Prime Minister Benazir Bhutto's government has all but ceased to exist. Her bitter disputes with the Pakistan Supreme Court, the president, her own family, and army officials are paralyzing decision-making. Unemployment, civil strife, and corruption are soaring. The debt-plagued economy is at risk of tumbling into a Mexican-style default.
The stage could thus be set for the next international bailout, and it might be more difficult than Mexico's. The International Monetary Fund, World Bank, and commercial banks in early October were scrambling to keep the government from defaulting on its $25 billion debt. But U.S. credit agencies could be on the verge of downgrading Pakistan's rating, and that would torpedo its ability to borrow.
The reason a Pakistan bailout could be trickier than Mexico's is that a central government might exist in name only, forcing the IMF and World Bank to administer parts of Pakistan's economy.
COMING HOME. A series of developments show how close Pakistan is to chaos. In one of the most startling, Bhutto's own brother, Murtaza Bhutto, was gunned down and killed by police on Sept. 20 in Sind Province. He had returned from exile in Syria and Libya where he had organized a terrorist group. But he turned his anger against his sister, and the police who shot him are controlled by her political party.
Immediately after the killing, President Farooq A. Leghari wrote letters to the Supreme Court complaining about corruption and the overall performance of Bhutto's government. That deepened an already severe constitutional crisis over who controls appointments to the courts. "Enemies of the Bhutto family are busy conspiring against remaining members of the Bhutto family," Bhutto said on Sept. 23.
Against that backdrop, a Pakistani delegation was in Washington in the early days of October negotiating with IMF officials. Bhutto was expected to join the negotiations. Her government is desperately seeking a $3 billion, three-year loan as well as disbursement of the remaining $400 million of a $600 million IMF loan, withheld because Pakistan hasn't made promised reforms. "The survival of Benazir Bhutto's government might depend on negotiations with the IMF," a report from British think tank Oxford Analytica says. The loan disbursement is a key seal of approval that would open the gates for further private lending.
Pakistan is also negotiating a $300 million loan from Citibank and others. It needs the fresh cash to make $400 million in payments in the last quarter of this year. Standard & Poor's Corp. and Moody's Investors Service Inc. are hinting that if the IMF negotiations don't go well, they might act to downgrade. "Countries in the B-plus category are inherently volatile," says Guido Cipriani, director of sovereign ratings for S&P. "Information can come to light in a very short period of time."
Despite Bhutto's effort at spin control, her economy is clearly in a precarious state, with inflation galloping along at a rate of at least 15% a year. The stock market is at a three-year low, and unemployment is growing due to the closure of half of Pakistan's 300 textile mills. Energy policy, once regarded as a success, has gone sour because demand for power has not grown as fast as projected.
The most damaging developments concern Bhutto and her husband, Asif Zardari. Transparency International, a German foundation, has recently ranked her government as the second most corrupt in the world, after Nigeria's. British newspapers say that Bhutto and her husband have acquired a 300-acre estate near London. Meanwhile, Pakistani cricket-hero-turned-politician Imran Khan has produced accounts showing Bhutto's husband made $500,000 worth of credit-card purchases through a bank in Switzerland. Bhutto hasn't responded to the charges.
With Bhutto's grip on power under attack from all directions, it may be just a question of time before Pakistan collapses. That wouldn't send the same shock waves through world markets that Mexico's crisis did because Pakistan is not on the doorstep of U.S. financial markets. Instead, the most important fallout could be over geopolitical issues such as Pakistan's nuclear standoff with India. And if law and order breaks down further, battles could intensify among Shiite and Sunni Moslems and myriad other groups. No matter where it happens, a government in meltdown is not a pretty sight.