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Crony State Capitalism Feb29th, 2012

Recently Iran agreed to export 80,000 barrels crude per day to Pakistan. Pakistanrequested a loan of $500 Million from Iran for the pipeline to be built. Iran refused butagreed lend $250 million. This loan of $250 million doesnt have the interest rate or

the loan repayment length decided yet. The fun does end here. Russia is pressuringPakistan to award a $1.2 Billion Oil Pipeline no-bid contract to Gazprom, a Russianfirm that has used its economic clout for political gains in Europe

Lets try to understand whats happening here.

1. Iran is going to loan $250 Million for IP pipeline to Pakistan

2. Russia wants $1.2 Billion to build the pipeline for Pakistan

3. Pakistan will import $292 million of crude from Iran every month.

So what is Pakistan giving in return? The answer is I dont know. And heres why Isay this

1. Pakistan owes a total of $130 billion, local and foreign debt combined.

2. Pakistan has a trade deficit of about $1.5+ Billion per month i.e. its importing

66+% more than its exporting

3. Repayment of $2.3 billion (1.5 billion SDR) to the IMF is due this year. This will

put immense pressure on Rupee in the Forex Market.

So how do we solve the huge debt, the huge trade imbalance and rupee depreciation?Simple! Take on more debt, use that debt to build infrastructure to boost moreimports and then reduce the price of imports by subsidies financed by moneyprinting! The general public is completely complacent in these decisions. The publicprotested the rise in oil prices. The public demanded and welcomed the recentsubsidies. And I can only assume the response from the public to this Iran Pakistan Oilpipeline is going to be encouraging. Never mind the consequence of influence of

these both countries, Iran and Russia, will play in the internal affairs of Pakistan whenthe debt bill comes due. There is a saying When you borrow money from theRussians, you are lending your soul. For Pakistan, there will be no room left for soul-searching. That too would have been collateralized.

Last year I read a book by Michael Lewis Boomerang Travels in the New ThirdWorld. The author tried to understand the mindset of citizens of different countries.What surprised me was the stark resemblance between Greece and Pakistan (withoutthe law & order situation). I will quote a paragraph from his book

"What happened in Greece when the Greek people were left alone in a dark

room with a pile of money what they really wanted to do was bloat thestate. Because they had this very perverted relationship to their owngovernment it was a kind of pinata filled with goodies that everybody got acrack at."

Fact of the matter is the only reason why there are riots in Greece before Pakistan isbecause Greece doesnt control its own local currency. Greece cannot print money

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and inflate away its debt, unlike Pakistan. If Pakistan hadnt been bailed out by theIMF in 2008, you would have seen the greek scenes on the streets of Karachi andLahore.

Pakistan is considered to be the worlds 6th largest population, representing about 3%of the worlds population. Its share of GDP in the World Economy 0.25%. To put it insimple terms, Pakistan is consuming about 10 times more than it is producing. Sowhos providing the rest? The International Economy. Pakistan has truly given a newmeaning to the word A Welfare State

Asif Ameer trades equities, bonds and derivatives in the International Capital Markets. He canbe reached via Twitter @AsifAmeer_AP