South Asia Monitor: Pakistan: A Fragile Economy - July 1, 1999
July 1, 1999
Sanctions imposed on Pakistan following last year's nuclear tests precipitated a balance-of-payments crisis and a near default on its external debt. The Pakistani economy, unlike India's, faced an immediate foreign debt crisis. A U.S.$1.56 billion loan from the International Monetary Fund (IMF) helped stave off default and stabilize the country's external financing position. It also aimed to provide a window of opportunity for the politically tough measures needed to shape up the economy.
The 1999-2000 budget, announced this month, unfortunately does little to address the country's severe fiscal imbalance. Output growth is depressed, and exports and foreign investment have fallen steeply. Prospects for growth are also limited by the economy's narrow industrial and export base and huge debt burden. Moreover, the conflict with India over Kashmir is likely to further strain budgetary resources and deter foreign investment. Meanwhile, with development spending taking the brunt of budget cuts, long-standing goals of reducing illiteracy and slowing population growth will continue to take a back seat. This precarious situation is likely to continue until the government is willing to take the political risks involved in serious reform.