Foreign relations and the state of the economy have become inextricably linked in Pakistan due to the PML-N administration’s overarching objective to borrow from external sources to meet its budgetary needs and to shore up its foreign exchange reserves – from multilateral/bilateral sources, commercial loans from foreign banks at high rates of return with a short amortization period, and debt equity through issuance of sukuk/Eurobonds at higher rates of return than prevalent in the market at the time.
Fiscal year 2013-14 began with Ishaq Dar the then finance minister seeking an International Monetary Fund (IMF) bailout package of 6.6 billion dollars – a package that was widely considered to be essential to meet the budget deficit of over 8.2 percent of Gross Domestic Product (GDP) for 2012-13 – a deficit to which Dar contributed 480 billion rupees through his irregular decision to eliminate the inherited circular energy debt on the second last day of 2012-13. Thence began a series of decisions by Dar that reflected his training as an accountant at considerable cost to the country’s economy. Dar employed a highly simplistic logic when he argued that borrowing from abroad – from the foreign commercial banking sector or incurring debt equity was the right way to go for two reasons. First because the rate of return was lower in these markets (around 7 percent) in comparison to the domestic market (around 12 percent) which, he argued, meant he was actually reducing the country’s indebtedness. Economists warned him unsuccessfully that he was not taking account of the 2 to 3 percent annual erosion of the Pakistani rupee vis a vis the dollar (a value which he controlled through another flawed policy, notably market intervention, thereby keeping the rupee grossly overvalued with negative implications on our exports while encouraging imports). Dar was advised that while domestic debt can be managed through deferring repayments and printing money (though within moderation as it is a highly inflationary policy) the same cannot be done with foreign debt. Again Dar ignored all advice. Second, the Eurobond and sukuk rate of return was higher than the market rate – 8.5 percent for the former and 6.5 percent for the latter. Dar was reminded again and again that his claim that these issuances constituted equity was inaccurate as it was debt equity. Again he refused to heed this advice.
As the IMF programme came to an end in September 2016 and structural reforms remained unimplemented particularly in the tax system, the power sector, and in improving the operational and financial capacity of state owned entities (which accounts for over a trillion rupees in annual injections today) cheaper sources of funds from abroad dried up and reliance on commercial bank borrowing rose dramatically. China emerged as the single major source of borrowing and during the PML-N’s five-year tenure the country borrowed in excess of 13 billion dollars from China however this amount was not concessional funding, and it did not generate a comfort level with other donors (bilateral/multilateral as is the case when a debtor nation goes on an IMF programme due to its rigid monitoring of conditions that are focused on reforms).
Enter Imran Khan and his team. Which source would be the easiest to access especially after US Secretary of State Mike Pompeo’s comment that the US would use its influence in the IMF to forestall extending a bail-out package to Pakistan to pay off Chinese loans? It is China and in this context it is relevant to note that the Chinese government reportedly approached the caretakers with proposals to (i) improve the trade imbalance through extending unilateral trade concessions (after failing to agree to amend the existing FTA with China that is heavily tilted in China’s favour accounting for 15 billion dollar annual Chinese exports to Pakistan against 1.5 billion dollar Pakistani exports to China); (ii) identified new areas of cooperation including social sectors under China Pakistan Economic Corridor (CPEC); (iii) proposed increasing foreign direct investment to Pakistan; and (iv) lending to Pakistan for balance of payment support.
Imran Khan in his first address to the nation as the Prime Minister stated that China has given a chance to Pakistan through the CPEC. Khan also marveled at China lifting 700 million people out of poverty and stated that there is much Pakistan can learn from China though one important component of China’s poverty alleviation strategy is not replicable in Pakistan notably the one child policy. Be that as it may, Khan must make all deals signed by the previous administration under CPEC transparent as was his constant refrain when in opposition, though Asad Umar, has disturbingly said that the administration would make all deals during the Khan administration transparent but not those agreed during previous administrations.
Relations with the United States, Khan said, must be “mutually beneficial” and not “one way” as at present. While under Trump, the US has been cutting down on military assistance with disbursements under the Coalition Support Fund all but dried up yet around 12 billion dollar remittance income comes from the US annually and Pakistan has a trade surplus with the US. The US under Trump continues to play a very important role in the region especially in Afghanistan and has forged close ties with our arch rival India. Be that as it may, Trump has challenged US traditional allies through his decision to raise tariffs, though India has not yet imposed retaliatory tariffs, yet all other major US trading partners have either imposed retaliatory measures (China, Canada) or are considering imposing them (as in the case of India). Thus, Khan may have little if any manoeuvrability with respect to balancing relations but continued engagement would be the answer.
The Saudi King and the Crown Prince congratulated Imran Khan on his victory. Saudi Arabia has in the past assisted Pakistan in not only deferring oil payments, which helped the balance of payment position and which would help in the present given our precarious current account deficit of 18 billion dollars, but also ‘gifted’ 1.5 billion dollars in 2014 to shore up our balance of payments position. Thenceforth relations soured as our parliament voted against sending troops to assist Saudi Arabia-led coalition in its operation against the Yemen Houthi rebels, a vote that was supported by Imran Khan’s party. During his victory speech Imran Khan stated that he would like to see Pakistan play a peacemaker role in the Middle East – an offer that was made by the Sharif administration and together with the then chief of army staff General Raheel Sharif he visited both Riyadh and Teheran but the exercise did not bear fruit in easing tensions between Iran and Saudi Arabia, though it may have contributed to General Raheel Sharif getting a commanding position in the coalition army immediately upon retirement. Unless Khan reverses that policy he is not likely to get any ‘gifts’ from Saudi Arabia.
Tensions with India never eased during the tenure of the PML-N administration. Many blame the establishment but Modi’s contribution, with his anti-Muslim stance rivaling only Trump and Israel’s Netanyahu’s, cannot be discounted. Khan indicated he would like to improve trade and commercial ties between the two countries though he must be aware that India insists we abide by our liberal trade policy in allowing an entire range of Indian imports while India itself has a stringent trade policy on which basis it would allow limited Pakistani imports; additionally Pakistani exporters complain of non tariff barriers by Indian customs. Imran Khan mentioned the core Kashmir issue in his speech and Modi is unlikely to restart talks with Kashmir as an item on the agenda. In other words, India’s one step may well require Imran Khan to take more than the two he promised for any de-escalation in tensions.
And finally, with respect to Afghanistan Imran Khan stated that the Afghan people have suffered much and Pakistan would make all efforts to bring an end to the conflict, and he wanted to see “open borders” with Afghanistan, “like the European Union.” Rather ambitious given the current ongoing fencing of our borders with Afghanistan due to constant infiltration of armed terrorists targeting Pakistan. Spokesman for the National Directorate of Security, Afghan intelligence bureau, blamed Pakistan for this month’s barrage of attacks in Kabul which killed over 50 injuring more than 400 civilians: “Suicide bombers are still being trained in Pakistan to be used against Afghanistan. Pakistan promised us that it will not allow Taliban to hold gatherings in their country but we see these gatherings are actually happening…. The Taliban is not from Afghanistan and is a tool used in Pakistan’s proxy war against Afghanistan.”
Imran Khan in his speech stated that his administration would like to improve ties with Iran. The Iran Pakistan pipeline remains non-operational due to the previous administration’s concerns about US sanctions on Iran, which were re-imposed by the Trump administration. It remains doubtful if Pakistan would forge greater ties with Iran in defiance of US sanctions given our existing economies ties with the US.
To conclude, the challenges that Pakistan faces with respect to foreign policy and the economy are varied and given the ongoing full blown economic crisis facing the country it is likely that economic considerations would be allowed to outweigh foreign policy considerations.
Anjum Ibrahim, "Foreign policy and economic challenges," Business Recorder. 2018-08-27.Keywords: Fiscal year , Foreign banks , Domestic debt , Markets , Tax , Imran Khan , Saudi Arabia , Pakistan , Iran , Afghanistan , China , Canada , PML-N , CPEC , IMF , GDP