Pakistan has agreed with the International Monetary Fund (IMF) on a $7.6 billion emergency loan to stave off a balance of payments crisis. 

Shaukat Tarin, economic adviser to the prime minister, said the IMF had endorsed Pakistan’s own strategy to bring about structural adjustments. The agreement is expected to encourage other potential donors, who are gathering in Abu Dhabi on Monday for a “Friends of Pakistan” conference.

The government had long delayed announcing its plans to turn to the IMF for help and President Asif Ali Zardari said in September the country did not want to seek IMF assistance. Tarin said in October that going to the IMF was “Plan C” if other lenders failed to come through.  “If we want to go to the IMF, we can … but only as a backup,” he said.

The times are clearly changing and in the midst of a financial crisis that has swept away some of the world’s most august financial institutions, there is no shame in admitting a need for help.

For that matter, I can remember former IMF Managing Director Michel Camdessus declaring confidently at one of the annual IMF meetings I covered in Washington in the mid 1990s that Keynsianism was dead. I challenged him at the time over his certainty, but wish I could ask the same question now that western economies are spending their way out of trouble like there’s no tomorrow.

But what will it mean for Pakistan that its new government, less than a year after elections that ushered in a new civilian democracy, has had to eat its words and turn to the IMF for help?

Does it bring to Pakistan the silver lining that it offered India, which when forced to accept an IMF bailout in the early 1990s began a programme of economic reforms?  As noted in an earlier post,  India as a result began dismantling decades of licence raj and never really looked back. 

And why did Pakistan’s closest allies, including the United States, Saudi Arabia and China, let it down by leaving it to turn to the IMF for help? As discussed in an earlier post, China, with $2 trillion in foreign exchange reserves, was in a strong position to step in to head off what could turn into a deeply unpopular move.  Traditionally seen by Pakistan as its most reliable friend, China appears to have decided that an IMF programme was the best medicine.

A new beginning? Or another source of instability?

When the British left India in 1947, they bequeathed what was arguably a European notion of the nation state on a region for which the very concept was alien. I say ”arguably” because anything one writes about Partition or the nation state is open to dispute. And until the financial crisis, I relegated this argument to the realm of historians – a subject that interested me personally, but did not seem relevant today.

That was until I noticed a new debate bubbling up on the internet about the future of the nation state. Will it become more powerful as countries scramble to protect themselves from the financial crisis as George Friedman at Stratfor argues in this article?  Or does the need for global solutions to the crisis sound a death knell for the nation state, as John Robb suggests here?

Let’s just suppose the paradigm has shifted and the 60-year-old model defined by the departing British colonial rulers is no longer valid. What does that mean for Pakistan and India? (more…)

Pakistan’s economy has survived three wars with India and a long history of tension with its much bigger neighbour. But this time its own domestic economic and political problems, combined with tension on the border with Afghanistan, are running smack into a global financial crisis that will make it harder for its traditional allies to bail it out.

So is it time to break the taboos and ask: Does Pakistan’s best hope of economic recovery lie in making peace with India?

President Asif Ali Zardari certainly seemed to think so when he told the Wall Street Journal in an interview last weekend that India was no threat to Pakistan and said that “there is no other economic survival for nations like us. We have to trade with our neighbours first.”

India’s Business Standard says in an editorial that Zardari is right to say India is no threat and that Pakistan needs to focus on reviving its economy. “The question, though, is not what President Zardari thinks about these issues, but whether the larger Pakistani establishment (including, most importantly, the army) shares his perspectives. At the moment, Mr Zardari seems to be running ahead of the pack,” it says.

India too is beginning to worry about the impact on its own economy of the global financial crisis, as these articles in the Hindustan Times and the Economic Times suggest. So it might also welcome the advantages of higher regional trade.

A chance for peace?