RS22983
Pakistan's Capital Crisis: Implications for U.S. Policy
November 21, 2008
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Summary
Pakistan -- a key U.S. ally in global efforts to combat Islamist militancy -- is in urgent need of an estimated $4 billion in capital to avoid defaulting on its sovereign debt. The elected government of President Asif Ali Zardari and Prime Minister Yousaf Raza Gillani is seeking short-term financial assistance from a number of sources, including the International Monetary Fund (IMF), China, and an informal group of nations (including the United States) known as the "Friends of Pakistan." The Pakistani government reportedly has reached a tentative agreement with the IMF for $7.6 billion in loans, but has reservations about conditions on the assistance, expressing concerns that they may create political and economic problems. The current crisis has placed some strain on U.S.-Pakistan relations. This report will be updated as circumstances warrant. A stable, democratic, prosperous Pakistan is considered vital to U.S. interests.1 U.S. concerns regarding Pakistan include regional and global terrorism; Afghan stability; democratization and human rights protection; the ongoing Kashmir problem and PakistanIndia tensions; and economic development in the region. Progress in this latter area has been severely threatened in 2008 by a sharp decline in Pakistan's economic stability, culminating in an immediate need for capital assistance. U.S. officials and independent analysts are increasingly concerned that a failing Pakistani economy could undermine multilateral efforts to stabilize South Asia and curtail the incidence of Islamist radicalism. After several years of strong and comparatively stable growth, Pakistan quickly slid into a severe economic crisis in 2008 (for reasons discussed later in the report). Real GDP growth has slowed from 7%-8% per year since 2004 to an estimated 3%-4% in 2008. Its official rate of inflation rose from 8.8% in January to 23.9% in October.2 Since the beginning of the year, the Pakistani rupee has depreciated by over 23% against the U.S.
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