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Source: www.asiaecon.org |

AS AID RISES IN PAKISTAN, SO DOES POVERTY


With levels of poverty already a significant concern in Pakistan, many believe that the situation will worsen if the country gets additional support from the International Monetary Fund (IMF). Pakistan should look for other sources of income instead of burdening itself with additional debt.


With levels of poverty already a significant concern in Pakistan, many believe that the situation will worsen if the country gets additional support from the International Monetary Fund (IMF). Pakistan should look for other sources of income instead of burdening itself with additional debt.

Late last year, the IMF and Pakistan agreed to a $7.6 billion deal. The principle reason for the loan was to help repair the balance of payments crisis. Foreign currency reserves had reached dangerously low levels and the government faced the possibility of defaulting on international debt obligations.

Pakistan is now seeking an additional $4.5 billion loan as inflation continues to rise and foreign exchange reserves are once again running low. But concerns over the rising poverty are causing some to question whether accepting money from the IMF is the most prudent decision.

Over the last three years, the poverty rate in Pakistan has increased from 23.9 percent to 37.5 percent. As of 2008, more than 64 million people were living below the poverty line versus 35.5 million people in 2005. Moreover, 74 percent of Pakistan’s population, or 122 million people, live under $2 a day. This figure is higher than Sub-Saharan Africa, where 72.2 percent live under $2 a day.

The problem with accepting additional funds from the IMF is the strict conditions forced upon the accepting government. Such regulations include a mandatory reduction in the fiscal deficit and raising interest rates. As a means to reach these obligations, the IMF wants social-sector spending cuts and the country’s development programs to be reduced. These in turn will cause higher unemployment and push more citizens under the poverty line.

Economists believe the best way for Pakistan to improve its economy and fight poverty is to consolidate the economy and adjust policies to stimulate investment. One way to do this would be to cut interest rates. Unfortunately, funding from the IMF can only be used  to  reconcile the balance of payments and building foreign reserves. In order to fulfill IMF requirements, interest rates would need to be raised, not lowered.

Many businesses are unhappy about the central bank’s decision to keep interest rates at 15 percent. Already much higher than all developed countries, the rate was originally raised as part of the first loan from the IMF last year. But amid the global slowdown, a high interest rate is having a spiraling impact on Pakistan, specifically its export market.

Some argue that securing funding from the United States may provide more favorable conditions. Given the partnership between the countries for the “war on terror”, financing from the United States may be possible. Advocates argue that the United States will be more lenient on how the money is spent than the IMF.

But before deciding where to accept money from, the government of Pakistan should consider if borrowing more money is in its best interest. The government needs to consider how it is going to pay back the loans. Moreover, the government needs to consider if the economy is in poor enough of a state to mortgage its future.

If Pakistan decides it is critical to borrow more money, than it must be prudent in deciding where to accept the money from. Assuming multiple options exist, the government may be better off accepting money from whoever will impose the least restrictions. Holding on to independent monetary and fiscal policy are of utmost importance for Pakistan to improve the economy and the poverty situation.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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