Stability in its immediate neighbourhood is in India’s best interest.
Pakistan’s economy is undoubtedly stuttering. Inflation has skyrocketed while employment levels have hit their nadir, with GDP growth noticeably decelerating. The fuel and food import-dependent country is left with precariously low foreign exchange reserves. For the entire current fiscal year, the Pakistani rupee has been crashing by the day, with no end to its decline in sight; with the annual debt servicing obligation being more than the federal government’s yearly revenues, the fifth most populated nation in the world now faces the grim prospect of a possible default in sovereign debt. The near total loss of the cotton crop in the unprecedented floods last summer has severely impacted the sizeable textile industry and halted the much needed export-revenue.
The manifestation of such ailments in the national macroeconomic parameters is extensive. Inadequacy of fuel, particularly the hydrocarbons, has caused citizens in cities as well as the vast countryside to cope without electricity for long parts of the day and night. Without adequate power-supply, mobile phone networks, factories and shopping malls are shutting down, and essential procedures and surgeries at hospitals are getting postponed. The 27.6% annual elevation in consumer prices so far is the highest in the last fifty years. It is expected to reach a 33% level by end March ’23. The rupee is down to 275 to a US dollar, compared to 184 at end of last March. The foreign exchange reserves at the beginning of February of about US $3 bn are barely enough to pay for three weeks of imports. With the federal government now imposing severe restrictions on the release of foreign exchange, the Karachi port stands cluttered with containers full of uncleared imported merchandise, both essential and otherwise.
Most of the 13 mn odd farmers in the disturbed province of Balochistan and adjoining Sindh (both of which were badly affected by last summer’s devastating monsoon flooding) are still reeling with little recovery from the damage to their homes, lands, agri-produce and livestock. Sizeable tracts of farms continue to remain soggy, and not-yet-fit to be sown with winter crops. With limited State support being offered and scant international relief coming in, the overall levels of economic activity remain visibly subdued.
The IMF’s recent stance to delay the disbursement of funds, out of a sanctioned structural adjustment loan of US$7bn, is only making matters worse. To release another $1bn, IMF officials are insistent upon the introduction of US$800 mn worth of new taxes, besides the already agreed measures of reducing the subsidies on fuel, electricity as well as letting the Pakistani rupee more fully float in the foreign exchange open market. For the government of Premier Shehbhaz Sharif, which is barely holding on to a majority, effecting more of such reforms is understandably politically difficult. Without the flow of multilateral funds resuming, the anticipated bilateral funding is held up. The current stand of Pakistan’s “all weather friends” China and Saudi Arabia, is also one of “wait and watch”.
THE FEW POSITIVES FOR PAK ECONOMY
Unlike most countries, Pakistan is well endowed with water. The Indus river and its five major tributaries, including the three eastern ones coming through India, irrigate vast tracts of agricultural land. The Indus Water Treaty of 1960, brokered by the World Bank, ensures Pakistan gets about 70% of the total water (130 million acre feet) and India, the remaining. The fertile lands of Pakistan’s Punjab province in particular, continue to be the granary of the nation. Sizeable quantities of quality cotton also get grown in the region, and the fairly well-developed dairying industry is also facilitated by the river basins and the fertile soil. Despite little direct budgetary support being extended to agriculture, the agricultural growth in recent years has been 4% per annum, while the resultant GDP increase has averaged about 3%.
Much like the Indian diaspora around the world, Pakistan too has a similar advantage. Remittances back home from its overseas residents remain sizeable and have been gradually growing. With its population at about one-sixth the size of India, its annual receipts have reached US $30 bn, and in per capita terms, the inflow into Pakistan has been higher than India’s. Over the years, Pakistan has been a recipient of sizeable multilateral development aid on concessional terms from the World Bank, Asian Development Fund and International Monetary Fund. Bilateral assistance from a host of western countries, especially the US, and later from Saudi Arabia and other Gulf emirates, has also been substantial. Of late, China has been its major benefactor. All such “civilian funding” has been in addition to the vast military aid the country has received over the decades. Such inflows have kept the foreign exchange reserves high, and provided its state managed rupee a degree of stability in value.
Another unintended benefit or a blessing in disguise that has accrued to Pakistan came from its own dismemberment in 1971, with East Pakistan becoming independent and emerging into the new nation of Bangladesh. While the loss was no doubt a major territorial-diminishing event, and a tremendous loss of face for its military and political leadership, it turned out to be of utility in managing its future fiscal and financial situation. The large population of erstwhile East Pakistan, with its relatively sparse natural resources, had in net terms been somewhat of a drag on its economy. Defending and administering a big part of the country—separated by over 1,500 km across India—was always expensive and difficult.
INDIA’S INTEREST IN RECOVERY OF PAK
A deteriorating economy, with persistently high inflation and low employment levels, will inevitably push back a large number of Pakistani citizens, particularly in rural areas, into poverty. Given its demographic profile of a younger population, and the lack of any worthwhile social security schemes in the country, the jobless youth remain prone to becoming restless and disruptive in actions. At its extreme, the consequent anarchy on a countrywide scale could pose a serious challenge to the maintenance of public law and order. As already being witnessed, the writ of the State hardly runs in Balochistan and in parts of the North, bordering the Taliban ruled Afghanistan.
Another resultant accentuation of the persisting economic crisis could be a sharp widening of disparities in income and wealth between the masses and the handful of ultra-rich families concentrated in the Sindh and Punjab in the North, as well as the entrenched military generals in Rawalpindi who have virtually been living off public funds. Growing disparity has the potential of fuelling the likely widespread unrest. While such a phenomenon might make some less perceptive Indians happy at first blush, it would be a myopic view of things.
In the long run, sustained economic hardship would compel the younger people of Pakistan to join the innumerable radical “madrasas” and religious groups, if only to make ends meet. Past experience clearly points to such centres being the primary feeding ground for the well-established outfits that train recruits to carry out state-sponsored terrorism into India. In containing this threat, India already expends huge efforts, both militarily and otherwise. A more restive neighbour could easily upset much of the recent gains made in lowering the menace of terrorism.
Another angle to bear in mind is that if Pakistan continues to spiral with no bailout in slight, the fledgling federal government might lean more heavily than before upon China and Saudi Arabia, two countries with deeper pockets. In that case both will no doubt demand and secure in the bargain their pound of flesh. A more accommodative China might ask for another military base, besides the one it already has at the Gwadar port in the South. To needle India, it could use these bases to train and arm a significantly larger number of terrorists dispatched by the Pak army regularly across the Kashmir and Jammu valleys. China would see tactical advantages in keeping the Indian armed forces more fully engaged on the western front, besides the eastern, where its troops already stand at eyeball-to-eyeball distances with the Indian defenders.
Saudi Arabia, hitherto, has usually financed the numerous religious madrasas all over Pakistan including the POK. While further facilitating such institutions, one can never fully rule out that it might sometime soon seek the technology and the manufacturing wherewithal available with Pakistan to develop a nuclear arsenal. Having another nuclear armed nation in Asia is certainly not desirable for the world or India.
FIXING THE STRUGGLING ECONOMY
To start, Pakistan has necessarily to tighten its belt and significantly lower the profligacy it has hitherto practised in fiscal and financial matters. Besides fuel, it needs to quickly rationalize the price of its electricity supply for all usages and categories of users. Subsidising these two items burns a big hole in its pockets and has become unsustainable with the prevailing levels of revenue from taxes and other levies. While raising the tax levels or user charges might not be a feasible option in times of economic distress, the reality is it has to be done soon. Alongside, a further slide of the recently floated rupee can only be checked through assiduously working on reducing the trade deficit—equal in value to its exports—and shoring up the foreign exchange reserves through the export of more merchandise and services. For some period of time, imports must be kept restricted to the essentials till the country’s reserves get built up. While difficult to do during a global economic slowdown, the country must also endeavour to enhance foreign exchange through attracting FDI as well as more remittances from its overseas residents.
In all scenarios, Pakistan has to continue to seek more foreign grants and loans. The IMF, the global body meant to maintain monetary stability, is holding back an instalment of $1.1 bn due for disbursement out of the 2019 sanctioned package, with the final instalment of $1.4 bn also due for disbursement next June. No doubt, the recanting of the assured reductions in the subsidy on electricity—first by the government of Imran Khan and then by Shehbaz Sharif’s—was in violation of the assurances given to the IMF. However, the unprecedented floods of last summer, the two-year long Covid-19 pandemic and the continuing disruptions in global supply chains, as well as the “imported inflation” caused by crude and natural gas prices, surely warrant greater flexibility by the IMF. Its understanding must be placed in the context of a country that has barely come out of the category of “least developing” nations and of late, whose per capita income in real terms has been declining. In taking another look, the IMF can simultaneously make the borrower-nation consent to a revised time schedule to act on the committed structural conditions. The World Bank and ADB also need to be prevailed upon to begin looking at sanctioning new loans, as being done by them in case of Sri Lanka. Equally warranted might be to call upon bilateral lenders, particularly China and Saudi Arabia, to defer the debts due for servicing shortly. While some of these SOS calls from Pakistan might be acceded, there remains little doubt that in the long run, it must eschew its habit of seeking frequent deferments of loan repayments. Only then will the capital markets of the world become for it a sustainable source of borrowing.
Given the chequered history, and the widespread mistrust of each other, expecting its “big brother” neighbour India to concretely help Pakistan may be a tall order. However, in the context of the recent public suggestion from Prime Minister Sharif to resume dialogue between the two nations towards normalcy, symbolic gestures are worth considering. Once a meaningful political dialogue between the two neighbours gets resumed, India could consider certain economic actions; these include restoring to Pakistan the Most Favoured Nation (MFN) trading status that was in position till the 2019 Pulwama incident, facilitating the resumption of trade in select items across the Wagah land border and jointly exploring the supply of surplus Indian electricity during lean hours. A certain amount of homework on these subjects already stands done. The offering of such olive branches by India would not go unnoticed globally, and more importantly, by the common citizen of the beleaguered neighbour.
Ajay Dua, a development economist, is a former Union Secretary, Ministry of Commerce and Industry.