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Pakistan’s strategic elite has been stressing on the changed focus on
economy and non-traditional areas of security due to not only forces
of globalization but as also due to the need to address the more
important issues of human development. General Karamat had even stated
that Pakistan accepts the imbalance inherent in equation with India
and will not seek to match capabilities even while it will upgrade and
modernize its military power so that its defence and deterrence
capability is not degraded. According to him whatever may have been
the determinants of Pakistan’s security policies in the past, the
focus is on political stability, economic viability, and internal
defence. Pakistan’s Prime Minister identifies with globalization and
ever expanding dimensions of economic security. He also states that
“Pakistan does not wish to enter into arms race with India, nuclear or
conventional. We believe that such a race is neither economically
sustainable nor morally tenable and would be destructive for the
entire region.” Even President Musharraf, after signing of the Indo-US
nuclear deal in March 2006, remarked that Pakistan is focused on
improving its economy and alleviating poverty and eradicating
terrorism and is not interested in joining a numerical arms race with
India. However, an analysis of Pakistan’s economy and military
expenditure may help us in understanding whether there has been any
substantial change in Pakistan elite’s perceptions.
The macro-level indicators do point towards an upward trajectory of
Pakistan’s economic growth. According to World Bank figures, the Gross
Domestic Product (GDP) growth has been 6.4 percent in 2004; in 2001 it
was 2 percent, in 2002 it was 3 percent, in 2003 it was 5 percent. It
was 8.4 percent for year ending June 2005 which apparently was due to
a ‘happy confluence’ of factors like an exceptional monsoon, fund
flows from World Bank and IMF and western and US aid in various forms.
For fiscal year 2005-2006, economic growth is expected to be around
6.2 to 6.7 percent, somewhat less than expected because of the impact
of earthquake in October 2005.
The overall foreign exchange reserves fell by US$ 1.29 billion
during Jul-Nov FY06 to touch US$ 11.3 billion by end-November 2005,
down US$ 1.7 billion from the peak level of US$ 13.00 billion reached
in April 2005. However these have to be compared with reserves $ 1
billion held prior to September 2001.
Pakistan’s per capita income of $ 480 in 2000 has also grown to $ 600
in 2004.These macro-economics conceal a number of variable factors
which may affect the sustainability of economic growth in the long
term.
A
number of reports have cautioned that long term economic outlook of
Pakistan is uncertain because Pakistan is highly dependent upon
foreign lending and import of basic commodities besides its public
debt being 70 percent of its GDP. Pakistan has been receiving aid from
World Bank, International Monetary Fund (IMF) and other international
institutions in a more liberal manner after it became ally of the US
in war against terror. Even Pakistani diaspora which had become
cautious in sending foreign remittances after military take over in
October 1999, resumed sending funds after 2001. In 2003, it received $
4 billion in foreign remittances compared to one billion dollars in
2001. What might compound the problem is consistently substantial
fiscal deficit every year.
Pakistan’s external debit of $ 33 billion has grown to $ 38 billion in
2005 (one third of the GDP) and is poised to grow more during 2006.
Defence expenditure and interest on public debt take away 67 percent
of total revenues leaving very little for expenditure in areas of
infrastructure, health and education. Economic reforms have been slow
and hampered by political instability and lack of political will. In
February 2005, President World Bank remarked that even though
macro-economic indicators were looking good yet ‘Pakistan has a long
way to go in terms of achieving its human development goals’. World
Bank President committed to increase lending to Pakistan by 50 percent
for the period 2006 to 2009 and cautioned that there are many problems
that remain to be tackled.
In
the fiscal year 2005-06 Pakistan’s trade deficit in first six months
has increased by 132 percent amounting to $ 5.6 billion compared to $
2.4 billion for the same period previous year. Pakistan’s oil import
bill has also increased by 62 percent. Moreover, Saudi Arabia has
declined to resume $ 2 billion special financing arrangement (SFA) for
crude oil imports thus creating more problems. Pakistan’s foreign
exchange reserves of $ 11.3 billion are much less to cover $ 13.65
billion (even more now because oil price is hovering around $ 75 per
barrel) worth of six months imports- ‘a benchmark that the Pakistan’s
government used to take pride in recent years’.
In
May 2006, World Bank Vice President for South Asia said Pakistan has a
history of ‘boom-bust cycles’ and “now is the time to sharpen watch on
macroeconomic situation”. Pakistan imports in first quarter of current
fiscal year have increased by almost 50 percent whereas exports have
increased only by around 23 percent thus giving an indication of
overheating of economy. (For instance import of non-essential items
like automobiles has swelled the import bill by $ 1 billion). The
balance of payments deficits and budget deficits combined with 8 to 9
percent of inflation have deleterious effects on the economic growth.
Also the macroeconomic growth has not benefited the deprived sections
of the population in any visible way.
Pakistan is yet to view India as an economic opportunity and benefit
from the growing Indian economy because of its obtuse policy of
linking solution of Kashmir issue before engaging in comprehensive
mutually beneficial economic relations with India. A recent study by
State Bank of Pakistan has argued that in an open trading regime with
infrastructural links, the immediate potential of Pakistan’s exports
to India is around $ 1.8 billion. Pakistan can only become a hub for
trade between Central Asia, Afghanistan and vast markets of India and
its neighbours if it allows transit trade. This would enable Pakistan
to benefit from transit revenues. The indirect trade between Pakistan
and India is estimated to be $ 2.5 billion. Transportation and
additional intermediary costs make Pakistani products uneconomical for
India. Pakistan’s economy stands to gain a great deal if South Asia
Free Trade Agreement (SAFTA) is implemented by Pakistan in letter and
spirit.
Pakistan has laid stress on the military aspects of security and
therefore the defence expenditure as a percentage of overall
government expenditure has been consistently high at an average of 18
percent for the last five years or so. Similarly the percentage of GDP
spent on defence budget has been maintained at 4 percent plus levels
with large annual increments in real terms in spite of the avowed
change in emphasis on military security. For 2005, its defence
expenditure had gone up to 5 percent of its GDP. For fiscal year
2006-2007, Pak military has asked for rupees (Rs) 250 billion as
compared to Rs 223 billion in the previous year. However the actual
defence expenditure last year was Rs. 240 billion and it would be no
wonder if this fiscal year the actual defence expenditure crosses Rs.
300 billion mark. In fact, this has become a regular feature for past
many years when budget estimates are shown low so as to avoid negative
reactions to the passage of bill through the parliament even though
hardly any questions are raised on passing the defence budget.
Regular and unplanned for large increases in defence spending are
not in consonance with nascent economic growth and development goals
of Pakistan as a nation. For instance, Pakistan faces a gap of $1.4
billion per annum which was filled through external assistance to
provide basic facilities to all under a programme called Million
Development Goals. But the requirement of funds for achieving these
goals is very huge. Instead Pakistan’s ruling military junta seeks to
match increases in the Indian defence budgets in order to maintain a
certain level of parity. The threat from India arises more from large
number of technical and science graduates it produces and who add to
India’s wealth rather than from the military machine of India.
The
US $ 3 billion aid package for Pakistan apparently lays more emphasis
on military component of the aid rather than the civil aid even though
the US claims to split its aid evenly between both the components.
According to Pentagon, Pakistan received coalition support funding of
$ 1.32 billion for period January 2003 to September 2004, an amount
roughly equivalent to one-third of total defence expenditure during
that period. $ 600-700 million given per annum by the US to Pakistan
for leasing its bases and for providing logistics support goes
straight to the military’s coffers thus enabling the military to
continue with its capital acquisitions.
Even
though purchase of F-16 fighter aircrafts was deferred by Pakistan due
to earth quake and resulting unpopularity of the military government,
Pakistan has been given major equipment through US military grants
and sales. Another deal signed a week after the earthquake for $ 1
billion with Sweden for purchase of six early warning aircraft was
quietly allowed to continue in spite of urgent requirement of funds
for rehabilitation, reconstruction and provision of relief aid
(estimated to cost $10 to $ 12 billion) for the earth quake hit areas.
Purchases of Chinese J-10 and FC-1/Super 7 / JF-17, Chinese Frigates
and billions of dollars worth of three submarines are also in the
pipeline in the current fiscal.
The
inventory of military equipment being provided by the US includes six
C-130 military transport aircraft ($ 75 million grant), 12 radars and
40 Bell helicopters ($ 300 million sale), eight P-3C aircraft, six
Phalanx guns and 200 TOW missiles (proposed sales worth up to $ 1.2
billion) and sale of 300 Sidewinder air to air missiles and 60 Harpoon
anti-ship missiles (worth $ 226 million) besides six Aerostat
surveillance radars ($155 million) and other miscellaneous military
equipment. It is obvious that all this equipment is not meant for
counter terrorism missions and is ultimately likely to be used against
India thus highlighting the misplaced perceptions of the US also in
preserving the so called balance in South Asia. This also indicates
that Pak military’s notions of security have very low priority for
human security and their fixation with military security have not
undergone a major change.
Therefore the inference which can be drawn is that even though
Pakistan’s macro-level economic indicators are positive, the long term
sustainability of the economic trends looks uncertain. Pak economy is
heavily dependent on the munificence of the US and international
economic institutions. A change in strategic situation may affect
Pakistan economy adversely. Critical mass required for self-sustained
economy is absent in Pakistan. The present economic boom, according to
a Pakistani economist, rests on very weak foundations and a lot needs
to be done. Daily bomb blasts and continuing unrest in Balochistan and
Pak military’s propensity to support the likes of Talibans and
terrorist outfits for their activities in Afghanistan and Kashmir do
not inspire much confidence with the foreign investors. Increased
internal instability and disorder would also affect inflow of
foreign exchange remittances as well as GDP growth.
Pakistan’s reluctance to go the whole hog on implementing SAFTA and
at the same time aspiring to be a trade, energy and transit hub for
Central Asia and beyond would remain just a pipedream. Political and
military establishment has not fundamentally altered its perceptions
on military security and has not given adequate attention to other
areas of human security. Also, the US military aid to Pakistan
prevents Pakistan from seeking harmony with India and assists Pakistan
in adopting a hard-line position on pending issues with India. This in
turn has a negative impact on Pakistan’s growing economy. A democratic
government is more likely to address the needs of people than a
military dominated government. In final analysis, it will be premature
to conclude that Pakistan’s economy has arrived and is on an
irreversible trajectory.
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