Friday , 24 May 2019
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A Primer On Pakistan Economy

AJIT RANADE

THE Pulwama terrorist attack was mind-numbing brutality. Jaish-e-Mohammed 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 i.e. ISI, perhaps the military establishment, and the State too.

Massive intelligence failure

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 kind-of-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 campaigning tool.

What pressure can India bring on Pakistan in response to Pulwama? Surely it involves diplomacy, economics and geo-politics. Jaish-e-Mohammed 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 massacre. 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 On the economic front, India has slapped a 200 per cent import duty on all imports from Pakistan, and withdrawn the ‘most favoured nation’ status.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.

Minuscule trade with Pak

But bear in mind that Pakistani imports are just $488 million, less than 0.01 per cent of India, and less than 2  per cent 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  per cent of the total foreign trade.

Pakistan’s economy is about $300 billion, one eighth the size of India. Pakistan carries an increasingly unsustainable debt. The total debt of the government in domestic currency is roughly Pakistani Rupees 27 trillion, 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 per cent in the last one year, since December 2017. The international rating agencies peg Pakistan below investment grade, i.e. junk grade. Its foreign investment has dropped by nearly 20 per cent 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 (MBS) brought a delegation with an entourage that includes businessmen and government officials to offer investments up to $20 billion. This includes a $10-billion  petrochemical complex and refinery at the port city of Gwadar.

Foreign investments in Pak

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 $1  trillion, 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  Khan visited Riyadh. The Chinese too are expected to pour a total of more than $60 billion in the Belt and Road Initiative, including the controversial China Pakistan Economic Corridor which passes through Pakistan-Occupied Kashmir.

The United Arab Emirates 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.

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