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Fiscal Implosion In Pakistan Economy And Impact On Defence Spending

Lt Gen K J Singh (Retd) Fri, 03 Mar 2023   |  Reading Time: 4 minutes

Pakistan has landed itself in fiscal maelstrom due to its profligate rentier mindset. The country’s economy is on ventilator and is literally gasping for external bail-outs. The talks with IMF remain inconclusive and only lifeline has been China announcing $700 million loan to redress immediate forex emergency. The country’s foreign currency reserves had dipped to all-time low of $3.2 billion, barely enough to cover three weeks of imports. Chinese loans will boost forex reserves by 20%. Pakistan’s forex funds are derived from foreign loans and inflow of remittances as country’s exports are rather insignificant. Manufacturing is dependent in most cases on imported raw materials creating vicious cycle of dependency on forex.

Pakistan lulled by her geo-strategic location had forged alliances with CENTO/SEATO and iron brother format ties with China. It has also ascribed to herself larger than life role of guardian of faith, trying to be leader of OIC. It will be appropriate to recall, quest for Islamic bomb, where ZA Bhutto stated that, “We shall eat grass but make nuclear bomb.” The belief that Ummah (brotherhood) will ultimately bail out Awaam (populace) lies in tatters as Saudi Arabia and UAE want IMF process to be concluded first to obviate profligate spending. ISI also set up terrorist assembly lines to further US agenda in Afghanistan.  Pak blatantly milked security funding and managed to double time USA by concurrently playing along Taliban. The dollar pipeline got shut off with withdrawal of US troops from Afghanistan.

The major share of the contracts and benefits were cornered by military establishment through their foundations like Fauji, Shaheen, Baharia, FWO and SCO. The details of this mega empire are chronicled by noted Pakistani expert, Ayesha Siddiqa in her book, ‘Crossed Swords’. Nawaz Sharif’s plan of adding geo-economic heft by so called game changer, CPEC has met similar fate due to inefficiency and corruption. Lt Gen Asim Bajwa and Army affiliated entities, once again cornered their share in CPEC making it a failing project. Oligarchic mind set transcends beyond Khaki into civilian domain. As per Ishrat Hussain, in his widely acclaimed book, ‘The Economy of an Elitist State’, 1% population constitute the elitist oligarchy. The resultant inequality has reduced very large segments to abject poverty and penury. The recent floods in 2022 and widespread destruction in its wake have added to fiscal distress.

China accounts for the largest share i.e., 30% of total debt, which is more than twice combined borrowings from World Bank and Asian Development Bank. It is approximately three times larger than loans advanced by IMF. Total debt had reached 77.8% of GDP in 2022. Pakistan as per Topline Securities in a report in Wall Street Journal is required to repay $73 billion by 2025. IMF has been negotiating a rescue package amounting to $6.5 billion with initial tranche of $1.1 billion. The significance of these rather tough negotiations by IMF is that they will trigger unlocking of other promised packages like $7 billion by Saudi Arabia and UAE. Iran has also promised to boost bilateral trade from $ 2 billion to $5 billion by revamping border markets. Uzbekistan has also promised similar boost in border trade.

IMF negotiations have remained inconclusive as IMF would like to ensure that its funds do not get diverted to pay the largest creditor, China and are invested in economic revival. IMF diktat stipulates paring subsidies and limiting these to only needy sections of populace. They also want higher taxation on ultra-rich and bringing privileged sections in taxation net. Pak tops the chart with 25 projects under IMF scrutiny. Murtaza Syed, former Deputy Governor of State Bank of Pakistan, laconically confessed that, “In fact, we are the IMF’s most loyal customer.” Desperation is such that radicals are making outlandish suggestions of monetising nuclear know-how.

While Pakistan looks for external largesse, it has to revisit the age-old wisdom of – ‘charity begins at home’. Objective advice to Pakistanis is, make no mistake, it is an implosion, triggered by internal catalysts like predatory corruption, bordering on organised plunder and populist freebie culture, breeding sense of entitlement of subsidies, particularly in petroleum prices and electricity tariffs. Imran Khan, who currently is topping popularity charts would have to take large part of blame for mismanagement besides burning bridges with traditional allies like USA, Saudi Arabia and UAE. Unlike India, Pakistan blew up its chances of cheap petrochemical imports from Russia by supplying munitions to Ukraine. This was self-serving initiative anchored by Gen Qamar Bajwa to garner US support.

Pak Defence Minister, Khawaja Asif in an event in Sialkot confessed that country has already defaulted on financial commitments and is already bankrupt. He blamed establishment, bureaucracy and politicians for this mess. The desperation is such that rabid elements have been touting outlandish ideas like selling nuclear know-how. The runway inflation has touched nearly 40% with riot like conditions for basic commodities like wheat flour (atta).  Pushed by IMF, Shahbaz Sharif government has launched major austerity drive. A slew of new taxes being dubbed as mini-budget have been announced to raise PKR 170 billion.

He also opined that IMF or any other external agency cannot redress the situation.  He unequivocally stated that solution lies within.  He made a startling revelation that one fourth of debt can be paid off, if only two golf clubs built on government land are sold off. Former Army Chief, Gen Bajwa and now Gen Asim Munir have taken the mantle of loan negotiation without much traction.  Pak Army budget has traditionally been pegged at 2.8% of GDP, which was pared down to 2.2%. In contrast, India has been limiting her spending to around 2% and in current budget it is projected at 1.87% of GDP. Pak has earmarked 17.5% of total government expenditure, which is an increase of 11.16% from last year. Comparatively, Indian spending is only 13.18%.  There has been considerable opacity in defence spending particularly with regards to allocations made to ISI and ISPR. Pak has treated terrorists as strategic assets and has been funding them through counterfeit and drug economy. Both have come under increasing scrutiny including international agencies like FATF.

The moot question is how will this impact defence spending and deep state. Some demonstrative cuts like disposing off diplomatic properties is taking place. However, deep state is unlikely to jettison its dalliance with terrorism. It may temporarily pause but Pakistan is likely to remain invested in core projects like K2 cell of ISI. The deep state is already voicing its demands for additional funds and stated that funds are not even adequate to feed troops. It will be pragmatic to remain vigilant with regard to desperate measures that may be adopted by Pakistan. While it may give us some temporary comfort due to fiscal distress but in the long run, it will be pragmatic if nuclear armed Pakistan is put on leashed IMF monitored economic recovery.


Author
Lt Gen KJ Singh, PVSM, AVSM & Bar, is former Western Army Commander and is currently the State Information Commissioner. He holds Maharaja Ranjit Singh Chair in Panjab University. He has had a stint as Advisor to CM and is a member of UT Advisory Council.

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POST COMMENTS (2)

ASHOK IYER

Mar 13, 2023
Sir, respectfully, either Pakistan, currently, has no nuclear weapons or it doesn’t have direct access to such weapons. If this was not so then, the IMF would have pumped in billions of dollars into Pakistan a long time ago. Yes, they have the nuclear knowhow but, given their history and reputation, one can safely assume that they have already passed on this knowhow to various interested parties and the monetary compensation, as usual, has ended in the private pockets of the Establishment. Regardless of the defense budget, the Pakistani Military Establishment will continue maintaining and funding terrorists through a combination of narco money and funds raised from Islamic radicals in the international community. To counter this, India should increase its defense budget by 0.1% or 0.2% and use those funds to support Baloch and Pashtun freedom fighters. At the same time, it would be a good idea to recognize Balochistan as an independent country and also openly support the Afghan refusal to accept the Durand line as the de facto border between Afghanistan and Pakistan. The Afghan claim is legitimate as the Durand Line agreement expired in 1993 so, we should offer complete support to the Afghans in recognizing Khyber Pakhtunkhwa as an integral part of Afghanistan. Similarly, by recognizing Balochistan as an independent country, we can even open an embassy for them in India. I see nothing wrong with this as China has been doing similar stuff for a long time like claiming the entire South China Sea, Taiwan, Arunachal Pradesh etc. as its territory. This will definitely escalate into a major civil war in Pakistan and will cause serious impediments to China’s access to the Gwadar port and its BRI will face serious problems. There are many benefits to India from such an act. In the first place, on account of the brutal civil war inside Pakistan, the Military establishment will have neither the resources (both financial and human) nor the motivation to target India. Secondly, our endeavour to reclaim POK will be made much easier. Thirdly, any threat of China attacking us from our western front through Pakistan will be minimized. Fourthly, if we get hold of POK, we can use it as a base to support Xinjiang freedom fighters in their struggle against China. Fifthly, with China under pressure on both its Eastern and Western fronts, India can seriously start working on reclaiming Tibet and neighbouring areas from the clutches of China.

Kalidan Singh

Mar 04, 2023
It is very much in our culture to help a snake until it has bitten us. Such sacrifice is considered noble. Hence, there is a growing chorus of voices in India that we should help Pakistan now. Even though most Indians are aware that Pakistan is a disgrace, will reject help (or steal all of it), and will mock India, and renew its hatred, the advocacy of the kind 'we should help Pakistan' has currency in elite, educated social circles. With this note, I aim to caution. Even today, Pakistan is sending in insurgents, and is sending drones, and dreams of destroying India (and their minions in India, many of them educated, wish for the same thing). Pakistan went from hating India, to now asking: 'why is India giving money to Sri Lanka and Bangladesh and not to us.' They see no irony in this, nor shame, nor a sense of 'we did this to ourselves.' Pakistan feels entitled to anything it thinks is theirs, and predicated on an intensely silly notion that they are strong and fearsome. I aim to caution. I see that some of their talking heads, like Mr. Qamar Cheema (who claims he has some doctorate from some Pakistani U) consistently: a. Take the tone that 'how can India be doing all these (great things), how dare you, what do you have to say for yourself?' He places Indian talking heads (including the Major) on a defensive footing as if an explanation is owed to him. b. Maintain that every problem of incivility and criminality in Pakistan is directly caused by India (and he never bears the burden of owning that they lost all wars, that they have sent insurgents and terrorists, and that they harbor terrorists). Talking to Pakistan is a waste of time. Indulging the likes of Qamar Cheema, who does not seem that intelligent by is definitely extremely subversive and obviously devious, validates their sense of equivalence (i.e., their tone that if India is advancing and they are not, there is something wrong, and that Indians must help them out now and make it all happen for them). In this regard, I aim to caution against the intense hubris and self-aggrandizing that is characteristic of us. While I encourage every Indian intending to help Pakistan to sell their possessions and head to Pakistan with their money (and take their fellows with them), I hope we decide to not engage in any way with Pakistan. Not until anything they do or don't do, but until we have regained what we have lost. When we are ready. I aim to caution. We are a nation that welcomed all invaders, and quickly joined their ranks. We cannot afford to do this with Pakistan.

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