Pakistan Heading for Economic Meltdown?

Staring an economic crisis in the face, Pakistan is meeting with the International Monetary Fund today in Dubai, United Arab Emirates, with hat in hand, asking the organization for badly needed funds that would save the country from default.

And in Islamabad, staring at his own empty pockets, 33-year-old Mohammad Asfir had to tell his son he wouldn't get any toys for his birthday.

"I am coming from toy shop. The birthday of my kid. He was insisting me to get some toys, but I was unable," Asfir said, while walking through an Islamabad market. "Not only economy is in depression. … All of us are in depression."

Such is the state of Pakistan's economy today. Asfir worried about how he could support his family on an accountant's wage.

Pakistan's current deficit soared to $14 billion this year, threatening to prevent the country from being able to pay its foreign debts. Twenty-four percent inflation in the cities -- and even higher in rural areas -- has made everyday items, especially food, unaffordable for many Pakistanis. In the last year, 10 million people have become undernourished and now nearly half the country can be considered food insecure, according to the United Nations.

The deepening economic crisis, in addition to a huge deficiency of electricity, comes during a time when Pakistan's security has never been worse.

Suicide bombers have struck 88 times, killing more than 1,100 people since July.

That pushes badly needed foreign investment away. It also creates a combustible environment in which al Qaeda and Taliban thrive, threatening to destabilize a nuclear country on the front lines of the war on terror. From Pakistan, militants launch daily attacks on American troops in Afghanistan.

"The loss of lives and economic cost imposed by this war are now rising to an unbearable level," said Shaukat Tarin, the governor of the Bank for Pakistan, at the World Bank and the IMF in Washington this month.

"The economic crisis, the security crisis, the power crisis, they're all interconnected," Sayem Ali, Standard Chartered Bank's Pakistan economist, told ABC News today.

In many ways, Pakistan is a victim of the global economic downturn. As food prices and oil prices increased globally, they spiked here. But under former President Pervez Musharraf, there was no attempt to offset high fuel subsidies, no attempt to remove liquidity from the market. The trade imbalance grew and deficits began to soar last year.

"When the price of oil shot up above $100, on every barrel that we were consuming, we were losing $40," Hanid Mukhtar, the World Bank's senior economist in Pakistan, told ABC News. "There was no policy action taken by the government that would have been unpopular with the public but would have at least saved the economy."

And so an economy that used to grow by at least 6 percent annually is now sputtering to survive. Rumors that the government would seize foreign currency bank accounts led to a run on banks last week. The Pakistani rupee has dropped more than 25 percent this year; the stock market 40 percent in the last six months.

Pakistan urgently needs at least $3 billion -- and as much as $5 billion -- economists say, but it will be asking the IMF for as much as $10 billion.

"If Pakistan doesn't get the money, there may be a repeat of freezing foreign currency accounts, foreign currency rationing and, eventually, a default on its sovereign loans," Tarin said.

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