When Cash & Hate Collide: Frayed US-Pakistan Ties

♠ Posted by Emmanuel in ,, at 9/29/2011 12:14:00 PM
OK, so I had to think of a hackneyed title to describe an even stranger relationship. In general public consciousness--especially that of America--Pakistan emerged on the world stage in the wake of the 9/11 attacks. If not wholly supportive of the Taliban regime in Afghanistan back then, it was at least tolerant of its existence. By throwing wads of cash ("foreign aid") to curry Pakistan's favour, then-leader Pervez Musharraf famously switched allegiances to become a global warrior on terror--though his country's ultimate loyalty has remained in question. Since then, Pakistan has encountered several upheavals--the return of former leader Nawaz Sharif from exile, the killing of Benazir Bhutto and the subsequent election of her controversial husband "Mr Ten Percent" Asif Zardari.

All the while, Pakistan's economy has not exactly been a paradigmatic example of South Asian growth. In the wake of the global financial crisis, it did once more what it's done before in taking out an IMF standby agreement. With the consequences of a full political meltdown in a nuclear power potentially rather severe, the West ponied up quite quickly.

Fast forward to today and we have had interesting developments in this exercise in political economy. On the political side, we've had Pakistan complaining mightily about US excursions into its territory--especially that which eliminated Usama bin Laden. (Nevermind owing the US an explanation as to why he was sheltered in Pakistan's capital for the longest time, but territorial sovereignty does matter.) On the economic side, let's just say that Pakistan has, alike during previous bouts of IMF borrowing, failed to meet IMF conditionalities. This time around, failures to improve revenue collection are the culprit. The Pakistan News Service has the lowdown on this repeat borrower's history of, er, repeatedly borrowing without successfully escaping the need to do so. IMF lending to Pakistan is almost a mini-history of lending fashions at the institution:
Pakistan and the International Monetary Fund (IMF) will end [their] 12th loan programme, tag[ged] unsuccessful after 11 out of total signed loans of 18 in [the] last 53 years history of relations between two sides as Islamabad got [its] first loan programme from the Fund in 1958. The existing Standby Arrangement (SBA) programme will again repeat the old history as it is going to expire on September 30, 2011, on [an] unsuccessful note under which Islamabad failed to draw [the] last two tranches of $3.4 billion.

Pakistan’s history of using IMF resources can be divided into three distinct phases. In the first period—1970 to 1988—Pakistan had four one-year SBAs followed by one three year Extended Fund Facility (EFF). The special characteristics of this phase were (a) with the exception of two, [the] rest of the SBAs were fully disbursed, (b) there was little emphasis on structural reforms (except in EFF), and (c) repeated approach to Fund resources, in between periods of break.

In the second period, 1988 to 1999, Pakistan had both the short term and multiyear arrangements with the IMF. Unlike the first phase, these arrangements emphasized on variety of structural reforms along with demand[s on economic] management policies. Almost all the arrangements went off-track sooner or later on account of policy slippages. As a result, throughout this period Pakistan was continuously under one or [an]other IMF programme.

In the third period, 2000-2004, Pakistan availed one facility of SBA and PRGF [Poverty Reduction and Growth Fund] each. These arrangements were completed successfully as Pakistan met most of the structural performance criteria. With the recovery from macroeconomic crises, Pakistan exited from IMF programme in 2004.
The article then goes on to describe various IMF loan programmes since independence; more recent activity can of course be found on the [extensive] Pakistan pages on the IMF site.

In any event, disagreements over security have worsened with the US in the process of cutting off aid to Pakistan over sundry disagreements about how these monies have been used. Matters have come to a head over American incursions into its territory at the same time Pakistan has been unable to meet aforementioned conditionalities to avail of further disbursements of IMF cash. And don't forget that the less-than-transparent Pakistani intelligence service ISI has been accused by Admiral Mullen, outgoing chairman of the US Joint Chiefs of Staff, of coddling the allegedly terroristic Haqqani network. (Various political parties are now in the process of addressing this serious accusation.)

So the US and Pakistan don't quite get along. But what are the economic costs if Pakistan indeed goes it alone? The Express Tribune has some ideas:
The signals are indeed dire. The powers that be, above and beyond Prime Minister Gilani, had already spoken to break the heart of the business community: Pakistan was ready to take the consequences of its embrace of the Haqqani network and that it was the US that would suffer after losing Pakistan as an ally. As for the break with the IMF — after Finance Minister Abdul Hafeez Sheikh could convince neither the MQM [coalition partners] within the government nor the PML-N in the opposition to implement the RGST (Reformed General Sales Tax) — it threatens the economy with ‘dollarisation’ and rampant inflation already standing at a level higher than any other South Asian economy. What the businessmen wanted was probably not within the grasp of Mr Gilani. They were of the opinion that if the US was to be defied and if the umbrella of the IMF was to be removed, then they could hold up their end of the bargain provided that law and order was restored...

The pacification of Karachi is a long way off and may be overtaken by other crises triggered by the tiff Pakistan has picked with the US, to provide temporary emotional relief to the country’s intensely anti-American population. What the Gilani government is doing will not serve to bolster the confidence of the business community in Karachi. The army chief has not denied that the Haqqani Network is alive and well in Pakistan but has claimed that a lot of other countries in addition to Pakistan were maintaining contact with a militia of Taliban that controls 13 of Afghanistan’s 34 provinces. And Mr Gilani has delivered the most telling blow by saying: “America can’t do without us; it should stop sending out wrong messages.”
The end result may just be capital flight as the already-thinned business community in Pakistan flees:
No prizes, therefore, for predicting that the businessmen of Karachi will soon start saving their money and assets from being devalued by fleeing to other markets in the neighbourhood. It would be fair to say that the next few months or more will be uncertain to say the least, and that the consequences of a permanent break with the Americans could be severe on Pakistan’s economy.
To be honest, Pakistan's security services are at least as duplicitous as Westerners who've deservedly earned Pakistan's ire through the years. The ISI is as much of an obstacle to Pakistani development as foreign intervention. Unspeakable as it may be to many Pakistanis, could the alternative to coddling Americans actually be worse? There is much talk that a chastened Pakistan will soon be currying US favour once more given few alternatives and a moribund economy. Most of its "record" $18B reserve holdings f'rinstance are attributed to foreign donors the country is currently keen on ridding itself of.

Pakistan has been the mother country of many great minds; it does sadden me how it has been unable to sort things out at home so it can move forward alike its neighbours in India. Despite also having highly contentious and often violent politics, the latter has somehow managed to improve its situation in a way Pakistan has yet to find.

As an aside, those all-purpose saviours the Chinese are being mooted for picking up the slack in lending to Pakistan.