The Sick Man of South Asia

Pakistan’s economy remains in flux after it inked a newly brokered deal with the International Monetary Fund (IMF) to secure a $6 billion cash infusion over the course of 39 months. With as little as $8 billion of foreign reserves in state coffers, Pakistan subsists on a brittle economy in the short term and confronts deep, structural deficiencies in its economy for decades to come. Geopolitically, the country finds itself enclosed by American disenchantment and Chinese opportunism, increasing the difficulty of achieving economic diversification. Lacking sustained and critical reform, Pakistan risks prolonging its generational economic malaise.

In the immediate, Pakistan faces a bruising economic outlook, comprising of rising inflation and unemployment. The Pakistani rupee has plummeted against the dollar over the past year, losing one-fifth of its market value in total. With exchanges currently hovering around 150 rupees to the dollar, everyday Pakistanis are squeezed by escalating prices of imports. Kaiser Bengali, a distinguished Pakistani economist, suggested Pakistan’s dire situation could chronically worsen.

Because the government has minor impact influencing the economy, he conjectured the rupee could plunge even farther – to 250 rupees/dollar – in just one year’s time, a development that would far exacerbate the crisis. Further, the nation’s energy sectors have burned through innumerable loans managing to stay afloat. Unable to recompense these loans or attract new sources for loans, Pakistan’s government was compelled to increase prices across the board to salvage its cash-strapped industries, contributing mightily to inflation.

Apprehensive over the prospect of rampant inflation, Pakistan’s central bank moved swiftly to tighten its monetary policy regime. Interest rates spiked to a five-year high, from 10.75 percent to 12.25 percent in late May. The bank’s rate hike favorably serves two aforementioned policy objectives in Pakistan, reducing inflation and buoying the rupee at market exchange rates, but it introduces new obstacles into the real economy.

Pakistan’s capacity to issue loans to small businesses, individuals, and established ventures, previously constrained by its delicate fiscal order, will necessarily lessen in amount. Private actors, ceteris paribus, will be increasingly repelled from receiving loans due to higher interest rates. Most tangibly, this will affect the durability of infrastructure projects and expansionary plans for businesses, decreasing the rate of investment across the economy.

Additionally, ongoing investment will be subject to the interest rate hike; thus companies must allocate more resources toward their completions. Consequently, these economic actors will reduce their outside spending to accommodate for interest rate adjustments. Because options for saving money in bank accounts, for whom this option exists, appears preferential to spending at higher interest rates, consumption will be met with a similar precipitous decline. In tandem, the dual reduction in consumption and investment will impede direly needed economic growth, despite alleviating the excesses of inflation.

As such, Pakistan’s central bank slashed expectations of growth for the remainder of the fiscal year. Their projections suggest the dawdling economy will be met with a sizable fiscal deficit, another unwelcome episode amidst exhaustively adverse economic conditions. Pakistan’s foreign exchange reserves linger at dangerously low levels. While the IMF pledged to inject $6 billion into Pakistan’s economy, there are stringent preconditions to accepting aid. Pakistan was forced to introduce austerity measures into its next budget, stipulating a slew of spending cuts and a separate set of reforms in the energy sector.

Another requisite the IMF made compulsory was allowing the rupee to be free-floating by market forces. Pakistan’s state bank has interfered in years past to artificially buttress its currency, but the IMF’s requirement forbids this under the duration of the loan. Pakistani exporters are apprehensive about a floating currency because, as recent history highlights, market conditions can worsen instantaneously. Added uncertainty here accentuates investors’ uneasiness in conducting business with Pakistan.

American disengagement with Pakistan is a separate factor contributing to the country’s ailing financial situation. The Trump Administration withheld two installments of military aid last year, valued at $900 million and $300 million apiece, out of discontent for Pakistan’s duplicity in combating militant Islamic groups. Pakistan appeared publicly unconcerned by the blow, but its fiscal house could have ostensibly benefited by the timely, recurring cash flows.

More pressing is the government’s efforts to escape the “grey list” – a group of nations the Financial Action Task Force (FATF) categorizes for having responded weakly to mitigating terrorist activities within their borders. At the behest of American frustration, Pakistan was thoroughly vetted by the FATF, and in June 2018, was officially placed on the list. Membership to the grey list entails severe financial penalties, made possible through high impediments positioned on inflowing investment. The Pakistani foreign office tabulated the nation’s annual loss to be $10 billion for remaining on the list.

Despite having been globally ostracized for its present status, Pakistan has since invested little effort into demolishing terrorist networks internally, which could give the FATF credence for downgrading Pakistan to the “blacklist,” the severest possible classification citing non-compliance. Doing so would impose a moratorium on inward investment originating from foreign governments, an evidently higher cost for inaction. Ultimately the FATF is the final authority, but Pakistani non-compliance and apathy were entirely avoidable pitfalls that could have reclaimed untold billions for its faltering economy.

Apart from accepting the IMF’s bailout package, Pakistan has little recourse in attracting investment designed to boost its economy, that is, with the very extreme exception of China. Chinese investment in Pakistan, via the China-Pakistan Economic Corridor (CPEC), has injected many billions of dollars into Pakistani infrastructure projects, generating nearly one hundred thousand jobs in the country. Young Pakistanis have flocked to acquire Mandarin competencies, with the aim of obtaining employment in the transportation, infrastructure, and energy sectors as Chinese investments rapidly stream into these domains. Analysis compiled by the University of Karachi’s Applied Economic Research Centre (AERC) forecast CPEC producing “over 700,000 direct jobs” in Pakistan by 2030.

The flurry of Chinese investment has moderately stimulated Pakistan’s economy against the backdrop of major economic turmoil, but concerns are mounting about its overreliance on China. The Middle Kingdom is responsible for nearly half of Pakistan’s annual trade deficit, and its loans, with obscure and sometimes predatory conditions, are continually earmarked to break ground. China has a lengthy track record of economic manipulation against smaller states by seizing control, via “debt-trap diplomacy,” of strategic equity, primarily ports and military installations.

Given this troubling history, combined with Pakistan’s feeble economy and disproportionate reliance upon China, Pakistan could be the latest domino to drown amid the sea of Chinese investment in Eurasia. Take for example the Gwadar port, the lynchpin integrating China’s Belt and Road Initiative with the Maritime Silk Road in southwestern Pakistan. The port is discernibly a juicy target for Chinese primacy, derived from strategic and economic motivations. General Joseph Dunford, speaking on the solvency of the Gwadar port, declared in March that “Pakistan owes China at least $10 billion” on the port alone – a significant sum to reimburse.

Confined to a fiscally precarious position, it’s uncertain from where Pakistan could continually procure revenue to stave off a painful default. Current and emergent Chinese projects might cripple Pakistani finances by their sheer weight, but even if they do not, China will retain an inordinate degree of control over vital spheres of influence for the foreseeable future.

All told, Pakistan’s present and forthcoming economic dysfunction make it a vulnerable actor on the world stage. By striking the improbable combination of engendering high inflation and low growth, repelling the Americans, emboldening the Chinese, and succumbing to the IMF’s assistance, Pakistan’s flailing economy renders it the sick man of South Asia.

Photo Credit: Pixabay

How Pakistan is courting the Abyss

This article originally appeared in The Huffington Post.

Ever since the 1990s analysts and authors have spoken about Pakistan’s multiple crises and referred to it as the failed or failing state. Pakistanis are prone to use this to argue that their country will never fail but those who write on the country know that it is only a matter of time. Tilak Devasher’s recent book ‘Pakistan: Courting the Abyss’ (New Delhi, Harper Collins India, 2016) is one of the best analyses of Pakistan’s potential ‘multi-organ failure.’

Devasher, a former Indian civil servant who has conducted research on Pakistan extensively in the course of his work, tries to examine “the internal and external dynamics of Pakistan” to “explain why Pakistan is such a persistently troubled state and why.” His prediction that “without serious corrective actions, a tragic destiny looms” for Pakistan is likely to further upset Pakistanis who see such analysis as reflecting hostility towards their country.

There is, however, no hostility in Devasher’s must read book for those who objectively wish to understand both the long-term challenges of Pakistan as well as the way forward. Statistics don’t lie and facts do not change just because of patriotic fervor.

In 428 pages, Devasher delves into pre-partition history to examine in depth the key issues facing Pakistan on account of its unique identity and ideology as well as the skewed civil-military relationship. He methodically studies the myriad challenges facing Pakistan — rising Islamization accompanied by religious violence, debilitating economic and environmental challenges and a rigid foreign policy based on confronting India even as it fosters dependence on a foreign power.

In one of the most poignant chapters at the end of his manuscript, Devasher quotes passages written by Pakistanis to capture what he calls “the tragedy of Pakistan – from the blood-soaked yet enthusiastic creation in 1947 to the present- day exhaustion and gloom and doom scenarios.” He traces many of Pakistan’s current problems to its creation.

Like scholars Farzana Shaikh (a Bangladeshi), Christophe Jaffrelot (a European) and Husain Haqqani (a Pakistani), Devasher notes that Pakistan’s identity crisis is rooted in the country’s origins. “Pakistan did not start on a clean slate,” Devasher notes. The heart of the problem facing Pakistan even seventy years after creation “continues to be a debate over the meaning of ‘Pakistani identity’. This was and remains a critical issue since Pakistan was a new country carved out of India and precisely for that reason had to be distinct from India.”

The fear that Pakistan would not survive and that India sought to undo partition led to the use of one religion (Islam), one identity (Pakistani, not ethnic), one language (Urdu) and one existential threat (India) to bind the country together. However, the dilemma has always been that “Pakistan came to be constructed by putting together geographical provinces who shared a common religion but had never before shared a common history, culture, language or ethnicity. They all had a strong attachment to their traditions and were resentful of any central control.”

It is often said that like Prussia, the Pakistan state does not have an army; its army has a state. Acknowledging that the army dominates the country, Devasher joins Aqil ShahChristine Fair, Husain Haqqani and Ayesha Siddiqa in arguing that the army has been narrowly focused on defining Pakistan’s interests often ignoring other threats facing Pakistan.

Devasher, like Christine Fair, also asks the question of whether or not the army will ever change its policies towards India. “Even if, and this is a big if, the army is constrained to seek accommodation with India given the economic conditions of Pakistan, its visceral hatred for India is unlikely to change. Neither will it discard its strategy of bleeding India via non-state actors,” he concludes.

The reason, Devasher argues, is that the Pakistan army would need to re-examine its core beliefs like “Partition itself was unfair and is incomplete” and “India has not accepted Partition and, given an opportunity, would undo it.” Such fundamental rethinking appears difficult, if not completely impossible.

Devasher dedicates a large segment of his book to the WEEP (Water Education Environment Population) crisis facing Pakistan arguing that for its very survival Pakistan needs to do more on each of these fronts. Pakistan will become a water-scarce country by 2035 and “Pakistan’s economy is more water intensive and water dependent than that in any other country in the world.” Instead of blaming India for an unfair Indus Water Treaty, Pakistan needs to do a better job at water management.

Pakistan has one of the youngest populations in the world but this demographic dividend could turn into a nightmare “with a large youthful population that is unemployed and unemployable and will become fodder for the terrorist organizations.” Pakistan’s education crisis is not only the low literacy rate of 56 percent or that it has the world’s second highest out-of- school population of children. Pakistan’s educational curriculum has “factual inaccuracies and omissions,” promotes militancy and jihad, encourages prejudice and bigotry against religious minorities and other countries.

Pakistan’s economic crisis, Devasher argues, is not something that can be rectified in the short term by aid or quick solutions. It is instead ignoring “structural weaknesses that have not been rectified over the decades.”

In the end Devasher asks the multi-million dollar questions: Will Pakistan “ever give up its quest for parity” with India? Will Pakistan allow Afghanistan “to develop as a sovereign country?” Will the United States finally realize that its support has had a negative impact on Pakistan and so reduce further assistance? And if this happens will China then seek to take over or will China step back?

According to Devasher given the magnitude of problems facing Pakistan “a mere tinkering with issues will only make matters worse.” Pakistan has been at the edge of the abyss for a long time and does not seem ready to pull itself back anytime soon.

Uri: Prudence or Retribution

                                                                     Map of the Kashmir Region

                                                                     Map of the Kashmir Region

Allegations are once again being leveled against Pakistan for continuing to support militant terrorist organizations, which most recently have been involved in an attack on an Indian army base in the disputed region of Kashmir. This army base located in Uri, near the line of Control between Pakistan and India, was ambushed by four militants during the early morning hours and managed to kill 18 Indian soldiers and wounded several others.

India’s director general of military operations, Lt. Gen. Ranbir Singh, stated that the attackers were “foreign terrorists” and were found with items that “carried Pakistani markings.” Singh went on to state that initial investigations point to Jaish-e-Muhammad who are also believed to have been behind the attack on Pathankot air force base in January. Lt. Gen. Ranbir Singh stated that there would be a “befitting reply” to those involved in this act of aggression. Specifically, he stated that India “reserve[s] the right to respond to any act of the adversary at a time and place of our own choosing." Pakistan’s Chief of Army Staff (COAS) Gen. Raheel Sharif responded to Indian officials stating that Pakistan was “fully prepared to respond to the entire spectrum of direct and indirect threats.”

In response to this attack, PM Narendra Modi called for a meeting at his official residence with military advisers and national security officials. In a series of tweets, Modi went on to say that "I assure the nation that those behind this despicable attack will not go unpunished." These comments were also echoed by India’s Home Minister Rajnath Singh who called Pakistan a “terrorist state”. He stated that he was “deeply disappointed with Pakistan’s continued and direct support to terrorism and terrorist groups.” Pakistan’s Senior Foreign Policy Adviser to PM Nawaz Sharif, Sartaj Aziz, responded that “Pakistan categorically rejects the baseless and irresponsible accusations being leveled” by Indian officials. Mohammad Nafees Zakaria, a spokesman for Pakistan’s Foreign Ministry, also firmly rejected allegations that Pakistan was involved in the attack on Uri.

Yet, an increase in harsh rhetoric and an escalation in hostilities is no longer sufficient. PM Modi is facing a backlash from his domestic base that are demanding a response against Pakistan. The PEW research center in a recent report stated that, “more than half of BJP supporters (54 per cent) and a plurality of Congress party adherents (45 per cent) disapprove of the prime minister’s handling of relations with Pakistan.” The report goes on to say that the majority of Indians favor a military response in the face of terrorism. If India was to respond militarily it runs the risk of escalating the conflict into full blown war with its nuclear-armed neighbor.

Additionally, it would be beneficial for India to provide proof of Pakistan’s involvement within the attack at Uri. It is still premature to implicate Pakistan but it would be in India’s best interests to lower its rhetoric and conduct a thorough investigation. This Wednesday, PM Nawaz Sharif is headed to the United Nations General Assembly and is expected to discuss the Kashmir issue. India could also use this opportunity to present evidence and the progress of its investigation that may implicate Pakistan. It could also complement this evidence with a clear and comprehensive policy that aims to bring a settlement with the people of Kashmir who continue to protest against Indian security forces. Delhi can no longer hope for this issue to remain domestic rather than international. It must face this facet of the issue head on.

India would also benefit from pursuing a policy of restraint within Kashmir. A recent CNN article has reported, “85 people have been killed in the past 72 days in clashes between protesters and security forces.” Through India’s growing economic significance, it has surpassed Pakistan and has signed strategic agreements with the United States. Myra Macdonald, commenting on the statements coming from the United States and United Kingdom, stated that “both countries realize there is very little hope of Pakistan giving up its support for militant groups... The US and the UK have seen so much double-dealing by Pakistan in Afghanistan that they are now far more sympathetic to the Indian position.” India must strengthen this position by continuing to remain on the moral high ground.

A security analyst in Islamabad, Amir Rana, commented to the Washington Post that “this single attack and this single day has tilted the balance in favor of India...earlier it was all talk about Indian human rights violations. Now it will be overshadowed by terrorism.” He went onto say that Sharif no longer has “the confidence he had before the attack. This has weakened Pakistan’s moral and diplomatic position.”

Furthermore, experts say that a conflict with Pakistan would deter investors and international business from India and cause trouble for India in both domestic and international markets. The political instability created within the markets would most likely damage the Indian economy and runs the possible risk of harming future economic progress. India would be better off spending its energy on further increasing its economic power. If Modi was to pursue a hawkish strategy he runs the risk of unraveling the progress his platform of economic growth has brought to India. It is not difficult to assume that war would not encourage continued foreign direct investment.

India needs to ignore the hawks in Delhi, focus on economic growth, pursue a policy of reconciliation rather than aggression against dissatisfied Kashmiris, and continue to pursue the status quo that has allowed India to become an ever-stronger global player. 

Mumtaz Qadri's Execution - A Step Towards Challenging Extremist Narratives in Pakistan

On the 4th of January 2011, Salman Taseer, then Governor of Punjab, was assassinated by his bodyguard, Mumtaz Qadri, having been shot 27 times as he returned to his car after having lunch with one of his friends in Kohsar Market, a picturesque marketplace and café spot often frequented by expatriates. In the months before his death, the Governor had angered religious conservatives for his support of Asia Bibi, a Christian woman who had been sentenced to death under the blasphemy law for allegedly insulting the Prophet Muhammad. Pakistan’s controversial blasphemy law, a remnant of British rule in the subcontinent, prohibits blasphemy against any recognized religion, though it is mostly used against non-Muslim religious minorities.

Though the murder was heavily condemned by most political parties in Pakistan, hundreds of lawyers offered to represent Mumtaz Qadri pro-bono upon his first appearance in court and showered him with rose petals. Garlanded with flowers, and lionized as a defender of Islam and Muhammad, Qadri quickly amassed innumerable followers across the nation.

After the President of Pakistan rejected his mercy appeal, Qadri was hanged on February 29, 2016. While moderate Pakistanis around the nation rejoiced at the state having effectively exercised its writ in the face of the religious conservatives, his death was unsurprisingly met with nation-wide protests, including a strike by legal functionaries in Islamabad. His funeral was attended by hundreds of thousands of supporters, (including the head of one of the largest political parties in Pakistan, the Jamaat-E-Islami), though media channels were banned from airining his funeral, resulting in a much appreciated veil of normalcy for everyday Pakistanis.

Ayesha Siddiqa, a Pakistani civil-military scientist, geo-strategist and former bureaucrat argues that the hanging of Qadri and other events, such as the rescue of Shahbaz Taseer, the slain governors son who was kidnapped in late-2011, the passage of the Women’s Protection Bill by the Punjab Government, and the Pakistan army’s operation against militant groups, do not necessarily show Pakistan eschewing violence and conservatism, but is instead a “mirage”. A new shrine that is built around Qadri’s grave to which throngs of supporters flock every day is further emblematic of this deep-seated, ideological problem.

It is clear that the state of Pakistan has ceded too much ground to the religious conservatives. Asia Bibi remains languishing in jail for her alleged crime, and religious groups have launched fresh calls for her hanging after the execution of Qadri, who also has a mosque named after him in the capital. Islamic scholars have rejected calls for amendment of the blasphemy law, and religious parties are currently warning the government of nationwide protests if recently-enacted pro-woman legislation is not withdrawn. Many representatives of the same religious parties have also condemned the execution of Qadri.

Time will tell whether or not Pakistan is finally moving to redefine its ideology, which, as Michael Kugleman argues, has provided an enabling environment for extremism for decades. Pakistan has kept looking the other way when it comes to cracking down on hate speech, and if the public school curriculum is taken as an indicator, impressionable young minds are being saturated with intolerance.

While Qadris hanging will likely deter citizens from taking the law into their own hands, this is but a tiny step on a long, arduous journey the state of Pakistan must take if it wants to effectively challenge extremist narratives. The government must have a zero-tolerance policy towards divisive ideologies at all levels, and should push for legislative reform, supplemented by counter-narratives that promote pluralism and tolerance. This should include clamping down on madrasas and mosques which preach and promote intolerance, as well as to enforce sentencing on hate crimes.