Islamabad: The avowal that "the economic situation in the country is bad" was made by Yahya Khan himself, on his return from the eastern wing where he had met Sheikh Mujibur Rahman. "I have inherited a bad economy which I am now going to pass on to Sheikh Mujib, the future prime minister of Pakistan."

Foreign exchange reserves have dwindled to a low point of about Rs800 million - not even enough to foot the import bill for three months. This situation is due to the diminishing flow of assistance mainly from western countries, a decline in export earnings and, in particular, a considerable drop in home remittances.

Constant rumours about a devaluation of the Pakistani rupee have contributed to the reluctance of Pakistanis abroad to send their earnings back home. To a lesser extent it is rooted in politics. The expected change of government, linked as it must be with the question of the future relationship between the two wings, as well as around the problem of nationalisation advocated by election winners Mujib and Zulfikar Ali Bhutto, has led to feelings of uncertainty. The same factors are also behind the reserve shown by the western Aid-to-Pakistan consortium in making pledges for the current fiscal year. Though some member countries have gone ahead on a bilateral basis the consortium as a body has yet to make its final decision. It is expected to meet in early March in Paris.

Meantime the foreign exchange dilemma has become so acute that the government has had to ask the IMF (International Monetary Fund) for a stand-by credit. Preliminary discussions have already been held and arrangements will be finalised next month. One main difficulty in securing the credit is the IMF's insistence on a specific package of policies the fund would like Pakistan to pursue in the fields of exchange, monetary and fiscal fieldsÑincluding the devaluation of the rupee.

Though the World Bank has promised to help Pakistan overcome devaluation difficulties by granting special financial aid, Yahya Khan as head of a care-taker regime would prefer if possible to avoid substantial decisions which would commit the future civil government. Now, however, Mujib is understood to have asked the president not to land him with the stigma of devaluation. This heightens the possibility that Yahya Khan will accede to IMF pressure - the more readily as such a decision would facilitate the forthcoming negotiations with the consortium. Pakistan's economy, almost entirely bound to the bonus procedure, is anyway prepared for devaluation, though probably the only positive result would be a restoration of the country's monetary system. The effect normally aimed for in devaluing - increased exports - is unlikely to work, for in Pakistan the question of promoting exports is a problem of quality rather than of prices.

In addition, some sectors of Pakistan's industry are plagued by problems of quantity. A considerable shortage of raw cotton has forced some smaller textile mills to close down. Following an urgent appeal by the textile manufacturers association to ensure an adequate supply for the domestic industry, the government has urged the socialist countries not to buy cotton under barter agreements from Pakistan at least for the current season, switching instead to import of other commodities such as yarn.

New restrictions have been imposed on the import of non-essential items and a so-called cyclone surcharge has been levied on income tax paid by firms and companies as well as on individuals with an annual income of Rs 18,000 and over. These fiscal measures, which are expected to raise an additional Rs170 million revenue, also include an excise duty of one rupee per gallon of motor fuel, raising the price to Rs5 .

Whether this austerity programme will meet the shortage of foreign exchange and revenue remains to be seen. The State Bank of Pakistan at least is obviously sceptical and has not only imposed credit restrictions but issued no less than Rs720 million of new notes within a fortnight. This is likely to exert further inflationary pressure at a time when the cost of living shows daily sharp increases.

Under the circumstances both Mujib and Bhutto have begun not surprisingly to encourage their followers to have patience. Suggestions along these lines is in strong contrast with election promises - the question is how well the voters remember, and how much they will allow their leaders to forget.