Pakistan's financial crisis may shake the world

By MARTIN SIEFF  |  Oct. 21, 2008 at 10:16 AM
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WASHINGTON, Oct. 21 (UPI) -- The global financial crisis is close to knocking out its most important and potentially most dangerous victim yet: Pakistan needs a financial support package of $10 billion to $15 billion to avoid collapse.

The stakes could not be higher: With a rapidly increasing population of more than 150 million -- larger than that of Russia -- Pakistan is also the world's only Muslim nuclear power. But since the fall of President Pervez Musharraf earlier this year, the bitter regional, social and religious disputes that have been building for decades have exploded in public. The current government of pro-American President Asif Ali Zardari is struggling to maintain any effective presence at all in the vast North-West Frontier Province, which covers one-quarter of the country.

If the government in Islamabad goes bankrupt, then the extreme Islamist forces spearheaded by the Taliban of Afghanistan, who already enjoy broad support among the Pashtun tribes of the NWFP, will have a far greater chance to turn the great cities of Pakistan, especially giant Karachi, into chaos.

As American military analyst and UPI columnist William S. Lind has warned, Fourth Generation war -- 4GW -- non-state forces like al-Qaida benefit from undermining the structures of established states and can metastasize rapidly if a state structure collapses, especially in a vast nation like Pakistan.

The Taliban and their fellow Islamists, aided by al-Qaida, already have stepped up their guerrilla operations against the Pakistani army and police.

On top of all this, Pakistan is now on the verge of default. It needs $3 billion within a month to maintain its debt service schedule and $10 billion over two years. This seems peanuts compared with figures thrown around in the United States recently. The U.S. Congress approved a $700 billion bailout, and critics charged that even this huge sum would prove to be insufficient to restore investor confidence.

Precisely because major governments around the world feel under pressure, however, Pakistan is currently struggling to get a financial support package put together. Pakistani officials are meeting International Monetary Fund representatives in Dubai Tuesday to craft a rescue -- they hope.

But there have been some ominous signs: Apparently traditional supporters of Pakistan -- China and Saudi Arabia -- have shown no willingness to step up to the plate. Ironically, they are two of the handful of nations that do, in fact, have enormous financial reserves. But the plunging global oil price has spooked the Saudis, and the Chinese know their economic stability is dependent on the U.S. economy staying afloat and continuing to provide them with their most important export market.

Overall the Pakistani economy is in a desperate state, and the causes are long term, structural and not at all conducive to any "quick fix": The new Zardari government in Islamabad has inherited high inflation, large income inequality and a chronic lack of spending for infrastructure and education.

The caution and preoccupations of other countries around the world, however, do not diminish the threat to global and regional peace if Pakistan should default. The Zardari government -- already unpopular with the Islamists, the urban poor and its own military establishment, especially the officers of the Inter-Service Intelligence agency -- could hardly survive such a catastrophe. And if the Zardari government fell, the impact on regional stability would be dire.

Neighboring India, fearful of Pakistan's nuclear arsenal -- conservatively estimated at 30 nuclear weapons but possibly considerably larger -- might be spooked into considering some kind of pre-emptive intervention. Even if it did not, the threat would be real that in the chaos following default and the fall of the Zardari government, extremist forces could gain control of one or more nuclear warheads.

Also, if Zardari fell, the impact on Pakistan's relations with the United States and on Washington's ability to effectively prosecute the war on terror could be dire. Currently, U.S. and NATO forces in Afghanistan -- around 50,000 in number overall -- are supplied by air along transport corridors over Pakistani territory. If a future Pakistani government should close those corridors, the already embattled U.S. and NATO forces in Afghanistan would find their situation deteriorating rapidly.

Pakistan's leaders are also understandably reluctant to put their political future and their country's fate in the hands of the International Monetary Fund, for they realize that IMF aid is usually tied to draconian conditions requiring the slashing of government spending. In a country like Pakistan, that means cutting social programs to support the poor, including subsidizing food prices.

Zardari government officials are now pinning their hopes on the recently created "Friends of Pakistan" group of nations that is led by the United States and also numbers Britain, Canada, France and Germany among its members. And Pakistani Prime Minister Yousaf Raza Gilani is rushing to put together an economic package to attract international investment -- something Musharraf disastrously neglected during his nearly nine years in power.

The odds against Pakistan escaping economic meltdown are daunting. But the consequences of that happening are too frightful to contemplate.

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