x Abu Dhabi, UAETuesday 25 July 2017

Pakistan must slash military spending says IMF

With the country on the brink of economic collapse and the risk of default looming, Pakistan may be forced to seek an IMF bailout on terms that 'would rip the heart out of the army'. In the global financial crisis, the threat to emerging markets has produced turmoil in currency markets. As John McCain's electoral defeat looks increasingly probable, Republicans are already positioning themselves for a battle over the future of their party.

"The International Monetary Fund yesterday ordered Pakistan to cut military spending by almost a third as fears grew that the nuclear-armed nation's economic crisis was now so bad that its role in the war against al Qa'eda and the Taliban was imperilled," Bruce Loudon reported for The Australian. "The secret IMF demand - one of several measures that the bankrupt country is being asked to agree to for a bailout of its tanking economy - was disclosed as the president Asif Ali Zardari prepared to go cap in hand to Saudi Arabia for help." A report on Pakistan's economic crisis in The Economist said: "The economy is close to freefall. Inflation is running at about 30 per cent. The rupee has devalued by about 25 per cent in just three months. The fiscal deficit is a whopping 10 per cent of GDP. Foreign-exchange reserves cover just six weeks of imports. A $500m Eurobond matures next February, but the market has already decided it is junk. The country needs at least $3 billion in short order, and a further $10 billion over the next two years to plug a balance-of-payments gap. Without it, default abroad might well coincide with political anarchy at home. "Pakistan's new president, Asif Zardari, has made desperate begging trips to Saudi Arabia, America and China. To no avail. The Saudis are dragging their feet on a Pakistani request for $5.9 billion-worth of finance in the form of deferred oil payments. The Chinese seem to have done their due diligence and concluded that they cannot blithely advance billions to an increasingly dysfunctional state. "America is distracted by its own financial crisis and an impending change of administration. A bill yet to be passed by congress links economic assistance of up to $1.5 billion a year for ten years to progress on the war against Islamist extremists in the tribal areas and Afghanistan. Richard Boucher, the assistant secretary of state for South Asia, visited Pakistan this week, but said there was no prospect of American cash in advance. Mr Zardari is now scheduled to make another trip to Saudi Arabia in early November to entreat the Kingdom to bail out its old friend." In the mean time on the military front, AFP reported: "Pakistani troops have recaptured a key town from al Qa'eda and Taliban militants after a two-month operation in which 1,500 rebels and 73 soldiers were killed, the military said on Saturday. "Security forces backed by helicopter gunships drove insurgents out of Loisam, a strategic town in the Bajaur tribal region bordering Afghanistan which is at a crossroads of extremist supply routes, it said. "Islamabad has previously hailed its operation in Bajaur as proof that it is responding to US and Afghan demands to take action against extremists in Pakistan's seven semi-autonomous tribal areas." CNN added: "About 30 US military personnel are training members of Pakistan's Frontier Corps on how to fight Taliban and al Qa'eda militants in Pakistan's tribal regions, according to several US military sources. "The Pakistanis trained by the US contingent - which includes Army Special Forces troops - will in turn become trainers for Frontier Corps troops on the front lines fighting the militants, the sources said."

Turmoil in the currency markets

"Governments across the rich world have taken drastic steps to save the banking system," The Economist said. "As the fears of outright collapse recede, their focus has turned to improving the supply of credit to households and firms by pushing market interest rates down and encouraging banks to lend more freely. But a growing number of economists, and now the Bush administration, believe that the credit crunch also has to be addressed at its source - in America's housing market, where prices have fallen almost one-fifth from their peak, and foreclosures have soared." The New York Times reported: "Fear that the financial crisis is infecting once-healthy economies created another white-knuckle day for investors Friday, causing stocks to tumble from Tokyo to New York. "Uncertainty also roiled currency markets as investors continued to turn to the security of the United States dollar and the Japanese yen and drove down currencies of developing countries like Brazil, Ukraine and South Korea and even of developed countries like Britain.... "Hedge funds and other investors are pulling money out of [emerging markets] ... on an immense scale, analysts said, and putting it into dollars and yen. There were few safe harbours, as commodities also tumbled. Fears of a spreading global recession caused oil prices to fall 5 per cent, to $64.15, even after Opec, the oil cartel, announced it was cutting output. Government-backed mortgage bonds and debt issued by top-rated corporations were also dragged down in the undertow. " 'This is a panic in the way of the fine 19th-century panics, where we all run around like headless chickens,' said R Jeremy Grantham, chairman of the Boston-based investment firm GMO, who had predicted stocks would tumble. 'I have been in the business for 40 years, and I have never seen anything like this.' "So great are the concerns among policy makers about the turmoil in currency markets that it has prompted talk of a coordinated intervention by the leading industrial countries in coming days, to quell the soaring dollar and put a floor under emerging-market currencies. "Such a move - in which the Federal Reserve and other central banks would sell dollars and yen and buy other currencies - has been used extremely sparingly by the United States in recent years. " 'The risk is huge, but it is appropriate at this point, because if the emerging markets go into default, the consequences would be catastrophic,' said Kenneth S Rogoff, an economist at Harvard. "When a developing country's currency loses value rapidly, it impedes the ability to pay back loans from Western banks. That could cause a rash of corporate or even government defaults - a feature of previous financial crises in Asia and Latin America." In The Washington Post, David Smick wrote: "The rich, developed countries enjoy huge resources that can save them from financial collapse. But those resources are not unlimited. In Europe, taxes as a percentage of GDP have grown to 43 per cent (compared to roughly 20 per cent for the United States). Translation: If Hungary, Pakistan or South Korea went broke and European governments were forced to raise taxes to finance a bailout, the economic pain would be excruciating. "That is why the 'shock and awe' of the current bank bailout efforts hasn't yet stabilised world financial markets. Investors suspect that the problem is just too expensive to confront. The IMF estimates that global banks have already lost $1.4 trillion. By the time the world fully enters into recession next year, global bank losses will almost certainly have increased dramatically. Some experts expect them to reach a whopping $5 trillion. "So the question remains: Do the world's governments have the resources to take on such a massive rescue operation? The global markets aren't sure. "Our next president, beginning the day after the election, needs to call for global contingency plans in case countries collapse - because the financial market will bet against the global economy as long as this uncertainty exists. Eliminate that uncertainty, or at least show how the world economy will cope with such calamities, and our policymakers can return to the thorny job of cajoling our bankers into lending again."

Republicans prepare for a battle over the future of their party

"While congressional Republicans will not publicly concede that the presidential race is lost for the GOP, they speak frankly about the real possibility of an Obama presidency. They are discussing ways to reenergise the Republican party at a time when Democrats will probably be in charge of the White House and hold larger majorities in the House and Senate," The Boston Globe reported. " 'It's time for a fresh start. We need new faces and new people to communicate what our party stands for,' said Representative Zach Wamp, Republican of Tennessee. After the elections, Republicans need to develop a simple, five-point plan that gets back to the principles espoused by GOP icon Ronald Reagan, he said - smaller government, no deficit spending, and a strong national defence that does not entail making the United States the 'world's policeman'. "Capitol Hill Republicans say they lost their way and are now being punished for it." Politico reported: "Even as John McCain and Sarah Palin scramble to close the gap in the final days of the 2008 election, stirrings of a Palin insurgency are complicating the campaign's already-tense internal dynamics.

"Four Republicans close to Palin said she has decided increasingly to disregard the advice of the former Bush aides tasked to handle her, creating occasionally tense situations as she travels the country with them. Those Palin supporters, inside the campaign and out, said Palin blames her handlers for a botched rollout and a tarnished public image - even as others in McCain's camp blame the pick of the relatively inexperienced Alaska governor, and her public performance, for McCain's decline. " 'She's lost confidence in most of the people on the plane,' said a senior Republican who speaks to Ms Palin, referring to her campaign jet. He said Ms Palin had begun to 'go rogue' in some of her public pronouncements and decisions.

" 'I think she'd like to go more rogue,' he said. "The emergence of a Palin faction comes as Republicans gird for a battle over the future of their party: Some see her as a charismatic, hawkish conservative leader with the potential, still unrealised, to cross over to attract moderate voters. Anger among Republicans who see Palin as a star and as a potential future leader has boiled over because, they say, they see other senior McCain aides preparing to blame her in the event he is defeated." David Frum, former speech writer for President George W Bush, wrote: "To fire up the Republican base, the McCain team has hit at Barack Obama as an alien, a radical and a socialist. "Sure enough, the base has responded. After months and months of wan enthusiasm among Republicans, these last weeks have at last energised the core of the party. But there's a downside: The very same campaign strategy that has belatedly mobilised the Republican core has alienated and offended the great national middle, which was the only place where the 2008 election could have been won. "I could pile up the poll numbers here, but frankly ... it's too depressing. You have to go back to the Watergate era to see numbers quite so horrible for the GOP. "McCain's awful campaign is having awful consequences down the ballot. I spoke a little while ago to a senior Republican House member. 'There is not a safe Republican seat in the country,' he warned. 'I don't mean that we're going to lose all of them. But we could lose any of them.' "In the Senate, things look, if possible, even worse." The Times reported: "In August last year Pastor Kirbyjon Caldwell telephoned the White House and left a message for President Bush to call him back. When he did, Mr Caldwell told him that he had decided to endorse Barack Obama in this year's presidential election. " 'He took it very well,' Mr Caldwell said, though the call could hardly have thrilled the beleaguered President. "Mr Caldwell, a 55-year-old African-American, is not just head of America's largest Methodist congregation, the 15,000-member Windsor Village United megachurch in Houston. He is Mr Bush's religious adviser."

pwoodward@thenational.ae