India may help Pakistan get a bailout

As Pakistan heads to the IMF for an emergency bailout or risk financial meltdown, what are the implications for India?

Pakistan's negotiators, led by Shaukat Tareen, completed one round of talks with the IMF in Dubai this week. It will see Pakistan making a formal request for help which should be wrapped up by the IMF by November 15 — when the G-20 meets in Washington to get a grip on the global financial crisis and two days before an 8-nation Friends of Pakistan meet in Abu Dhabi to help Pakistan tide over the present crisis. Pakistan's financial situation is not enviable. Its foreign exchange reserves plunged to less than $7 billion in the last week, down by more than $400 million the previous week. Forex reserves with State Bank of Pakistan were $3.71 billion, down by over $320 million from last week.

The country estimates it needs up to $15 billion from foreign lenders to cover its current financing needs. The Asian Development Bank released $500 million in the beginning of October, but that hasn't helped much. The real problem is not that Pakistan's economy is tanking — in the wake of the global financial crisis, there are others headed that way. It's a couple of things: first, that Pakistan's best friends, China, Saudi Arabia and US, have failed to fulfil 'Plan A', and it's this lack of confidence by friends that is eroding further confidence from the country. Pakistan is understandably reluctant to go to the IMF. The global financing body, after a few years in the shade, is suddenly enjoying a resurrection, but its conditions are as unpalatable now as they were in the late 90s, as bitter memories of Korea and Thailand will testify. Certainly Pakistan has already been asked to cut defence expenditure. Reports from Pakistan say the IMF has asked the government to cut expenditure, further depreciate the rupee and raise taxes. A cut in defence expenditure (in 2008 Pakistan spent 3.2% of GDP on defence) would be extremely unpopular with the army which is battered by strongly adverse public sentiment on the one hand and their own Taliban on the other.

It prompted Asif Ali Zardari to publicly reject that condition. Zardari's game is now to work out a package from the IMF that avoids some of the harsher strictures, to give themselves some room. But an IMF package, however lenient, involves some painful decisions, which may be difficult for a precariously positioned civilian government to undertake.

In this Pakistan will receive help, certainly from India, because PM Manmohan Singh is clear that he will, like most other world leaders, support Pakistan's request of a bailout from the IMF. India watches with concern a Pakistan going down the tube, with nuclear weapons and state-sponsored jihadis on the rampage. India's assessments about the present situation centre largely on the security aspects. Certainly, Pakistan will not take any substantive action to act against terror groups targeting India, citing the financial crisis and how tough steps are difficult.

While India will support Pakistan's bailout plea, India has also suggested that one of the easier ways by Pakistan to lessen the pain within is to open up to more trade with India. That would give a big fillip to its economic recovery plans. It's easier said than done, because financial crises hasn't helped a large part of the Pakistan establishment de-link trade from Kashmir.

Second, India will have to work much more closely with other, more important stakeholders in Pakistan (India is not a member of the FOP grouping). This will include suggesting more trade, less restrictions on an open economy, specially with India.

On the flip side, India worries that a Pakistan, holding the twin nuke-jihad guns to its own head, can essentially get a pass from some essential restructuring of its country — less the economy than its military-terror infrastructure. It's a restructuring of the ISI that is required, say Indian analysts, more than raising interest rates and taxes.

India believes Pakistan will get better-than-expected terms for a bailout, because Pakistan's case is not comparable to say, Ukraine or Hungary. Its Pakistan's position in the war on terror that will tilt the balance, say Indian sources. The world is reluctant to let Pakistan go down the tube, India believes.

Some Indian optimists want India to offer a short-term bailout package to Pakistan in return for a deal on Kashmir. Pakistan is yet to cash $25 million aid that India gave after the 2005 earthquake in PoK. It will take more than a financial crisis to change Pakistan's mind on its national fundamentals.