All of the initial evidence released points towards the Lashkar-e-Toiba and related groups having a hand in the Mumbai terrorist attack. International diplomatic pressure is mounting on Pakistan to crack down on terrorist training camps in Pakistan-occupied-Kashmir. This is not the first time: in the past Pakistan has been accused by several countries besides India, including Afghanistan, the United States, the United Kingdom, and China of permitting terrorist training camps on its territory. Such pressure has historically led to cosmetic changes, but things have soon returned to “normal”.But this time the situation might be different. Pakistan has been deep in the economic doldrums, partly because of terrorism. The economic outlook is utterly bleak: it has gone as far as to seek an IMF bailout to deal with a balance of payments crisis. Its foreign reserves, which stood at 14 billion in June 2007, had sunk to below 5 billion in September 2008. The Pakistani rupee lost a quarter of its value this year and the stock market has lost even more — 35 per cent, as an IMF report pointed out. According to the Economist Pakistan has a widening current account deficit of 7.2 per cent, and budget deficit of 6.7 per cent. Inflation hovered around the 24 per cent mark. During the 1997-98 financial crises in East Asian countries, the IMF had loaned billions of dollars to Indonesia, Thailand, and South Korea to cover their foreign exchange-denominated debt; but the current economic problem of Pakistan is not similar to that crisis, in which South-east Asia suffered due to heavy dollar-denominated borrowings and the shortcomings of their banking system. Pakistan does not have a collapsing banking system; instead, it has capital flight. Terrorist activities and a climate of insecurity have accelerated the departure of capital, domestic and foreign, and discouraged foreign direct investment. According one estimate, suicide bombers have struck 88 times, killing more than 1,100 people since July. That pushes badly needed foreign investment away from Pakistan. The American financial crisis is also expected to hurt Pakistan. The New York Times estimates remittances from Pakistani migrants back home to relatives in Pakistan at having been expected to be $7 billion this year, about $3 billion of that from American Pakistanis. But that inflow is likely to be less.Will the IMF bailout be enough? It is doubtful. The IMF’s expectations are that Pakistan’s government will cut spending, increase the tax base and step up the pace at which public sector enterprises are brought into the private sector. These measures might be unpopular and painful; the government’s promises to the people will be hard to meet after IMF restrictions. As a result Islamic militants within Pakistan might gain new recruits. Moreover, an insecure democratically-elected government will find it extremely difficult to take unpopular actions to fix the economy, but at the same time any major economic downturn might give the army new reason to stage a comeback.Pakistan needs as much as 15 billion dollars for up to three years; that may be possible only through foreign direct investment. Foreign direct investment, a bundle of capital, technology, and management, should help Pakistan in several different tracks: through capital formation, technology spillovers as well as the development of a more thoroughly competitive environment. All this should boost the conditions that lead to economic growth for the Pakistani economy. FDI is not only about the provision of capital: it is also a help in boosting productivity. Economic growth of any country depends not only on labour and capital but on overall efficiency or productivity. For achieving a sustainable growth rate, Pakistan thus also needs high rate of capital formation. The rate of capital formation in Pakistan was historically below 20 per cent — mainly because domestic savings are low, at 11.7 per cent, and because foreign investment was scarce. The FDI inflow into Pakistan is less than one per cent of the total FDI made globally. Thus there is an urgent need that government should take special efforts for attracting foreign investors. Terrorism, permitting terrorism to thrive, and the insecurity created by the threat of terrorism, means that foreign investors are extremely chary of coming to Pakistan.It is more than clear that Pakistan’s role as the “epicentre of terrorism” has left it vulnerable. Ultimately Pakistan will have to stop support to terrorism; it has to be done voluntarily or economic crises will force it. The writer teaches at Nirma University, Ahmedabadexpress@expressindia.com
