Pakistan Heading for Economic Meltdown?

Pakistan's economy woes compound its security problems.

ISLAMABAD, Pakistan, Oct. 21, 2008 — -- 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.

The government hoped that China, the United States or Saudi Arabia would lend cash or oil rebates, but all three have made it clear they aren't able or willing to do that just yet.

Pakistan is also looking to the newly created Friends of Pakistan group, which includes some of the richest countries in the world. But U.S. Assistant Secretary of State Richard Boucher, who attended the group's second meeting Monday in Islamabad, told reporters that "it's not a cash advance. … The goal is not to put money on the table but to look as to how to supplement Pakistan's efforts."

So that has pushed Pakistan into the arms of the IMF, which will force some politically unpopular concessions out of the government.

The IMF is expected to ask Pakistan to cut spending, increase tax revenues and restrict government-owned industries such as Pakistan International Airways, the national airline.

"The government has come in based on some promises to the people and those involve some large-scale fiscal expenditures," Ali said. "Their plan to set up small-scale housing across the district, employment generation schemes at the local level, and all the promises that the government made to its people when they came into power -- those promises will be hard to meet" after IMF restrictions.

There is a bright side to siding with the IMF, economists say. The World Bank, the Asian Development Bank and even Saudi Arabia have linked loans to Pakistan's ability to prove it has a plan to get out of this mess.

And Pakistan has already met some of the most painful IMF demands: cutting subsidies on food -- which many poor need in order to eat -- as well as fuel.

But that has caused minor protests and driven up the price of gas, hurting an already struggling and frustrated population.

"It's becoming extremely difficult to live a decent life. Everything is becoming extremely expensive. No matter how much you earn, it's not enough," said 30-year-old Humnay Jaz, exiting a pharmacy in a bright-green sari. "Everything is going sky high. Look at medicines. You buy something, which was 200 rupees three months ago, is now 443 rupees. Everything is completely accelerating."

Power cuts -- known as "loadshedding" here -- are hurting businesses' ability to produce. The power is off for at least six hours every day in Islamabad, but around the country, some cities and villages don't have power for half the day.

That hurts security as well. Local media reported that new CCTV cameras in Islamabad, installed throughout the city after the Marriott bombing, don't have backup generators and so produce no picture for hours every day.

But as much as security is an issue, Pakistanis are most concerned about their pocketbooks.

"They're more worried about the economy," Jaz said. "Because it's just becoming extremely difficult to survive in this country now. Of course terrorism is a big problem too. But day-to-day living -- it's becoming extremely difficult."