdown, the government’s revenue aims seem aspirational rather than feasible.

The danger was that the government would meet its target by cutting infrastructure spending, thereby undermining the country’s growth prospects. But Pakistan has one invaluable asset that is not quoted on its balance-sheet. It scares the rest of the world. Thus on April 17th a group of 31 countries, called the Friends of Pakistan, met in Tokyo and offered an extra $5.3 billion of friendliness over the next two years. Though the government is precarious enough to arrest the world’s attention, it is still—just—credible enough to earn its financial backing.