PAKISTAN has little to cheer at the moment. Sanctions imposed after nuclear tests in late May have aggravated economic troubles that have been hanging over the country for some time. With foreign reserves of under $700 million and debts of $32,000 million, the country's economy is in a desperate state. The latest downgrade in its credit rating by Standard & Poor's was entirely predictable (see Pakistan).

Having failed to convince the IMF to release a $1,700 million relief package during recent talks in Washington, the government is now seeking to acquire loans from local industrialists and business tycoons, including Prime Minister Nawaz Sharif, to avoid total default on debt repayments.

Prospects of receiving any indigenous help look bleak as the local financiers have still not received a plausible explanation for the decision to freeze more than $11,000 million of foreign currency accounts. The government has already defaulted on repayments of loans to several banks and has failed to pay its dues to foreign and local companies since June. Trade has fallen, tax collection targets have been revised downwards and the inflows of foreign investment and remittances have come to a standstill.

A second round of talks with a visiting mission from the IMF and World Bank, scheduled for 16-24 October, is expected to yield few positive results, and the government appears to stand little chance of winning a reprieve on its debt service obligations unless it takes a much more radical approach to economic reforms.

'Sharif is the strongest prime minister we have had in years, but he has to make some tough decisions,' says a Western diplomat in Islamabad. 'International donor agencies have been shoving money down Pakistan's throat with the conditionalities of structural changes which have not been implemented. They have to take action now.'

But some help may be at hand from other quarters, through the $1,500 million Pakistan Fund launched by the Jeddah-based Islamic Development Bank (IDB). The IDB is putting $100 million up front for the five-year closed-end fund, and a further $100 million will be contributed by other Islamic institutions. It will be offered for subscription to banks dealing in Islamic products and to individual investors, especially overseas Pakistanis.

But these funds will come at a price. The IDB will buy and lease back assets including the Kot Addu power plant, National Refinery, Pak-Saudi Fertilizers and Pak-Arab Fertilisers. The collateral will also include remittances from Saudi Arabia and the UAE, Pakistan Telecommunications Company's earnings from calls and Pakistan International Airline's earnings from return tickets to Pakistan from the two Gulf countries. The State Bank of Pakistan (SBP), the central bank, will provide standing guarantees on remittances from overseas Pakistanis. The fund's proceeds will be lent to Pakistan a rate of interest of 5 per cent above six-month Libor, the highest ever offered to Pakistan. The Pakistan Fund may provide some money by the first quarter of 1999, but it will not solve long-term liquidity problems.

The government has been trying to raise money domestically, but with little success. A campaign to improve tax collection has fizzled out, and targets have been revised downwards to Rs 300,000 million ($5,881 million) from Rs 352,000 million ($7,024 million) set in the 1998/99 budget.

'I cannot correct the market. The way imports and production are faring, you cannot expect revenue collection according to the budgetary estimates,' says Moeenudin Khan, chairman of the Central Board of Revenue (CBR). 'The estimates have been revised downward and the IMF has been informed accordingly.'

Only 1.6 million of the 130 million Pakistanis pay tax. 'Unless we change our behaviour we cannot bring about a change,' says Khan. He points at corruption as being the main reason for the failure of CBR's restructuring. 'Corrupt people are the envy of this nation. The society is accepting corruption that was never accepted before. I am going to be a complete failure not because of lack of effort but the lack of structural changes.'

Privatisation has fared little better. Says Khawaja Mohammed Asif, chairman of the Privatisation Commission (PC): 'If the privatisation process is not completed in the next one to two years, debts are allowed to continue piling up and vested interests keep stripping state-owned companies of their assets, then an economic turnaround will not be possible.'

According to Asif, the PC can achieve good results in a short period of time if it is given a free hand and the government ensures that the process will not be politicised. 'You cannot get a better bargain anywhere in the world than Pakistan. The international investors know this and despite the current economic hardships there is still interest in Pakistani assets,' he says.

There are also potentially good deals to be struck in the infrastructure sector. Investors see opportunities in the development of ports and container terminals, but again the implementation of such projects leaves much to be desired. 'Port Qasim is a gold mine being turned into a sewer because of petty self interest,' says a leading Karachi businessman.

Several other projects proposed by local and international investors have also failed to make any progress due to political interference. A widely expressed view is that no one in Pakistan likes someone else to succeed. 'Everybody takes pot shots. This is a sign of a very small mind,' says a Western diplomat. 'They have to learn that if your neighbours are successful, you will also get opportunities to be prosperous.' However, this message does not appear to be getting through.