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Coup could devastate Pak economy, fear IMF, analysts

International Monetary Fund Managing Director Michel Camdessus today said that Pakistan could lose IMF aid if democracy were not restored after the military coup that deposed Prime Minister Nawaz Sharief.

Camdessus said in a European radio interview that the IMF, which has delayed payments from its latest $ 1.5 billion credit because of doubts about Pakistan's economic programme, did not want to continue its aid if donor countries decided to cut off their support.

Asked if the IMF should give money to putschists, he said, ''I hope that developments in Pakistan will lead to a democratic normalisation of the situation ...''

''If not, no?'' interjected the radio journalist. ''If not, no,'' Camdessus replied.

''We were about to finish a negotiation with Prime Minister Sharief,'' he added. ''We made conditions that have not yet been met to unblock our money.''

Camdessus, who expressed concern about the coup in a heavily populated nuclear power such as Pakistan, said donor countries often suspended their bilateral aid when a coup occured during the course of an aid programme.

''At that moment, since the IMF does not want to do everything all by itself, its aid is interrupted as well,'' he said.

Payments from the latest IMF credit approved in 1997 were delayed before the coup because of doubts about economic conditions and a dispute over the role of independent power producers.

The IMF loan stalled initially after US-led sanctions to punish Pakistan for testing nuclear bombs. Payments resumed this January as the country struggled to find funds to pay its debts and to prevent an economic meltdown.

But the IMF and the World Bank remain worried about Pakistan's economic performance, especially about tax collection and the actions of the independent power producers and how much they charge for electricity.

Fund officials said last week that IMF management had met with Pakistani officials following last month's annual meetings of the IMF and World Bank. They ''hoped to resolve soon the outstanding issues'' blocking new payments from the credit, the fund said in a statement last week.

Camdessus said he was concerned about the coup because Pakistan was ''in that hot belt of the world, it is a country that is nuclear, Islamic, very populated, a neighbour of another country that is also very populated.''

''Democracy is in retreat,'' he said. ''When democracy retreats, countries are in danger. These are real threats, we're not in the virtual realm here.''

New York analysts said Pakistan risked losing billions of dollars in foreign loans because of the coup.

Pakistan this summer finalised agreements with international banks to renew $ 877 million in commercial loans and with western governments to roll over $ 3.3 billion in loans from country creditors.

But the deals have not been ratified and analysts said they could unravel in the absence of an elected government.

The IMF is worried about the coup in big borrower Pakistan and is watching the situation closely to see how it affects loans and economic plans, a spokesman said yesterday.

Spokesman William Murray said the IMF would assess what the coup meant for Pakistan's latest IMF loan, a $ 1.5 billion credit approved in 1997.

In Karachi, experts said Pakistan's military coup may have brought its faltering economy to its knees and unless a credible economic and political plan is announced soon, critical deals to reschedule debt could unravel.

They said the coup had thrown into doubt badly needed international lending programmes, increased worries about a foreign exchange crunch, and could kill off any lingering investment interest in the cash-starved country.

Bankers and analysts said a return to normal business with the rest of the world was tied to continued lending from international donors, without which Pakistan was unlikely to remain solvent for long.

Pakistan's financial institutions and markets were closed today, and the central bank ordered the suspension of all foreign exchange transactions.

Bankers said they had received frantic calls from depositors asking to withdraw their foreign currency deposits.

''We thought we had seen the worst in May last year and that a modicum of confidence was returning. The fear is that this coup could turn out to be a bigger jolt than the nuclear tests,'' said the head of research at a brokerage house.

Analysts said a delay by the military in announcing its policy plans was making the situation worse.

''It seems they do not have a plan and if that is true it is more disturbing,'' said a senior banker.

''They should realise they don't have time. What they need to do immediately is take into confidence the whole nation and the international community, come up with a credible plan and announce a set-up that has replaced the government.''

Bankers said the coup would certainly cut off foreign inflows and that it would take time for the military government to convince the international community Pakistan's political and economic policies would follow an acceptable path.

''It will take time and that is something Pakistan does not have. We were already at the brink and the coup can only help accelerate the downward spiral towards bankruptcy,'' one banker said.

''There is already a foreign exchange crunch getting worse day by day, and if there is a further halt on inflows the country can go bust anytime.''

Analysts said the IMF traditionally ties its lending to policies rather than to governments, but its actions are often heavily influenced by the views of its largest shareholders, such as the United States.

''Unless they (the military) are successful in bringing together a credible economic team with a credible economic plan, they do not stand a chance of convincing the donors and the West that normal relations can be maintained,'' another analyst said.

The bankers said Pakistan's foreign debt rescheduling was also tied to continued IMF lending.

The country forecast $ 2.8 billion in remittances, investment and bank deposits for the fiscal year which started in July, but bankers said the inflows were already falling behind that pace and that the coup would not help turn around that trend.

''What investors, lenders and donors would like to see in Pakistan is a set-up with some sort of a political mandate and commitment to the IMF structural reform agenda. That at the moment is a big question mark,'' an analyst said.

In Karachi, the State Bank of Pakistan, Pakistan's central bank, said it had ordered money changers, or kerb foreign exchange dealers, not to open on Wednesday.

''No foreign exchange transactions shall be made,'' the SBP spokesman said.

The central bank had earlier announced a bank holiday for today.

The spokesman said the move was a government decision but refused to comment further.

''The State Bank, banks and all financial institutions will be closed for public dealing but staff has been asked to attend their offices,'' the spokesman said. He did not provide any further details.

Pakistan's premier bourse, the Karachi Stock Exchange, held a meeting today to consider the closure of the market, an official said.

''I have called a meeting of the board of directors to consider the closure of the market in view of the bank holiday,'' Yasin Lakhani, chairman of the KSE said.

The KSE 100-share index yesterday ended 7.15 points or 0.57 per cent higher at 1,256.94 points.

But dealers said news of the army coup had affected stock values in the unofficial kerb trade at the exchange.

Kristin Lindow, chief analyst for South Asia at Moody's Investors' Service, said she believed the IMF had postponed releasing any new money as Pakistan has not complied with all the terms of the agreement.

In the secondary market, the Pakistan Eurobond due in 2000 was offered at $ 53 with no buyers, traders said.

With just over $ 1 billion in foreign currency reserves and facing a likely cut-off in any new money, Pakistan will face a mounting challenge in getting out of recession and meeting payments.

Pakistan ranked 138 of 174 nations in the human development index compiled by the United Nations and has a per capita income of 95 dollar per annum.

UNI/Reuters in London, New York, Paris, Karachi and Islamabad

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