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Pakistan hurtling toward new financial crisis

This brought around US$8.8 billion into Pakistan's coffers between 2002 and 2011, including US$1.5 billion in 2009-10, but Islamabad stopped claiming the money as ties with Washington collapsed in the wake of the raid that killed Osama bin Laden last year.

“There's not really any money coming in, and that being the case, the government is financing itself by borrowing from the local banks and the local banks aren't seeing deposits coming in to keep up,” said Liz Martins, an economist with HSBC.

The pressure on finance houses “means they have very limited money to lend to the private sector,” she said.

“There's no money coming from the IMF, no money coming from the bond markets, and international investors are very cautious.”

Islamabad borrowed 365 billion rupees (US$4 billion) from the banking system — both private banks and the SBP — in the first half of the current financial year, the central bank said in its second quarter economic report.

With inflation already running at around 11 percent, the alternative of printing money to pay debts opens the way to the nightmare of hyperinflation.

The IMF says Pakistan needs to raise tax revenues substantially to reduce the deficit sustainably, but with an election due within months analysts do not expect Finance Minister Abdul Hafeez Shaikh to follow its advice in his budget on Friday.

“I don't think the government is able to bear the terms that come with going back to the IMF,” said Sartaj Aziz, former finance minister and vice chancellor of Beaconhouse National University.

The situation was already serious, he warned. “The total expansion of currency is higher than ever, so it is already reaching dangerous levels. It has to be arrested by drastic remedial measures,” he said.

Officials from the finance ministry were repeatedly contacted by AFP, but declined to comment on how they planned to finance the deficit.

In Pakistan, once a general election is called, an interim government takes power for three months while campaigning is under way and Aziz said he thought this would give the government a way to duck difficult budget decisions.

“I think the government will be happy to wait until the election is called and hand the problem over to the caretaker government,” he said.

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