Wednesday, Mar 22, 2023

As its rentier economy collapses, Pakistan’s immediate future looks grim

With the US withdrawal from Afghanistan and change in the geopolitical environment, Pakistan’s opportunities for rent seeking have been diminishing. Its growing closeness to China isn’t helping either

Ajay Darshan Behera writes: With the US withdrawal from Afghanistan, the advantage of the geopolitical environment has been diminishing, much more so as Pakistan aligned closer to China. (Reuters)
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As its rentier economy collapses, Pakistan’s immediate future looks grim
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Pakistan’s economy is almost on the verge of collapse. With inflation at 25 per cent, the Pakistani rupee trading in the market at 255 to the dollar and foreign exchange reserves which have sunk to about $3.5 billion, Pakistan is staring at a possible loan default. It desperately needs external funds to shore up its dwindling reserves. It has received pledges of $10 billion from foreign donors. But no one will go ahead till the IMF bailout package of $6 billion signed in 2019 goes through. The IMF has insisted on the correction of structural imbalances in the economy and advocated strict conditionalities.

The government has no choice but to accept the conditionalities in order to receive the funds, increase its foreign exchange reserves and repay external debt. But this will provide only short-term relief without addressing any of the structural problems in an economy that cannot balance its expenditure with revenues. Pakistan’s consumption-led, import-intensive growth model is an unsustainable economic model which has trapped the country in a vicious cycle of perpetual borrowing. The so-called IMF bailout package will only add to Pakistan’s debt. It needs $30 billion by the next fiscal year for debt repayment.

Pakistan’s economy, as a result of its inability to generate revenues, has been aid- dependent. One of the country’s leading economists, Akmal Hussain, has argued that Pakistan’s aid dependence is rooted in the very structure of the economy “that has been shaped by successive elite-based, rent-seeking regimes in Pakistan’s history.”

The geopolitical advantages that Pakistan had during the Cold War and subsequently throughout the US presence in Afghanistan during the American “war on terror” resulted in the growth of a rentier economy. Pakistan may not be a classic rentier state like the natural resource-rich Gulf economies which are based on their oil wealth. These states receive an income without an increase in the productivity of the domestic economy and don’t need to tax their citizens. The concept of a rentier state can also be applied to countries that trade their strategic location and generate rents externally by manipulating the regional security environment. Pakistan’s military economy has also benefited from this rentier economy.

Thus, relatively high GDP growth in Pakistan has only been achieved during the military regimes, when large foreign aid inflows were available. It did well under General Ayub Khan in the 1960s. It was bailed out from a very difficult economic situation during General Ziaul Haq’s regime when it became a “frontline state” against the Soviets in Afghanistan in the 1980s. During the 1990s, after the end of the Cold War, Pakistan’s economy was on the downslide. The economy picked up again when General Musharraf joined the US-led war on terrorism. There is a cyclical pattern in Pakistan’s economy. It does well when it is fighting others wars. But as aid declined in the subsequent periods of civilian governments, so did its GDP growth.

Between 1951 and 2011, Pakistan received nearly $67 billion in aid from the US. Since 2002, the US has provided $30 billion in direct aid to the country. Further, since the beginning of the war on terrorism, the Coalition Support Fund has formed the largest category of US funding for Pakistan, amounting to $13 billion. However, since 2008, there has been a change in the nature of US assistance to Pakistan. The first major step was the promulgation of the Enhanced Partnership with Pakistan Act of 2009, or the Kerry-Lugar-Berman bill, which diverted spending mainly to social programmes in education, health care, infrastructure development, poverty alleviation, and the like.

Subsequently, US leaders have been vocal in pointing out the rent-seeking behaviour of Pakistan’s ruling elite. Former US Secretary of State, Hillary Clinton had said that it was difficult to increase aid when Pakistan’s own elites pay no taxes. President Donald Trump in January 2018, in a tweet, accused Pakistan of giving nothing to the US but “lies and deceit” and providing a safe haven to terrorists. More recently, Saudi finance minister Mohammad Al-Jadaan stated at the World Economic Forum that support from the Kingdom would be aligned with multilateral agencies and would also depend on Pakistan’s willingness to revamp its economy. He said, “we are taxing our own people; we are also expecting others to do the same.”


With the US withdrawal from Afghanistan, the advantage of the geopolitical environment has been diminishing, much more so as Pakistan aligned closer to China. Pakistan’s advantages in rent-seeking are diminishing. Even an IMF bailout will not be easy. Besides the harsh conditionalities, it will be watched closely to ensure Pakistan does not use IMF money to repay debts to China. The opacity surrounding the China-Pakistan Economic Corridor has been under question. The true picture of the terms and conditions of the loans has not been made public. Pakistan owes more than $87 billion in outstanding debt to the Chinese.

The outlook for the next few years doesn’t look too good. The IMF bailout can only be a short-term solution. Besides more loans, where are the additional resources going to be generated? Boosting tax revenues is a requirement, but this is easier said than done. Pakistan has the world’s lowest tax-to-GDP ratio. More importantly, can there be any reforms in the military economy? The defence budget is 25 per cent of the federal budget. The various foundations run by the military have a revenue of $26.5 billion which is about 10 per cent of the GDP, but pay no taxes. The government has a huge challenge in dealing with the dwindling currency reserves, mounting debt and widening trade deficit. The tough job of boosting exports, attracting remittances and generating taxes lies ahead.

The writer is professor at the Academy of International Studies, Jamia Millia Islamia University, New Delhi

First published on: 28-01-2023 at 18:00 IST
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