Pak economy in doldrums but it has rich friends

The Pulwama terrorist attack was mind-numbing brutality. Jaish-e-Mohammad has claimed responsibility, and it operates from Pakistan. The deadly attack needed sophisticated planning, logistics, arms procurement, fund flow and sensitive information. All this is not possible without some sort of institutional and well-entrenched support infrastructure. Of course, all this is stating the obvious, but it bears repetition. So, all of this points to the involvement, directly or indirectly, with deniability of the intelligence apparatus, the ISI, the military establishment, and the Pakistani State, too.

Unfortunately, it points to massive intelligence failure on India’s side, a fact acknowledged by the Governor of Jammu and Kashmir, too. Even more unfortunately, the Pulwama killing has set the stage for a potentially incendiary and highly polarising social and political environment in India.

Not just the attacks on and threats to Kashmiri students and people scattered around the country, but also an economic blockade-like treatment to the state. India goes to elections in less than three months, with the milieu increasingly polarised anyway, on non-economic issues. Pulwama just adds more fuel, and it won’t be long before the terrorist attack gets politicised and becomes a major campaign tool. 

What pressure can India bring on Pakistan in response to Pulwama? Surely, it involves diplomacy, economics and geopolitics. Jaish-e-Mohammad has already been declared a terrorist organisation by the United Nations in 2001. Even then, it has operated with impunity on Pakistani soil. The United States and another 50-odd countries have condemned the Pulwama attack. It might just be water off a duck’s back, or there may be some minor consequence.

On the economic front, India has slapped a 200% import duty on all imports from Pakistan and withdrawn the “most favoured nation” status. The MFN term is misleading, because all it means is that all WTO members must extend the same market access to every trading partner. It is like “equal status” rather than “most favoured”. But, in exceptional circumstances, countries are allowed to withdraw MFN.

But bear in mind that imports from Pakistan are just $488 million dollars, less than 0.01% of India’s imports, and less than 2% of Pakistan’s total exports. So, this too is of symbolic value. The two neighbouring nations have almost non-existent trade and commerce links, despite a huge potential and common history. South Asia is the only region in the world where intra-regional trade is minuscule, constituting less than 5% of the total foreign trade.

Pakistan’s economy is about $300 billion, about one eighth the size of India’s. Pakistan carries an increasingly unsustainable debt. The total debt of the government is roughly Rs 27 lakh crore Pakistani rupees (about $193 billion), of which foreign debt is $100 billion. This requires $12 billion merely for annual servicing. But the country has reserves of barely $8 billion, equivalent to less than three months of exports. The currency has depreciated by more than 35% since December 2017.

Overseas funding

The international rating agencies peg Pakistan below investment grade, which is junk grade. Its foreign investment has dropped by nearly 20% in the last one year. Its defence budget is unsustainably high. Hence, the newly elected government under Prime Minister Imran Khan has been on an aggressive diplomatic drive to secure funding from overseas. And he seems to be succeeding.

Just two days after Pulwama, the Crown Prince of Saudi Arabia Mohammed bin Salman took a delegation, including businessmen and government officials, to offer $20 billion in investments. This includes a $10 billion petrochemical complex and refinery in the port city of Gwadar.

Remember that the Saudi company Aramco is also negotiating to participate in a mega $44 billion refinery in the Konkan coast of Maharashtra. The Saudis have a sovereign wealth fund of nearly one trillion dollars, of which these numbers would make up a small fraction. Prior to this anticipated Saudi investment, it had already extended $6 billion in emergency aid to Pakistan, of which half was concessional debt, when Imran Khan visited Riyadh.

The Chinese, too, are expected to pour in a total of more than $60 billion in the controversial China-Pakistan Economic Corridor, which passes through Pakistan-Occupied Kashmir, as part of Beijing’s Belt and Road Initiative.

The United Arab Emirates (UAE) is expected to allocate nearly $30 billion in investments to Pakistan. The US has said that it will review Pakistan’s bailout request to the IMF, including the country’s debt position and could pressure the IMF to extend an emergency loan. The IMF has already given Argentina a historic record bailout loan of $57 billion.

Pakistan, despite a failing economy and highly unsustainable debt, can count on help that adds up to well over $100 billion from its geopolitical friends Saudi Arabia, UAE and China. Saudi Arabia sees Pakistan as a countervailing force to unfriendly Iran. China has its reasons, and these include access to the Gwadar Port and the Arabian Sea. So, even though Pakistan has a failing economy, with friendly geopolitical support, it is going to grow. Thus, it seems that the future course of history in the subcontinent will be influenced by this kind of debt leverage.

(The author is an economist and Senior Fellow, Takshashila Institution)

(The Billion Press)