A strong economy requires a cutting edge financial system that inspires confidence and efficiently provides a wide range of financial services to households and businesses alike; and capital markets are an essential component of a strong financial system. A diversified financial system is conducive to both financial stability and efficient resource allocation in support of medium-term economic growth. These conditions have been absent from Pakistan for a long time driving the country repeatedly into the arms of the IMF. The embrace has not been comfortable. Successive governments thought it best to walk out of the embrace tempting though it may have been. The present government has also done the same. The handling of Pakistans economy has been such that it is confronted with large fiscal and current account deficits, high inflation, low reserves, weak currency, and a leadership that lacks vision and governance abilities. We tend to look at others to pull our chestnuts out of the fire. If the Americans are unable to offer a few crumbs from their table, we look to Saudi Arabia or China or other external friends for bailing us out. Self-reliance is out. It is true that Pakistani exports to the US will be most severely hit due to the perceived failure of this country to fight Americas war on terror. Since the US and the EU are major destinations of our exports, the existing huge trust deficit will result in diminished imports from Pakistan. Pakistan exports about 54 percent of the manufactured and semi-manufactured goods to the US and the EU. No efforts have been launched to explore new market outlets. If we are interested in trade and not aid, it is incumbent on the Ministry of Commerce and the departments under its control, as well as the Foreign Office, to shake up its slumbering bureaucracy and give them specific targets to achieve. Given the will, Pakistan can well make up for the loss it may suffer due to the American arm-twisting techniques. In the now aborted Standby Arrangement, the IMF had prescribed a number of conditions for Pakistan to comply. Indeed, we believe that the IMF conditions will reduce the capacity to engineer a solution to the problems of inflation and falling foreign currency reserves without increasing the unemployed buffer stock, said Jesus Felipe, William Mitchell and L. Randall Wray, authors of the ADBs report on Pakistans Economic Crisis. While the IMF statement suggested it is keenly aware of the need to deploy a 'socially acceptable solution, we consider that a policy strategy based on fiscal austerity will create unacceptable levels of socio-economic hardship in Pakistan, the report said. There existed two key objectives of the IMF loan, which are: (i). restoration of macroeconomic stability and confidence through a tightening of macroeconomic policies; and (ii). ensure social stability and adequate support for the poor and vulnerable in Pakistan. Under the loan terms, the external balance was to be targeted via a fiscal tightening from a deficit of 7.4 percent of GDP for the fiscal year 2007-2008, to 4.2 percent in 2008-2009, and then 3.3 percent in 2009-2010. The tightening was to be achieved by phasing out energy subsidies, better prioritising development spending and implementing strong tax policy and administration measures, interest rate hike to contain inflation, offload central bank borrowings, and build reserves. According to the loan terms, social assistance was to be strengthened, but better targeted so that spending on the social safety net could be increased to 0.9 percent of GDP in 2008-09, an increase of 0.6 percentage point of GDP. As Pakistan found itself in dire straits in fiscal 2008-09, its negotiating team did not have specific instructions from the government to point out that the conditionalities of the Funds programme would not help bail out the countrys economy. It should have been pointed out that the fund is less than clear on: (i). the nature of currency sovereignty; (ii). the nature and financing of budget deficits; and (iii). the nature and financing of trade deficits. Although Pakistans problems are a result of misguided policies, it does not mean that the only solution available is to subject the economy to an austerity programme. In the words of Joseph Stiglitz, a renowned economist and former SVP of the World Bank, Stabilisation policy cannot be separated from growth policy. Failure to stabilise may hurt growth, but stabilisation, in the traditional sense of the term (price stability and fiscal adjustment), does not necessarily lead to economic growth. Many Pakistani economists believe that the IMF programme does not correctly portray the sources of inflation pressures, or the constraints on economic development. Pakistan faces high inflation and insufficient progress towards development, simply because of the lumpy security expenditure and failure to fully utilise domestic resources. In order to achieve sustainable development, it should mobilise domestic resources to improve incomes and reduce supply bottlenecks through expansion of domestic capabilities. Given substantial levels of redundant resources, it should have been obvious that Pakistans inflationary bias could not be a simple matter of excessive demand. Thus in appraising the inflationary impact, it is incorrect to presume that fiscal policy has been excessively expansionary. Using budget deficits as evidence of excessive expansionary policy is therefore erroneous, unless the deficits have pushed the economy beyond full capacity use of its resources. For this reason, fiscal restraint may not be the medicine that is required in a situation in which a country is actually living below its means - as indicated by idle or underutilised resources. The writer is a retired secretary of the Government of Pakistan. He belongs to the former Civil Service of Pakistan. Email: shakeelahmad941@hotmail.com