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It would have been a bombshell for many, but in good old British tradition details of this annoucement were leaked this weekend, so here we are picking this apart before Alistair Darling has made his speech due later on today.

The jist of it: Labour want to spend their way out of this unprecedented recession. And we are all seriously concerned that the numbers behind the justification of the intention to spend our way out of the recession just does not seem to add up.

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The global financial crisis is threatening to engulf yet another state. This time we are talking about Pakistan.

Background: It’s a very different story from Iceland – and has a heavy political spin to it. Pakistan has had 9 years of military rule headed by Pervez Musharraf. He recently stepped down to avoid being impeached. Pakistan’s new civilian government is just 5 months old and is now headed by the widower of Benazir Bhutto, Asif Ali Zardari.

The challenge the new government faces is dealing with the aftermath of Pervez Musharraf’s outdated economic and security policies, and changing these policies to rescue the country from its current brink of default.

During Musharraf’s rule, Pakistan has been propped by aid from the USA. Now these loans have stopped, the country started rapidly running out of money.

As Reuters reports, “Pakistan has been running unsustainable fiscal and balance of payments deficits”. In the last few months, Pakistan’s foreign currency reserves have fallen sharply to just under $9bn (compared to $16bn in Nov 07), as the country is spending a lot of money on importing increasinly expensive oil, whilst also maintaining a large army and supporting programmes to fight militant extremists.

Impact of the crisis: As the result, Pakistan’s currency rupee has dropped in value by 19% in 2008. The country’s stock index the KSE (Karachi Stock Exchange) has slumped 41% from the April’s peak.

The inflation is running at 25%, and although the government has stated that it will aim to cut central bank’s borrowing, tightening the monetary policy, there is fear that heavy government borrowing (a much looser fiscal policy) will actually fuel inflation further.

Security fears: Pakistan’s people are living in poverty and many cannot now afford fuel and food staples. There have been protests where people expressed their anger at the situation. Strong popular discontent is fuelling support for militant extremist groups. This creates a big problem for the new government as it has vowed to deal with militant groups near the Afgan border. Pakistan have a large army to support at present, and lack of money will make it difficult to finance existing planned programmes.

Trouble is near: It is forecast that if the country carries on as is, it will need $10bn to prevent going bankrupt in February 2009. Government bonds traded internationally have already dropped down in value implying the market fears the government will default upon its debt.

Whilst the government has been denying it is facing a crisis of balance of payments, it has been reaching out to China for a large loan instead of the IMF.  

China is set to benefit: China presently has $2 trillion in foreign exchange reserves, and although it cannot be seen as totally immune from the ravages of the global financial crisis, it certainly seems well insulated at present. In fact, China might do quite well out of the Global meltdown, strenghening ties with other countries in trouble and acquiring new allies. Its prospects are presently far better than for many other states. Watch this space – China is set to grow and grow and grow…

 

Copyright 2008 by CuriouslyInspired

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