Pak army agrees to bud­get freeze...

...but whether the coun­try’s fi­nan­cial woes would per­suade it to smoke the peace pipe with In­dia re­mains to be seen

The Hindu Business Line - - THINK -

It’s close to be­ing the ul­ti­mate sac­ri­fice for the Pak­istan Army. No, we’re not talk­ing about lay­ing down lives on the fields of bat­tle. This sac­ri­fice is about giv­ing up the an­nual hike in the mil­i­tary bud­get. The move was fi­nally con­firmed Tues­day when Pak­istan’s Min­is­ter of State for Rev­enue Ham­mad Azhar pre­sented an aus­ter­ity bud­get in­volv­ing all-round belt-tight­en­ing.

Be­fore the bud­get, there’d been weeks of stony si­lence from the mil­i­tary even when it be­came clear ev­ery arm of gov­ern­ment faced hefty cuts be­cause the econ­omy is in such pa­thetic shape. Un­der such cir­cum­stances, could the armed forces bud­get be left un­touched? Only a few com­men­ta­tors dared sug­gest the idea.

The sig­nal the armed forces would bow to what the gov­ern­ment de­scribed as a “critical fi­nan­cial sit­u­a­tion” came last week when Pak­istan Army Chief Qa­mar Ba­jwa de­clared the mil­i­tary would “be fore­go­ing (the) rou­tine in­crease in (the) an­nual de­fence bud­get.” The armed forces haven’t agreed to ac­tual cuts but they’ve ac­cepted a seem­ing freeze and the pam­pered of­fi­cer corps will even forego their yearly in­cre­ments. Of course, Pak­istan’s armed forces pulls in cash un­der so many dif­fer­ent heads it’s hard to tell if the spend­ing freeze will ac­tu­ally take ef­fect or not.

For Pak­istan, go­ing slow on de­fence spend­ing is an in­di­ca­tion of just how big a hole the econ­omy is in. The gov­ern­ment hopes to hike tax rev­enues by 35 per cent, a

tough task in a coun­try where only a fraction pay taxes. The econ­omy’s grim state was high­lighted in the pre-bud­get Eco­nomic Sur­vey.

The out­go­ing gov­ern­ment fixed am­bi­tious tar­gets for the econ­omy that might never have been pos­si­ble to at­tain but they were missed by huge mar­gins. The only sec­tor that sur­passed tar­gets was live­stock, which ob­vi­ously wasn’t a huge cause for ju­bi­la­tion. GDP growth was a pal­lid 3.29 per cent com­pared to the tar­geted 6.3 per cent.

For the 2020 fi­nan­cial year, growth’s been fixed at just 4 per cent. In­dus­trial growth clocked 1.4 per cent, vastly un­der­shoot­ing the 7.6-per-cent tar­get. Ser­vices did slightly bet­ter at 4.7 per cent but even that fell short of the 6.5per-cent goal. Agri­cul­tural growth crawled at a measly 0.85 per cent.

No easy money

Mak­ing a pil­grim­age to the IMF is hardly a new ex­pe­ri­ence for Pak­istan. But this time round, the world’s a vastly dif­fer­ent place from ear­lier years. A hos­tile Washington ad­min­is­tra­tion has made good on its threats to cut Coali­tion Sup­port Fund­ing to the armed forces so one easy money av­enue is closed for the mo­ment. With Washington lean­ing on it, the IMF has been ex­tra-stern about loan con­di­tions im­posed on Pak­istan.

Sig­nif­i­cantly, last month Pak­istan ap­pointed Raza Baqir, who worked for the IMF for nearly two decades, as cen­tral bank gover­nor, in­evitably spurring spec­u­la­tion the IMF had sent its viceroy to en­sure Is­lam­abad stuck to its tough terms.

The sit­u­a­tion has been made worse by Prime Min­is­ter Im­ran Khan’s ini­tial re­fusal to ac­cept the econ­omy is well and truly up the creek. At first, he made it a point of hon­our Pak­istan would not go with a beg­ging bowl to the IMF and made pil­grim­ages in­stead to Is­lam­abad’s few rich al­lies like Pak­istan’s econ­omy is in a sham­bles

Saudi Ara­bia and China. As a re­sult of his trav­els, Pak­istan’s re­ceived $9.2 bil­lion from Saudi Ara­bia, China and the UAE.

Nev­er­the­less, fi­nally, Khan was forced to con­cede re­al­ity and called in the IMF, which after tough ne­go­ti­a­tions of­fered $6 bil­lion. Another $2 bil­lion is ex­pected from the Asian De­vel­op­ment Bank. The IMF made it clear it won’t be pay­ing the first tranche of cash till its con­di­tions are im­ple­mented in the bud­get. The IMF has also in­sisted Pak­istan’s cur­rency find its own level and just be­fore the bud­get’s pre­sen­ta­tion, the ru­pee fell to 151.92 to a dol­lar. Mean­while, the Pak­istan Stock Ex­change has been in free-fall, slid­ing from a 2016 peak of 52,000 to 34,280 on Mon­day.

In the short run, the IMF’s in­sis­tence on belt-tight­en­ing will only worsen the plights of busi­ness and cit­i­zens. The IMF has in­sisted, for in­stance, on an end to ex­porters’ tax breaks, which is likely to slam in­dus­tries like tex­tiles. Ed­i­ble oil prices have also been hiked.

Pak­istan has been work­ing

hard to con­vince its lenders that times have changed and it’s work­ing hard to lower ten­sions with In­dia. In­deed, Khan’s been mak­ing doveish noises, try­ing to cloak him­self as a peace­maker com­pared to the hawk­ish Naren­dra Modi.

The ques­tion is will Pak­istan’s dire eco­nomic sit­u­a­tion con­vince the peo­ple who mat­ter (the armed forces) that one way for­ward would be to aban­don its quest to keep pace with In­dia? Pak­istan’s de­fence bud­get this year is about $11 bil­lion com­pared to In­dia’s $68 bil­lion. But In­dia’s de­fence spend­ing is at a more af­ford­able be­low 2 per cent of GDP. By con­trast, even Pak­istan’s of­fi­cial de­fence bud­get is 4 per cent of GDP. And that’s a very in­com­plete pic­ture.

For in­stance, pen­sions are out­side the main mil­i­tary bud­get and so are anti-ter­ror­ism funds. The forces also get cash from what’s called the Pub­lic Sec­tor De­vel­op­ment Pro­gramme. Arms purchases are from some other part of the gov­ern­ment bud­get. Es­ti­mates are de­fence gob­bles up 20 per cent of the gov­ern­ment’s bud­get.

Bear in mind, Pak­istan has con­sis­tently kept up its de­fence spend­ing even though eco­nom­i­cally it’s fallen be­hind its neigh­bours. In 1995, Pak­istan’s ex­ports to­talled $11.6 bil­lion that rose to $21 bil­lion by 2017. By con­trast, Bangladesh, once the poorer of the two coun­tries, had ex­ports worth $34 bil­lion in 2017 and aims to push that to $39 bil­lion this year.

Peace prospects

It may be too op­ti­mistic to think Pak­istan’s fi­nan­cial woes could ever per­suade the mil­i­tary to smoke the peace pipe with In­dia. How­ever, there are strong ex­ter­nal forces at work here. The Chi­nese are wor­ried the money be­ing poured into the Chi­naPak­istan Eco­nomic Cor­ri­dor will be wasted un­less Pak­istan be­comes sta­ble in­ter­nally. A large chunk of Chi­nese in­vest­ments are be­ing made in Khy­ber Pakhtunkhw­a and Baluchis­tan, two trou­bled provinces. Be­tween last July and this April, for­eign in­vest­ment nose­dived 51 per cent to $1.3 bil­lion, a drop of 51 per cent from the year-ear­lier pe­riod.

Sim­i­larly, the Amer­i­cans need Pak­istan to bring the Afghan Tal­iban to the ta­ble but they’re also less will­ing than ever to put up with the coun­try’s shel­ter­ing of ter­ror­ists. Some months ago, ex-Nor­we­gian prime min­is­ter Magne Bon­de­vik trav­elled to Kash­mir where he met Hur­riyat and other lead­ers. Soon af­ter­wards, Bon­de­vik trav­elled to Pak­istan, prompt­ing a flurry of spec­u­la­tion about back-chan­nel ne­go­ti­a­tions.

Com­men­ta­tors in Pak­istan forecast the econ­omy will re­main fee­ble for at least three years. Could that weaken the pow­er­sthat-be to a point where they’d be amenable to out­side pres­sures? For that to hap­pen, the think­ing of Pak­istan’s rul­ing elite would have to un­dergo a top-to-bot­tom sea change.


Dis­mal pic­ture

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