Pakistan on verge of financial crisis

If you thought the news from this region of the world could get any worse, think again. News has surfaced about plummeting foreign exchange reserves in Pakistan. Just last week alone the reserves dropped 2.5%. Most investors want to avoid the political instability and the weak coalition that is holding Pakistan together. Pakistan's reserves now total approximately $10.5B, and are steadily dropping every day. Saudi Arabia has deferred Pakistan's energy payments, and is willing to renegotiate payments at a later date. The government's current account deficit as also fueled already high inflation and the there is a danger this can spiral out of control. This looks like the classic early 90's economic crisis formula: slow down+ no reserves + deficit = hyper inflation.

More importantly we must fear the consequences that will come out of such a financial crisis. If the current government looses its control, we may not like its replacement. The last thing the world needs is a rouge nation with nuclear weapons, no money, and an angry population. This is the doomsday scenario, but there are many more intermediate scenarios that will hurt us just as badly. Since the Pakistani Government's main expenditure is on military and security forces, they are likely to cut back on these costs. They have approximately 300,000 troops on the Indian LOC in "Azad" Kashmir, and they are not likely to cut these forces due to the threat of an Indian invasion. They will cut their security forces in FATA(Federaly administerd Tribal Areas ) and NWFP(Northwest Fronteir Provences). These areas are isolated from the rest of Pakistan as is so a withdrawal of troops would further this isolation. These areas are dominated by Pashtun ethinicity tribes, unlikes the Punjabis or the Sindhis in the east. Pashtuns are by nature more fundementalist, and have more sympathy for extremist elements. This will give safe havens to organizations like Al Queida, the Taliban, LeT, etc. Also, when the locals in the tribal regions have no security or economic livelihood they turn to regional warlords for money and safety. These warlords often engage in arms, human, or drug trafficing to finance their operations.

Looking at this data it is obvious that Pakistan has been propped up by US military aid. If this aid is to drop or cease for any reason, the country will be on the verge of ruin. Unfortunaley most of this aid has been wasted on strategic weapons to standoff with India. Much of that money was not used to fortify government control in FATA, Baluchistan, and NWFP. To make matters worse, this week the CIA has released information that highlights how the ISI (Pakistani Military Intelligence) is heavily comprimised by extremists. Any coup or instability is likely to originate from sympathetic ISI or Military officers. It has long been suspected that the ISI is behind many terrorism incidents in South Asia. This CIA report basicaly confirms much of the West's suspicions. The local population will willingly support a violent coup, if they are in a desperate position. Anti-inflation measures will drive up unemployment, and the population is feeling a sever pinch. Any event that will jepordize the political stability in Pakistan will lead to another round of foreign divestment and further pressure exhange reserves.

These collapses happen very fast, and countries can fall apart in less than 48 hours. Fortunately they have allies in Saudi Arabia and U.A.E that will be willing to finance their debts. Unfortunately, solving this crisis is not that easy, extra finances just postpones the problem rather than fixing it. Much of Pakistan is still rural(even though the land is not neccessarily suited for agriculture), and it will be very difficult to produce economic growth in that area. Much of the population are agianst modernization and westernization since they feel they will degrade their Islamic values. If you thought that the Pakistan saga is over once Bush leaves office and the military aid ends, think again.

This news adds a new dimension to the Islamic Extremist problems that plauges the region. If this nuclear state was to fail, what happens next? And will we be willing to deal with whatever is in control in Pakistan?