IMF Support For Low-Income Countries

As the global financial crisis has swept from developed to developing economies, the IMF has upgraded its support for low-income countries. New initiatives are expected to boost concessional IMF lending to $17 billion through 2014. These low interest-rate loans now come with policy programs that have more flexible conditions. The IMF has also overhauled its lending instruments, especially to address more directly countries’ needs for short-term and emergency support.

Signs of success

The IMF’s support for low-income countries needed an upgrade, first of all, because of the improved economic conditions in these countries. Many have made great strides toward macroeconomic stability. In the 1990s, the vast majority of low-income countries faced long-standing economic problems that required radical, long-term policy changes often accompanied by debt relief or cancellation.

Now, however, many of these economies are becoming more open and integrated into the global economy. Low-income countries are joining international capital markets, entering markets for goods and services, attracting foreign investment, nurturing their own private financial sectors, and benefiting from money sent home by citizens working abroad.

But with this greater international openness and integration comes greater vulnerability and exposure to the ups and downs of the global economy. This was highlighted by the impact that sudden jumps in world food and fuel prices had on several countries’ economies in 2007 and 2008. Spillover from the global financial crisis soon followed. It was apparent that the new generation of more stable but more vulnerable low-income countries needed a new generation of IMF loan facilities to support them.

More money

To combat the immediate ill effects on low-income countries of higher commodity prices and a slumping world economy, top priority for the IMF was making more money available. A first step was to modify the IMF’s main vehicle for helping countries that are hit by forces outside their control—the Exogenous Shocks Facility. Changes in September 2008 made this facility easier and more flexible to use, and 13 countries have already made use of it since then.

Then the IMF doubled its low-income country access limits—the ceilings on how much each country can borrow from the IMF. And it ramped up its total concessional lending to these countries, which is now expected to reach $8 billion over 2009–10 and $17 billion through 2014.

In addition, more than $18 billion of a planned $250 billion allocation of IMF Special Drawing Rights (SDRs) will go to low-income countries. These countries can benefit by either counting the SDRs as extra assets in their reserves, or selling their SDRs for hard currency to meet balance of payments needs.

Changes in lending instruments

To make its financial support more flexible and tailored to the diversity of low-income countries, the IMF has established a new Poverty Reduction and Growth Trust, which has three new lending windows. The new windows, which are expected to become effective later in 2009 when donor countries have given their final consent, are

The Extended Credit Facility (ECF), which replaces the Poverty Reduction and Growth Facility (PRGF). The ECF

• Provides sustained engagement in case of medium-term balance of payments needs
• Should be based on a country’s’ own poverty reduction strategy, and
• Offers more flexible timing requirements than the PRGF for countries to produce a formal poverty reduction strategy document.

The Standby Credit Facility (SCF), replacing the Exogenous Shocks Facility’s High Access Component, is similar to the Stand-By Arrangement for middle-income countries. The SCF

• Provides flexible support to low-income countries with short-term financing and adjustment needs caused by domestic or external shocks, or policy slippages
• Targets countries that no longer face protracted balance of payments problems but may need help from time to time, and
• Can also be used on a precautionary basis to provide insurance.

The Rapid Credit Facility (RCF), which

• Provides limited financial support in a single, up-front payout for low-income countries facing urgent financing needs
• Substitutes for a regular IMF loan when use of the other two facilities, which involve one- to three-year policy programs, is either not necessary or not possible, and
• Offers highly flexible financing that provides single-use loans that replace the Exogenous Shocks Facility’s Rapid Access Component and the subsidized Emergency Natural Disaster Assistance; and offers successive drawings for countries in post-conflict or other fragile situations, replacing and expanding subsidized Emergency Post-Conflict Assistance.

For policy advice and signaling to donors, countries can request non-financial assistance under the existing Policy Support Instrument (PSI), which

• Supports low-income countries that have secured macroeconomic stability and thus do not need IMF financial assistance, and
• Can provide accelerated access to the new SCF in case of subsequent financial needs.

Low-income countries will receive exceptional forgiveness through end-2011 on all interest payments due to the IMF under its concessional lending instruments.

Increased IMF financial support for low-income countries has been joined by changes in the design and assembly of the agreed policy packages—called programs—that accompany IMF loans. These changes aim to

• Strengthen the focus on supporting poverty alleviation and growth, for all these programs
• Protect public spending even as economic downswings cut revenues
• Prioritize national budgets in the direction of spending targeted at the poor, and
• Focus loan conditions on critical areas, such as transparent management of public resources.

IMF Backs New Package To Support World's Poorest During Crisis

IMF Backs New Package to Support World's Poorest During Crisis

The IMF, stepping up lending to low-income countries to combat the impact of the global recession, has announced a new framework for loans to the world’s poorest nations, including increased resources, a doubling of borrowing limits, zero interest rates until the end of 2011, and more flexible terms.

The IMF’s Executive Board approved the package of measures that will sharply increase the loan resources available to low-income countries. The resources—including from the planned sale of IMF gold—are expected to boost the Fund’s concessional lending to up to $17 billion through 2014, including up to $8 billion over the next two years.

In addition, the IMF announced zero interest payments up to the end of 2011 for all concessional loans to low-income members and lower interest rates on a permanent basis thereafter. A new set of lending instruments will underpin this increased support.

“This is an unprecedented scaling up of IMF support for the poorest countries, in sub-Saharan Africa and all over the world,” said IMF Managing Director Dominique Strauss-Kahn in a statement accompanying the July 29 announcement.

The crisis originated in the advanced economies and has had its most visible impact on the emerging market countries. But a third wave of the crisis has threatened the remarkable economic achievements many low-income countries have made over the past decade.

Crisis hitting hard

An IMF report on the implications of the global financial crisis for low-income countries had warned in March that the global financial crisis has hit poor countries especially hard, posing serious threats to their hard-won gains in boosting economic growth and creating a need for additional foreign financing to mitigate the impact of the crisis.

Also in March, Tanzania President Jakaya Kikwete, Strauss-Kahn, and former UN Secretary-General Kofi Annan convened a conference in Dar es Salaam of government, business, civil society, and opinion leaders to address these issues. The IMF committed at the meeting to increase its support for Africa with more financing, greater flexibility, enhanced policy dialogue, and a further strengthening of Africa’s voice in the Fund.

“We are responding with a historic set of actions in terms of support for the world’s poor. The new resources and new means of delivering them should help prevent millions of people from falling into poverty,” Strauss-Kahn said.

Comprehensive support package

As part of the response, the IMF has already more than doubled its financial assistance to low-income countries. New IMF concessional lending commitments to low-income countries through mid-July 2009 reached $2.9 billion compared with $1.5 billion for the whole of 2008.

The new measures represent a significant additional effort in the coming years. The IMF support package includes:

• Mobilization of additional resources, including from sales of an agreed amount of IMF gold, to boost the Fund’s concessional lending capacity to up to $17 billion through 2014, including up to $8 billion in the first two years. This exceeds the call by the Group of Twenty for $6 billion in new lending over two to three years.

• Interest relief, with zero payments on outstanding IMF concessional loans through end-2011 to help low-income countries cope with the crisis.

• Permanently higher concessionality of Fund financial support—with annual interest rates regularly reviewed so as to preserve a higher level of concessionality than previously.

• Doubling of average loan access limits for low-income countries

• A new set of financial instruments tailored to the diverse needs of low-income countries and better suited to meet the crisis challenges:

1. An Extended Credit Facility (ECF) to provide flexible medium-term support;

2. A Standby Credit Facility to address short-term and precautionary needs; and

3. a Rapid Credit Facility, offering emergency support with limited conditionality

In addition, the IMF’s Executive Board recently backed the Managing Director's proposal for a new general allocation of $250 billion of Special Drawing Rights into the global economy, of which more than $18 billion will help bolster the foreign exchange reserves and relax the financing constraints of low-income countries. If approved by the IMF's Board of Governors, the proposed SDR allocation would take place at the end of August.

Strauss-Kahn said that “All this represents a historic effort by the Fund to help the world’s poor.” He added that there would be greater emphasis in Fund-supported programs on poverty reduction and growth objectives across all its new lending instruments, including targets to safeguard social and other priority spending.

The new lending windows are expected to become effective later this year, when donor countries have given their final consent. At that time, existing concessional arrangements will automatically be converted into ECF arrangements. Existing arrangements under the Exogenous SHocks Facility, however, will remain in effect, and new ones that have already been prepared could still be approved during a three-month window.

More flexible conditionality

The IMF already announced this year a more flexible approach to conditionality in the programs it supports: structural reform conditions have been streamlined for all Fund-supported programs, and additional flexibility has been introduced for structural conditionality in medium-term, low-income country programs. IMF-supported programs have also accommodated larger fiscal deficits during the crisis in most low-income countries.

“Since the crisis hit, we have been listening and responding to our member countries,” said Strauss-Kahn. “The scaling up in the IMF’s support not only will help these low-income countries weather a crisis that is not of their making. Once the crisis has passed, it will also pave the way for a progress in the battle against poverty.”

Increased IMF financial assistance has been coupled with programs that include higher levels of pro-poor spending in a majority of low-income countries. Fund programs have accommodated increased fiscal deficits, and often higher spending, to meet the challenges of the food and fuel and global financial crises. Recent programs have also often contained looser monetary policy and higher inflation targets.

Role of gold sales

Some of the money to boost IMF lending to low-income countries will come from the envisaged sales of IMF gold. The IMF Executive Board will consider a plan for the Fund to sell about 400 metric tons of gold in order to create a new income model for the institution. In order to meet the financing needs of the low-income countries during the global crisis, some of the proceeds of those sales will be used to help provide new subsidy resources for the concessional lending to those countries.

Resources linked to the gold sales will be used to help fund concessional lending to low-income countries in the following ways. First, windfall profits when the gold sales take place can be used for the subsidy resources. Windfall profits would derive from gold sales at an average price in excess of $850 per ounce—that is the price assumed in the new income model as necessary to fund the model. Second, to the extent that the realized windfall profits fall short of the required contribution, the remaining amount will be generated through investment income from the endowment funded by the gold sales.

IMF World Economic Outlook (Video)

IMF Webcasts

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IMF World Economic Outlook

Speaker(s):
Olivier Blanchard,
Economic Counsellor

Monetary Policy Decision 29th September 2009

Macroeconomic considerations and outlook that influence monetary policy decision depict a
mix picture. While inflation (YoY) and balance of payment position has improved, fiscal and real sector performance remains tenuous. Domestic financial markets functioned adequately but lending to the private sector has remained subdued. From a forward looking perspective, expected improvement in the external current account and emerging global economic recovery augur well for Pakistan’s economy. But, limited progress on electricity shortages and stressed fiscal position dilute some of the optimism. Similarly, inflation outlook is not completely benign yet as depicted by recent monthly trends. Under these circumstances, assessment of balance of risks continues to be somewhat uncertain.
Both CPI and core inflation have declined further in August 2009, with former at 10.7 percent
and Non food Non energy (NFNE) measure of the latter at 12.6 percent on year-on-year basis. But, the pace of decline in inflation was less than expected. The monthly increase of over 1.5 percent in CPI inflation in the first two months of FY10 is still quite high and of concern. This monthly increase coupled with administrative issues in the supply chain of food items and projected increases in electricity prices to eliminate subsidies could have a bearing on the behaviour of domestic inflation in the coming months. Increase in international oil prices remains an underlying risk to inflation as well.
However, the likely presence of Ramadan seasonality in the CPI index, especially the food
basket, and disproportionate contribution of only a few items calls for caution in interpreting recent monthly inflation indicators. Similarly, the effect of cost push shocks like electricity and oil on inflation may be neutralized by below capacity economic activity and slow aggregate demand. Moreover, expectations of inflation are likely to remain in check while the stabilization program remains on track. While it is likely that inflation will continue its secular decline, as observed in our last communication, there are risks to watch as we go forward.
Tapering aggregate demand pressures in the economy can be clearly seen in persistent and
widespread decline in imports. Supported by continued strong inflow of worker’s remittances, this fall in import growth has resulted in a modest surplus of $82 million in the external current account for August 2009. Even the cumulative July-August, FY10 external current account deficit of $527 million is much lower than earlier projections.
Similarly, on the back of favourable revisions regarding outlook of Pakistan’s economy by
international rating agencies, portfolio inflows are now positive; $55 million in the first two months of FY10. This, together with inflows from the IMF, both for budgetary support ($745 million) and allocation of increased Special Drawing Rights (around $1200 million), and adequate, though lower, foreign direct investments substantially improved the external financial account. Resultantly, the SBP’s foreign exchange reserves have increased to $10.9 billion as on 28th September, 2009 – an improvement of $1.8 billion since the beginning of FY10 – and is reflected in Rs123.6 billion increase in the Net Foreign Assets (NFA) during 1st July – 19th September, 2009. This has helped liquidity conditions in the economy and translated into bringing stability to the foreign exchange market.
This improvement in balance of payments is despite a significant shortfall in non-IMF official
financial inflows. Non realization or shortfall in these official inflows could pose a potential problem for fiscal management, which faces significant pressure on both the expenditure and revenue side of the budget and has already posted a fiscal deficit of 5.2 percent of GDP for FY09 – 0.9 percentage points higher than the targeted level.
Provisional figure of Rs106.6 billion government borrowing from the SBP during 1st July – 19th
September, FY10 also indicate the extent of fiscal position’s weakness in the current quarter. This borrowing was despite the fact that Ministry of Finance realized Rs333 billion in the six Q1-FY10 T-bill auctions while adhering to an advance auction target of Rs325 billion for the quarter. However, this financing pressure along with recent uptick in market interest rates and liquidity tightness is largely cyclical and is mostly due to the month of Ramadan and Eid festival. Likely reversal of these phenomena along with the retirement of wheat financing and improvement in external flows is expected to improve the market liquidity in the coming months and flow of credit to the private sector.
Sustainable recovery of real sector of the economy would not be possible without revival of
business environment and availability of credit to private sector, which in turn depends on the
elimination of electricity shortages among other factors. Moreover, stagnant private sector investment can hurt the potential output of the economy, adversely impacting inflation persistence. However, recent steps taken towards resolution of the circular debt issue could lead to the resumption of private sector credit in the coming months.
In conclusion, there are some risks to inflation while the economy gradually stabilizes.
Moreover, uncertainty regarding the outcome of ongoing fiscal consolidation, resolution of electricity problem, and timing of official foreign inflows call for prudence at this point. Therefore, there will be no change in the SBP’s policy rate, which will remain at 13 percent. These issues are likely to determine SBP’s policy trajectory in the coming months.
Progressing further on the formation of the Monetary Policy Committee (MPC), Central Board of
Directors of SBP has finalized the composition of this nine member committee. In addition to the
Governor of the SBP, Syed Salim Raza, and Deputy Governor, Yaseen Anwar, three SBP executives – Riaz Riazuddin (economic advisor), Asad Qureshi (executive director, financial markets and reserve management), and Hamza Ali Malik (director, monetary policy department) – will be the internal members. Board of Directors of SBP will be represented by Mirza Qamar Beg and Tariq Sayeed Saigol
while Hafiz Pasha and Shahid Kardar will join as external members. This committee will start its
deliberations in November 2009. To harmonize the constitution of MPC with the legal framework of SBP and make it fully independent, amendments in the SBP Act have already been submitted for the legislative process. Until their enactment, the MPC will seek approval of its recommendations from the Board of Directors of the SBP.

Profile: Benazir Bhutto of Pakistan

Early Life and Family:

Benazir Bhutto was born on June 21, 1953, in Lahore, Pakistan’s second-biggest city, to one of Pakistan’s few feudal and politically dominant families. She is the eldest of four children. Her father, Zulfikar Ali Bhutto, was the president of Pakistan from 1971 to 1973, and prime minister from 1973 to 1977, when he was deposed in a coup led by Gen. Zia ul Haq, tried on dubious charges of “conspiracy to murder,” and executed by hanging in April 1979.

Western Educated:

Benazir was 26 years old at the time of her father’s death. Until then, she had little intention to be a politician. She studied political science and philosophy at Radcliffe College in Massachusetts (before Radcliffe’s merge with Harvard) beginning in 1969 — wearing jeans and taking part in demonstrations against the Vietnam War before moving on to Oxford University. She was the first foreign woman elected president of the Oxford Union, a prestigious debating society. She got interested in diplomacy toward the end of her father’s tenure as prime minister, and returned to Pakistan intending to work in his government.

Political Baptism by Fire:

Instead of living the life of a diplomat, Benazir Bhutto in 1977 became her father’s most forceful defender as he battled a murder charge in court, and as martial law gripped Pakistan. Benazir, at 24, emerged as the leader of her father’s Pakistan People’s Party. She asserted herself with overconfident authority, predicting “civil war, the breakup of Pakistan, a massive and total outburst from the people” if her father was executed. He was. Parts of Pakistan rioted, but neither broke up nor devolved into civil war. She was alternately in prison or under house arrest until 1984, when she went into self-exile in London.

Return from Exile:

Benazir Bhutto returned to Pakistan on April 10, 1986 to chants of “Welcome daughter of Pakistan” and “Benazir brings the revolution,” and promised that President Mohammad Zia ul-Haq would go. She shaped an entirely new public image. She donned the Islamic veil, quoted the Koran in public speeches, and agreed to an arranged marriage to Asif Ali Zardari, a rich businessman who would later bring her to grief. “An arranged marriage was the price ... I had to pay for the political path my life had taken,” she wrote in “Daughter of Destiny,” her autobiography.

Prime Minister, 1988-1990:

Wherever Bhutto traveled after her return to Pakistan, she attracted huge crowds unrivaled in Pakistani history. President Zia had ended martial law in 1985, but maintained a one-party state. He dissolved Parliament in May 1988. On Aug. 17, 1988, his plane crashed in mysterious circumstances. Bhutto’s People’s Party won the parliamentary elections but without an outright majority. Her record was checkered. To appease the military she gave it free reign in Afghanistan’s civil war on the side of Islamic militants. On Aug. 6, 1990, Pakistani President Ghulam Ishaq Khan ousted Bhutto on charges of corruption and nepotism.

Prime Minister, 1993-1996:

Bhutto was again elected prime minister in October 1993. During that tenure, one of her most consequential decision was to support the rise of the Taliban in Afghanistan, financially and militarily, an odd choice considering Bhutto’s strong stance in favor of women’s rights and human rights. Bhutto considered the Taliban a better alternative to Afghanistan’s civil war. The Taliban was also Pakistan’s proxy power in Afghanistan, in opposition to Iranian influences in the region. Bedeviled by continuing charges of corruption and nepotism, Bhutto was again dismissed by the very president she had chosen, Farooq Leghari.

Corruption and Nepotism:

Corruption and Nepotism In the late 1990s, Bhutto’s family, especially through her husband, Asif Ali Zadari, would be at the heart of a wide corruption inquiry tracing more than $100 million in foreign bank accounts and properties her family controlled. Her husband was implicated in kickback deals with French military contractor Dassault Aviation and a Swiss company hired to curb customs fraud, and from a Middle East gold trader (Bhutto had given Zardari a monopoly over gold and jewelry imports. The Spanish and Polish governments also documented Bhutto’s and Zardari’s money laundering and corruption schemes.

Bhutto's Arrogance:

Bhutto would not explain the deals, and tried to deflect criticism by downplaying her family’s wealth: “I mean, what is poor and what is rich?” she asked. “If you mean, am I rich by European standards, do I have a billion dollars, or even a hundred million dollars, even half that, no, I do not. But if you mean that I’m ordinary rich, yes, my father had three children studying at Harvard as undergraduates at the same time. But this wealth never meant anything to my brothers or me.”

Allegations, Convictions and Amnesty:

Bhutto’s husband faced 18 corruption and criminal cases over 10 years. None were proven in court. Yet he was imprisoned from 1997 to 2004, when he was freed on bail. Bhutto also faced a series of charges in five corruption cases. She termed those charges politically motivated, tied them up in various court proceedings, and in October 2007, won an amnesty.

Exile, Return and Assassination:

Bhutto again went into exile in 1999, this time to Dubai, but remained politically active. She negotiated a power-sharing agreement with President Pervez Musharraf, who signed her amnesty and cleared the way for her return to Pakistan on Oct. 18, 2007. The agreement with Musharraf was controversial, as Bhutto seemed to lend legitimacy to the very military regime she had spent a lifetime opposing. Soon after her return, she survived an attempt on her life.

Musharraf, fearing losing power as the Supreme Court was readying to rule on his recent, questionable re-election, suspended the constitution, declared martial law, and barred Bhutto from participating in political rallies. Musharraf’s stance has only strengthened Bhutto’s position as the likeliest next prime minister of Pakistan.

On Dec. 28, 2007, Bhutto was leading a political rally before hundreds of supporters at Liaqut Bagh, a park in Rawalpindi, the garrison city near Islamabad, the Pakistani capital. Shots were reportedly fired and a suicide bomber detonated near Bhutto. She was killed, along with scores of others.

Profile: Pakistan's Asif Ali Zardari

Pakistan's Asif Ali Zardari, husband of the late Benazir Bhutto, known as "Mr. Ten Percent" for his long trail of kickbacks and corruption.

Zardari is the husband of the late Benazir Bhutto, who was twice prime minister of Pakistan and was likely to be elected to the post a third time in 2007 when she was assassinated.
In August 2008, Bhutto’s Pakistan Peoples Party named Zardari for president. The election was scheduled for Sept. 6. Zardari’s past, like Bhutto’s, is riddled with charges of corruption. He is known as “Mr. 10 Percent,” a reference to kickbacks believed to have enriched him and his late wife to the tune of hundreds of millions of dollars. He’s never been convicted on any of the charges but served a total of 11 years in prison.

Asif Ali Zardari’s Early Life and Family:

Zardari was born on July 21, 1956, the son of Pakistani politician Hakim Ali Zardari, a Sindhi tribal leader who opted for urban life and grew fantastically wealthy from it. Asif Ali Zardari had a privileged childhood, attending Saint Patrick's High School in Karachi, the same school that former Pakistani President Pervez Musharraf—a Bhutto family rival—attended.

Zardari then attended the London School of Economics. Thanks to his father’s wealth, Zardari had a private disco in his own home and became known as a polo-playing playboy who called his ponies the Zardari Four. Zardari is a diabetic.

An Arranged Marriage of Convenience With Benazir Bhutto:

Zardari married Benazir Bhutto on Dec. 18, 1987. The marriage was arranged by the two families, with Bhutto’s mother picking out Zardari for her daughter. Bhutto and Zardari had met only five days before the wedding, though marriage negotiations took almost six months.

Had it not been for "the political ramifications of every step I take," Bhutto said at the time, "then perhaps this would not have been an arranged marriage, but, in the circumstances, it seemed the only course." Zardari kept to a few words: “I have no interest in politics,” an early but characteristic untruth. The couple had three children.

Zardari Charged With Attempted Murder and Extortion:

It wasn’t long before Zardari faced his first arrest—an attempted-murder and extortion charge in 1990 stemming from an alleged plot that April. Zadari and accomplice Ghulam Hussain Unar. Unar and Zardari allegedly strapped a remote-controlled bomb to the leg of Pakistani-born British businessman Murtaza Hussain Bukhari, who was discussing plans to build a hospital in Pakistan, and forced him to cash $800,000 in checks.

Zardari was imprisoned. He contested the charges, calling them politically motivated. Bhutto was prime minister at the time but was ousted in October 1990.

From Prison to Finance Minister to Second Murder Charge:

A special court acquitted Zardari of bank fraud and conspiracy to murder charges. He was released in February 1993. When Zardari’s wife became prime minister again months later, she named him finance minister—a post that did not exist. The couple built a $50 million “prime minister’s residence" on 110 acres on an Islamabad hilltop.

Zardari also acquired the 365-acre, $8 million Rockwood Estate in Surrey, England, and a $4 million estate in Palm Beach County, Florida. Cases of Zardari and Bhutto corruption piled up fast during her second tenure as prime minister.

A Laundry List of Corruption Allegations:

Charges and allegations included:

• Zardari buying almost $1 million worth of jewelry through a Swiss bank account and an American Express card.
• Zardari taking kickbacks from a Dubai gold trader.
• French military contractor Dassault Aviation agreeing to pay Zardari $200 million in exchange for a $4 billion jet fighter deal with Pakistan. (The deal fell apart when Bhutto was booted out of government.)
• In 1996, Zardari was arrested again and charged with murdering his wife’s brother.

Zardari was imprisoned. Pakistan’s president dismissed Bhutto for corruption. Zardari was in prison until 2004.
The government claimed Bhutto and Zardari siphoned $1.5 billion in public money during Bhutto’s second term. None of the charges stuck, though Pakistan is still, according to The New Yorker's Steve Coll, looking into more than $54 million allegedly stashed in Swiss bank accounts by the Bhutto family. Investigators, Coll writes, are also "looking into companies involved in Iraq's oil-for-food program, under Saddam Hussein, from which Bhutto allegedly benefited."

From Manhattan’s Upper East Side Back to Politics Again:

Zardari won his release from prison after his wife’s Pakistan Peoples Party negotiated a deal with Pakistani President Pervez Musharraf. Zardari moved to Manhattan’s wealthy Upper East Side, where he lived for three years. Following his wife’s assassination, Zardari claimed her will named him as her successor to the leadership of the Pakistan Peoples Party. Zardari asked his son, Bilawal, to be the party chairman, though Zardari clearly intended to wield the power. On Aug. 22, the PPP nominated him for the Pakistani presidency vacated by Musharraf earlier that week.

China marks 60 years with spectacle of power

BEIJING - China celebrated its wealth and rising might with a show of goose-stepping troops, gaudy floats and nuclear-capable missiles in Beijing on Thursday, 60 years after Mao Zedong proclaimed its embrace of communism.

Tiananmen Square in central Beijing became a high-tech stage to celebrate the birth of the People's Republic of China on Oct. 1, 1949, with the Communist Party leadership and guests watching a meticulously disciplined show of national confidence.

Celebrations began in the morning with troops firing cannons and raising the red national flag while President Hu Jintao, solemnly-faced and wearing a slate grey "Mao" suit, looked on from the Gate of Heavenly Peace over the Square.

Hu descended to the street and inspected rows of troops, riding past them in a black limousine and bellowing repeatedly, "Hello comrades, hard-working comrades!"

"From here it was that Chairman Mao solemnly announced the founding of the People's Republic of China, and from then the Chinese people stood up," Hu told the guests and troops.

"Today a socialist China embracing modernisation, embracing the world and embracing the future stands lofty and firm."

The two-hour parade of 8,000 picture-perfect soldiers, tanks and missiles, 60 elaborate floats and 100,000 well-drilled civilians was a proud moment for many Chinese citizens, watching the spectacle across the country on television.

"I am very proud of the military today. You can see we are getting stronger and stronger as a nation," said Qiu Chengjie, a 25-year-old businessman from southern Guangdong province.

The government also wanted the day of extraordinary spectacle and security to make the case that its formula of strict one-party control and rapid growth remains the right one for hauling the world's third-biggest economy into prosperity.

China has enjoyed growing economic and diplomatic sway in the wake of the global financial crisis, but its leaders remain nervous about their grip on power and international standing.

The surprises of the last six decades -- including upheavals like the Great Leap Forward and the Cultural Revolution -- have not deterred an army of pundits from trying to peer into China's future, making forecasts not just a few years ahead, but decades.

"China is poised to have more impact on the world over the next 20 years than any other country," the U.S. National Intelligence Council's "Global Trends 2025" report said.

The soldiers goose-stepping past at exactly 116 steps a minute carried the theme that the Party knows how to run a show -- and a huge country.

"This was for the leaders, for them to show they're in command, so everything was completely controlled," Zhang Ming, a historian at Renmin University in Beijing, told Reuters.

"Ordinary people will feel excited and proud, but in the end the public was not a part of this. This was for the leadership to show them and the world they are fully in charge."

Beijing also brandished its military muscle, with a flyover and show of weapons, including rows of what state TV said were Dongfeng 31 missiles, capable of carrying nuclear warheads more than 10,000 km (5,400 miles).

China is spending billions of dollars modernising its 2.3 million strong military to make it more high-tech and flexible. Two sources with ties to the People's Liberation Army have told Reuters that China aims to cut its army by 700,000 over two to three years while boosting the navy and air force.

But the overwhelming security controls highlighted a central paradox of present-day China. The government claims it has never been stronger and closer to its people, yet appears afraid of even small incidents that could tarnish its authority.

Even as the displays celebrated the People's Republic, security cordons prevented residents from seeing the parade, with central Beijing emptied of all passers-by.

"It's not really for us ordinary people, is it?" said Wang Chenggong, a migrant worker from rural central Henan province trying to watch a TV near a crowded streetside stall.

Residents on the parade route were banned from peeking out their windows.

"Go home! Leave now! Go watch TV at home!" a portly policeman yelled through a bullhorn at a street crowd gathering miles from the square.

After the military parade, floats lauding China's history, achievements and regions passed by.

They included a farm produce float with two model cows; one showing China's space programme with a lunar orbiter; and an Olympic Games display with a model of the Bird's Nest stadium.

China is a country of yawning social contradictions, with hundreds of millions of farming families living in dirt-poor hardship despite the rapid economic growth, and restive ethnic minorities in the western Tibet and Xinjiang regions.

Today these disparities were dissolved in the displays of material abundance, ethnic unity and political control.

Neat rows of marchers waving pompoms accompanied towering mobile portraits of China's successive Communist Party leaders, ending with President Hu, appearing strikingly slim and youthful.

The government even claimed it ensured clear skies by beating back rain with an arsenal of airborne chemicals.

Pakistan's economy and monetary policy

Pakistan's central bank is scheduled to announce its monetary policy for October-November on Tuesday. Here are some facts about the State Bank of Pakistan's monetary policy and the economy.

* In the previous policy review on Aug. 15, the central bank cut its key policy rate by 100 basis points to 13 percent -- the second rate cut since January.

* As part of an understanding with the International Monetary Fund, the central bank also announced in August an interest rate corridor, with the policy rate serving as the "ceiling" and the "floor" set 300 basis points below that.

* The frequency of monetary policy reviews was also increased to six a year from four, which was also part of the IMF deal.

* Pakistan is being propped up with a $7.6 billion IMF loan running for two years that was agreed in November. The IMF increased the loan by $3.2 billion in July.

* GDP growth slid to 2 percent in 2008/09, about the same as population growth. The government expects growth of 3.3 percent in the fiscal year to the end of June 2010. The Asian Development Bank expects growth of 2 percent in 2009, rising to 3 percent in 2010.

* Steady improvements in key economic indicators have encouraged the central bank to cut rates and provide impetus for growth, but concern about the fiscal side and risks of growing price pressures have prevented a big expansionary policy.

* Annual consumer price inflation slowed to 10.69 percent in August, its slowest pace in 20 months, though with higher food and fuel prices, inflationary pressures are likely to build again.

* With forces fighting Islamist militants in the northwest of the country, security remains the biggest worry. Food and power shortages, and rising prices are putting an extra burden on the economy.

* An enhanced IMF loan has led to improved sovereign ratings, but the reluctance of donors to come through with more than $5 billion in aid pledged over two years remains a concern.

Global Financial Stability Report

Global Financial System Shows Signs of Recovery, IMF

Risks to the global financial system have subsided as a result of unprecedented policy actions and, more recently, a nascent global economic recovery, according to the IMF’s latest Global Financial Stability Report (GFSR).

But the semiannual report, released on September 30, cautions that the road to financial rehabilitation is unlikely to be straight and that there will be significant policy issues ahead.

"We are on the road to recovery, but this does not mean that risks have disappeared,” José Viňals, Director of the IMF’s Monetary and Capital Markets Department.

The report points to the need to further repair bank balance sheets to enable the institutions to make loans needed to support the economic recovery. Without this step, downside financial and economic risks could reemerge, the report said.

"If we fail to meet the challenges still being faced by the financial system in the present crisis, we risk reigniting systemic risks and even derailing the economic recovery now in train. As you know, that is something we simply cannot afford," Viňals told a press briefing in Istanbul, Turkey, where the IMF released the report ahead of its annual meetings.

Markets regain footing

Wide-ranging government policy actions since mid-2007 to inject liquidity into markets, stabilize bank balance sheets, and restore credit market functioning have allowed financial markets to regain their footing. As a result, risk appetite has rebounded, leading to a powerful rally in risk assets such as stocks.

Stability in core markets has helped reduce risks in emerging market economies, especially in Asia and Latin America, while the new lending facilities and augmented resources of the IMF have helped lessen tail risks (those that are unlikely but with potentially devastating consequences) in vulnerable countries.

Still, a plan to mitigate the buildup of systemic risks and to ground expectations is necessary for sustained economic growth, the IMF report said. The report worries that improving markets could result in a loss of urgency that allows the much-needed policy agenda to lapse—that is, complacency could take over.

Banks back from brink

A gradual reopening of capital and funding markets to banks and a recovery in their earnings are signs that banking systems have stepped back from the brink of collapse.

For both banks and other financial institutions, the GFSR calculates that actual and potential writedowns from bad assets such as loans and securities have fallen by some $600 billion over the past six months—from about $4 trillion to $3.4 trillion, as a lessening in financial stress has narrowed spreads. Although writedown estimates are subject to considerable uncertainty, the analysis shows that the financial system is on the mend.

Nevertheless, banks still confront substantial challenges. The GFSR estimates that commercial banks have already recognized $1.3 trillion through the first half of 2009, but face another $1.5 trillion of potential asset writedowns ahead. Hence, overall, banks have recognized slightly less than half of their expected losses. U.S. banks have recognized slightly more than have those in the United Kingdom and euro area.

More bank capital needed

Even though bank earnings are recovering, they are not expected to be big enough to offset fully the anticipated writedowns over the next 18 months. The insufficient earnings, combined with continuing deleveraging pressure, means banks will have to raise more capital. Additionally, banks must refinance a massive amount of maturing debt over the next two to three years. An unprecedented $1.5 trillion in bank borrowing is due to mature in the euro area, the United Kingdom, and the United States by 2012.

The GFSR suggests that although their balance sheets have been stabilized, some of it because governments have injected capital, banks are not yet in a strong position to lend support to the economic recovery.

With pressures on financial institutions’ balance sheets and a dormant private securitization market, the GFSR projects that a “financing gap” could arise—that is, projected credit capacity will be insufficient relative to the demands of sovereign borrowers and the private nonfinancial sector (see Chart 1). Such a situation constitutes a downside risk to the recovery and the IMF report suggests that continued policy intervention may be needed to keep credit flowing.

Risk to governments

Public interventions and fiscal stimulus packages have already led to an increased supply of public debt, most notably in advanced countries. As the economy recovers and private demand for credit strengthens, countries will have to articulate medium-term plans to consolidate their fiscal positions.

Historical evidence from 31 advanced and emerging economies points to the higher costs to sovereign borrowers of taking on too much debt—a persistent 1 percentage point increase in the fiscal deficit leads to a 10 to 60 basis point increase in long-term interest rates (a basis point is 1/100^th of a percentage point).

Many private sector financial risks were transferred to the public sector during government rescue operations, leaving the governments vulnerable to future shocks. Countries with high debt-to-GDP ratios and large contingent liabilities (such as bank asset or liability guarantees) are particularly vulnerable, the report showed. This suggests that countries can reduce their exposure to systemic risks by designing and implementing medium-term fiscal consolidation plans that take into account the unwinding of the actual and contingent interventions in the financial sector.

Emerging market vulnerabilities

Emerging markets have in general withstood the crisis well, but vulnerabilities remain, the GFSR said. Although foreign portfolio investment has returned to emerging markets, cross-border bank credit is still falling. Those countries heavily dependent on bank credit have suffered most, especially in emerging Europe. The recovery of portfolio flows has helped mostly Asia and Latin America. In fact, in Asia, property and equity prices have appreciated, partly as a result of inflows from mature markets.

Although portfolio investment flows are resuming and signs of a recovery in the real economy are emerging, the global recession continues to take its toll. Corporate defaults are rising in all regions, with loan losses thus putting pressure on banking systems. Refinancing needs of emerging market businesses and banks are large, revealing substantial rollover risks. For instance, debt service of bonds and syndicated loans denominated in foreign currencies is estimated at $400 billion over the next two years, with much of it concentrated in late 2009 and early 2010 (see Chart 2).

Reforming the financial system

The GFSR also examines the need to reform financial regulation to curb some of the excesses that led to the global economic crisis, such as the risky lending to subprime U.S. home buyers, which triggered the downturn. The report says regulation must be reformed to do the following:

• Restore market discipline by increasing the level and quality of capital, which should encourage shareholders to monitor risk-taking more carefully.

• Widen the perimeter of regulation to include systemically important institutions and assess some type of charge for the contribution they make to systemic risks.

• Institute a macroprudential approach to policymaking to reduce regulations that amplify the ups and downs of the economic cycle and formulate policies that better account for the potential interactions of monetary, fiscal, and financial policies.

• Improve international collaboration and coordination to cope with the challenges posed by cross-border institutions that function globally, but become the responsibility of the home government if they fail.

World Economic Report October, 2009

Country	Subject Descriptor	Units	2009	2010
Afghanistan, Rep. of.	Current account balance	Percent of GDP	-0.938	-0.876
Bangladesh	Current account balance	Percent of GDP	2.149	0.997
Bhutan	Current account balance	Percent of GDP	-3.1	-8.5
Brunei Darussalam	Current account balance	Percent of GDP	35.202	36.827
Cambodia	Current account balance	Percent of GDP	-5.541	-7.244
China	Current account balance	Percent of GDP	7.808	8.572
Fiji	Current account balance	Percent of GDP	-25.91	-27.934
India	Current account balance	Percent of GDP	-2.212	-2.51
Indonesia	Current account balance	Percent of GDP	0.88	0.539
Kiribati	Current account balance	Percent of GDP	-3.1	-6.3
Lao People's Democratic Republic	Current account balance	Percent of GDP	-15.446	-8.145
Malaysia	Current account balance	Percent of GDP	13.424	10.959
Maldives	Current account balance	Percent of GDP	-29.024	-22.869
Myanmar	Current account balance	Percent of GDP	1.484	-1.803
Nepal	Current account balance	Percent of GDP	4.2	1
Pakistan	Current account balance	Percent of GDP	-5.135	-4.815
Papua New Guinea	Current account balance	Percent of GDP	-6.7	-4.7
Philippines	Current account balance	Percent of GDP	3.194	1.176
Samoa	Current account balance	Percent of GDP	-2.1	-5.2
Solomon Islands	Current account balance	Percent of GDP	-11.1	-18.2
Sri Lanka	Current account balance	Percent of GDP	-1.157	-1.314
Thailand	Current account balance	Percent of GDP	4.857	2.732
Timor-Leste, Dem. Rep. of	Current account balance	Percent of GDP	66.248	49.351
Tonga	Current account balance	Percent of GDP	-8.799	-8.679
Vanuatu	Current account balance	Percent of GDP	-5.3	-4.8
Vietnam	Current account balance	Percent of GDP	-9.663	-9.442
International Monetary Fund, World Economic Outlook Database, October 2009

Global Recovery Under Way but Likely to Be Slow, IMF

IMF Survey online

• Global activity now on the rise again, expected to reach 3 percent next year
• Rebound driven mainly by China, India
• Restoring financial sector health, continued macro policy support remain priorities

After a deep recession, global economic growth has turned positive, driven by wide-ranging, coordinated public intervention that has supported demand and reduced uncertainty and systemic risk in financial markets, according to the IMF’s latest report on the global economy.

The recovery is expected to be slow, as financial systems remain impaired and support from public policies will gradually have to be withdrawn. Households in economies that suffered asset price busts will continue to rebuild savings while struggling with high unemployment, according to the October World Economic Outlook(WEO), released on October 1.

“The recovery has started. Financial markets are healing,” said IMF Chief Economist Olivier Blanchard. “In most countries, growth will be positive for the rest of the year, as well as in 2010,” But he stressed that, to sustain the recovery, private consumption and investment will have to strengthen as high public spending and large fiscal deficits are unwound.

“The current numbers should not fool governments into thinking that the crisis is over,” he warned at a press conference. He urged countries around the world to coordinate policies to achieve a global rebalancing and sustain the recovery.

The report was released ahead of the IMF-World Bank Annual Meetings being held in Istanbul, Turkey.

Projected growth numbers

Key WEO projections include:

• World growth. After contracting by about 1 percent in 2009, global activity is forecast to expand by about 3 percent in 2010 (see table).

• Advanced economies are projected to expand sluggishly through much of 2010. Average annual growth in 2010 will be only modestly positive at about 1¼, following a contraction of 3½ percent during 2009.

• Emerging and developing economies. Real GDP growth is forecast to reach 5 percent in 2010, up from 1 ¾ percent in 2009. The rebound is driven by China, India, and a number of other emerging Asian countries. Economies in Africa and the Middle East are also expected to post solid growth of close to 4 percent, helped by recovering commodity prices.

Helpful steps

The pace of recovery is slow, and activity remains far below precrisis levels. The pickup is being led by a rebound in manufacturing and a turn in the inventory cycle, and there are some signs of gradually stabilizing retail sales, returning consumer confidence, and firmer housing markets. As prospects have improved, commodity prices have staged a comeback from lows reached earlier this year, and world trade is beginning to pick up.

The triggers for this rebound are strong public policies across advanced and many emerging economies that have supported demand and all but eliminated fears of a global depression. These fears contributed to the steepest drop in global activity and trade since World War II. Central banks reacted quickly with exceptionally large interest rate cuts as well as unconventional measures to inject liquidity and sustain credit. Governments launched major fiscal stimulus programs, while supporting banks with guarantees and capital injections.

Together, these measures reduced uncertainty and increased confidence, helping to improve financial conditions. This was seen in strong rallies across many markets and a rebound in international capital flows. However, the environment remains very challenging for lower-tier borrowers. More generally, as emphasized in the October 2009 Global Financial Stability Report(GFSR), the risk of a reversal is a significant market concern, and a number of financial stress indicators remain elevated.

Risks to recovery

The key policy requirements remain restoring financial sector health while maintaining supportive macroeconomic policies until the recovery is on a firm footing. However, policymakers need to begin preparing for an orderly unwinding of extraordinary levels of public intervention.

The key short-term risk is that the policy forces driving the current rebound will gradually lose strength, and the real and financial forces—although slowly building—will remain weak, as financial sectors have not yet been restored to health. Thus, premature exit from supportive policies must be avoided.

On the financial front, a concern—mainly for the major advanced economies—is that continued public skepticism toward perceived bailouts for the very firms considered responsible for the crisis undercuts public support for financial restructuring. This could pave the way for a prolonged period of stagnation, according to the WEO.

Beyond 2010

Sustaining healthy growth over the medium run will depend critically on addressing the supply disruptions generated by the crisis and rebalancing the global pattern of demand.

To complement supply-side efforts, there must also be adjustments in the pattern of global demand. Specifically, many economies that have followed export-led growth strategies and have run current account surpluses will need to rely more on domestic demand and imports. This will help offset subdued domestic demand in economies that have typically run current account deficits and have experienced asset price (stock or housing) busts, including the United States, United Kingdom, parts of the euro area, and many emerging European economies.

To accommodate demand-side shifts, there will need to be changes on the supply side. This will require actions on many fronts, including measures to repair financial systems, improve corporate governance and financial intermediation, support public investment, and reform social safety nets to lower precautionary saving.

State Bank of Pakistan permits micro-finance banks to provide mortgage loans

ARACHI — Starting this month, the State Bank of Pakistan (SBP) will permit Micro-Finance Banks (MFBs) to provide mortgage loans to individuals, SBP chief spokesman Syed Wasimuddin said on August 30.

Micro-finance refers to the provision of financial services to low-income consumers and the self-employed including credit, savings, insurance, and fund transfers.

“MFBs now can offer mortgages of up to US$6000 to individual borrowers, particularly in remote areas in Pakistan where commercial banks do not [normally] provide credit,” Wasimuddin said. The SBP also raised the micro-credit limit to $1800 per borrower from the earlier limit of $400 per person.

Established in Pakistan in 2002, MFBs were intended to achieve UN Millennium Development Goals aimed at alleviating poverty through socio-economic development.

“The MFBs requested that SBP raise the lending limit and allow them to offer mortgage loans… to extend the outreach of banks,” Kashf Bank CEO Roshaneh Zafar said. Kashf is one of nine banks offering micro-loans. They want to reach the 10 million households identified by the government and donor agencies as those who can most benefit from micro-finance support.

“We need $12 billion to reach these people,” said First Micro-Finance Bank CEO Hussain Tejani. According to him, about one million people have benefited from existing micro-finance services over the past seven years.

The Pakistani government, World Bank, Asian Development Bank and non-government organizations (NGOs) are all supporting MFBs to reduce poverty and promote socio-economic development, he added.

DATA SNAP: US 2Q GDP Falls Less Than Earlier Estimated

DATA SNAP: US 2Q GDP Falls Less Than Earlier Estimated

===================================================================
Gross Domestic Product       2Q      2Q      1Q  ! Consensus:    !
Overall GDP Growth        -0.7%   -1.0%   -6.4%  !        -1.2%  !
PCE Price Index           +1.4%   +1.3%   -1.5%  ! Actual:       !
                                                 !        -0.7%  !
=================================================================== 

WASHINGTON -(Dow Jones)- U.S. economic output last spring fell less than than previously estimated while inflation gauges remained benign.

Gross domestic product decreased at a 0.7% annual rate from April through June, the Commerce Department said Wednesday, revising its earlier estimated 1.0% drop because business spending in the quarter wasn't as weak as initially thought.

The new estimate was released on the last day of the third quarter, a period analysts think GDP grew, ending a year of contraction in the worst recession since World War II. The first estimate of third-quarter GDP is due out Oct. 29. Economists think the economy expanded modestly July through September; RBS Greenwich Capital Markets this week released an estimate of 2.5% to 3% growth.

The 0.7% decline in GDP during the second quarter was softer than in the darkest days of the slump, when GDP plunged 5.4% in fourth-quarter 2008 and 6.4% in first-quarter 2009. Wall Street had expected the Commerce Department would revise its initial projections for second-quarter GDP downward slightly. Economists surveyed by Dow Jones Newswires forecast a 1.2% decline.

GDP is a measure of all goods and services produced in the economy. The biggest component of GDP - consumer spending - decreased 0.9%, compared to the previously estimated 1.0% drop and the first quarter's 0.6% decrease.

The GDP component that includes spending on housing decreased 23.3%, compared to the previously estimated 22.8% tumble and the first quarter's 38.2% drop.

Internationally, U.S. exports fell by 4.1% instead of 5.0% as earlier reported. Imports decreased 14.7%; earlier, the government said imports fell 15.1%.

Federal government spending rose 11.4%, revised from an earlier estimated 11.0% jump. State and local government outlays increased 3.9%.

Real final sales of domestic product increased 0.7%, beating the earlier estimated 0.4% increase. First-quarter sales fell 4.1%. Real final sales is GDP minus the change in private inventories.

Corporate profits after taxes were revised downward. After-tax earnings rose 5.6% to $1.031 trillion in April through June from the first quarter, the report showed. Earlier, Commerce had estimated a 7.5% increase. Profits in the first quarter surged 16.6%. Year over year, profits were down 19.2% since the second quarter of 2008.

U.S. business spending fell by 9.6%, revised up from a previously reported 10.9% decline. Investment in structures decreased 17.3%. Equipment and software spending decreased 4.9%. Commerce earlier estimated equipment and software spending had fallen 8.4%.

Wednesday's report showed gauges measuring second-quarter price inflation were subdued.

The government's price index for personal consumption increased 1.4% in the second quarter, compared to the previously estimated 1.3% climb and the first quarter's 1.5% fall.

The PCE price gauge excluding food and energy increased an unrevised 2.0% in the second quarter, compared to the first quarter's 1.1% increase.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased an unrevised 0.5% in the second quarter, compared to the first quarter's 1.4% dip.

The chain-weighted GDP price index as expected posted no increase the second quarter. The chain-weighted GDP price index rose 1.9% in the first quarter.

Kerry-Lugar Bill: still seeking control over Pakistan

Kerry Lugar Bill has now been presented and it certainly moves away from the ridiculous Howard Berman Bill that was presented to the House of Representatives. However, once again, we are seeing the doublespeak so aptly describes by fellow columnist Anjum Niaz. At the end of the day, what may emerge in the Congressional consensus is a mix of the two bills, and the final shape will depend on how effective the Indian lobby has been and how critical the US regards our national submission to Indian interests. Be that as it may, the Kerry Lugar Bill (KLB) itself is problematic, even though it appears angelic compared to the Berman Bill – although the amounts and time lines are similar - $1.5 billion per year authorised for five years and a similar amount advocated for the following five years! The KLB delinks security or military assistance from non-military assistance but has conditionalities attached to both. In terms of security, the assistance is on a year-by-year basis, and the US president has to certify that Pakistan's security forces – that is the military which effectively means the army – are making concerted efforts to prevent Al Qaeda and "other terrorist groups" from operating in Pakistani territory! Given how even the loss of over a thousand security personnel has failed to convince the US that our military is doing its best under trying circumstances, the US continues to put forward the mantra of "do more", such certification would put our security forces under US pressure and "control" for a decade at least. And for what? For weapons systems that we have done without adequately for many decades.

As for getting US training in counter terrorism, that is a laugh given how inadequate the US itself has proven to be – whether it was Vietnam, Latin America, Iraq or Afghanistan. There is also the required certification that the military is preventing Taliban sanctuaries in Pakistan from where attacks against Afghanistan can be launched – as if the whole burden on preventing cross-border movement and attacks is the responsibility of the Pakistan army, not of the NATO forces or Afghan military! Once again, the US continues to focus on a military-centric approach and has a punitive policy towards the Pakistan military.The latter is reflected also in another requirement relating to security assistance: the US president has to certify that our security forces are not interfering in the political and judicial processes of Pakistan. While all Pakistanis wish to see this, is it the place of the US to dictate this as a conditionality? What has this got to do with military aid and fighting "terrorism"? To add further insult to the state of Pakistan, the US secretary of state, after consulting the secretary of defence and the director of national intelligence will also be submitting to Congress an annual report on the "progress" of Pakistan's security forces. The "progress" is not defined categorically so it could include demands for revelations of our nuclear assets locations, security systems and so on also.

Is our military so desperate for US weapons that we will compromise our nuclear assets? Already there is concern over the "sensitive" briefing allegedly given to US and some European diplomats relating to our nuclear assets. How far will we go just for dollars and some weapons systems that we do not really need? And what if "progress" also refers to cuts in our nuclear weapons' spending – something that the Zardari government has already begun to time "coincidentally" with his US visit, although some of us had written about this danger many months earlier!Then there is a very ominous phrase relating to the presidential evaluation and that is a reference to the roles of "Pakistan local, regional and national institutions". Does regional here offer an indirect intrusion of India somewhere or does it merely mean provincial institutions – and which institutions?Even with non-security or civilian assistance, there are conditionalities which are highly intrusive and relate to democracy, independent judiciary, rule of law and so on. All laudable, but why should we need US supervision or intervention financially on these counts? After all, on these issues, it is not money that is needed but political commitment and internal reforms which the senior judiciary has already initiated. Incidentally, on one count the US has understood the Pakistani penchant for bowing before dollars: the KLB also provides a regular $5 million for the US ambassador to Pakistan to provide "critical need development or humanitarian assistance" – an open-ended provision for buying loyalties and providing the US ambassador in Islamabad with more interventionist powers within Pakistan's domestic polity. As for the democracy agenda, what happens if the Pakistani people elect a group or party that is anathema to the US and its interests? Will they do with our democracy what they did to Allende and Chile and what they are doing to Hamas? As for rule of law, if the US was seriously interested in this, it would come clean on the "Disappeared People" issue and close Guantanamo Bay.

Ironically, Kerry while introducing the Bill, kept referring to the US positive experience during the earthquake when the US provided humanitarian assistance. But he has forgotten that it took many critiques in the Pakistani press for the NATO transport planes and helicopters present in Afghanistan to be galvanised into playing a humanitarian role – while resource-limited Cuba and our friend Turkey gave immediately and without any publicity-seeking dramas. The point that needs to be considered is: what are the long term costs of the US assistance to Pakistan and can we do without it? Certainly, if our leadership tightened its belt, cut out its foreign trips and perks and privileges, and actually governed effectively, our resources could be generated from within. Let the parliamentarians, most of who are economically prosperous, refuse to take their bloated pay and perks packages and redirect them towards education and health in their areas. Let the wheat and sugar mafias and smugglers be apprehended and so on. And let the military continue to rely on its indigenous weapons systems and nuclear deterrence. As for fighting terrorism and extremism, the military is only a last option with tremendous negative long term fallout – especially as long as we are seen to be doing US bidding or acting under US pressure.

We now face a threat not only from the militant extremists from within us, but also from the US. Yes, the writ of the state has to be asserted, but there has to be a political road map and a holistic approach not the military being sent in to fight in a political vacuum – simply because the US and its many apologists in Pakistan and in foreign-funded NGOs abroad, have decreed so. The US leadership with its multiple histrionics, beginning with Obama, has made its negative Pakistan agenda clear: it is eventually seeking control of our nuclear assets and we are playing into their hands. On the one hand, the militants are threatening the fabric of Pakistani society and on the other hand the US is creating violent dissensions within Pakistan not only amongst civil society but also between the military and civilian structures. It knows that unless it destroys the military institution, it cannot achieve its goal of targeting out nuclear assets. So, it is demanding a role for the military which will undermine its morale, bring it into conflict with its own people and create further unrest.

Bangladesh, the various military actions in Balochistan and the murder of Akbar Bugti should be important reminders of the costs of military operations against one's own people. We have terrorist courts and paramilitary forces – isolate the militants by providing security and justice for the locals and bringing the terrorists to face the law – not simply creating more IDPs. After all, how many will we kill through military power? Militaries are never a solution to political problems and where the civilian government has lost its writ it should declare an emergency and move to re-establish it. Of course, if our leaders actually took time off from their foreign forays to visit their own troubled areas, it could offer solace and support to those caught in the military-militant crossfire. As for the US agenda, what part is still not clear to our rulers?