Pakistan’s Case of Economic Windfalls and Its Experiment in Afghanistan

 By Brig. Vivek Verma


Over the past half-century, Pakistan has used the geostrategic events in Afghanistan as a strategic opportunity to resurrect its ailing economy and legitimise military rule. The US drawdown from Afghanistan paved the way for the Taliban takeover. The hybrid government in Pakistan has been delighted about the possibilities of the Taliban forming the government in Afghanistan and has been supercharged in its engagement across the world. Will Pakistan be the third time lucky from the Afghanistan imbroglio, or will its ‘magnificent obsession’ turn fatal.

The Windfall of 1979- Creating Terrorists as Strategic Assets

Pakistan faced its worst economic crisis after the 1971 Bangladesh War. The revolt in East Pakistan due to political vendetta by West Pakistan led to the creation of independent Bangladesh. The martial law authorities were compelled to hand power to Zulfiqar Ali Bhutto’s Pakistan People’s Party amidst a difficult macroeconomic situation. The poverty incidence rose to 55 per cent in 1971-72. The world oil price shock of 1973 increased Pakistan’s import bill. The failures of cotton crops in 1974-75, pest attacks on crops and massive floods in 1973, 1974, and 1976-77 impacted Pakistan’s economy badly. It experienced the worst inflation between 1972-77 when prices increased by 15 per cent per annum while the annual average fiscal deficit/GDP ratio rose to 8.1 per cent. The trade balance deficits tripled in six years from US$337 million in 1970-71 to US$1,184 million in 1976-77. Zulfiqar Ali Bhutto’s famous words, “we will eat grass, even go hungry, but we will get one of our own (nuclear bomb)” to counter India and the economic mismanagement did not go down well with the military. On 05 July 1977, General Zia-ul-Haq led military coup d’état sealed the fate of flamboyant Zulfiqar Bhutto. The martial law regime had to legitimise its existence and endure the execution of Zulfiqar Bhutto. It started with denationalisation, deregulation, and privatisation to shore up the economy.
In 1979 President Carter suspended all economic aid to Pakistan except for food aid because of uranium enrichment facility development by Pakistan. However, the USSR invasion of Afghanistan in 1979 came as a godsend opportunity to General Zia. He saw it as a strategic opportunity to shore up Pakistan’s failing economy and legitimising his dictatorship. He agreed to be the frontline state to fight the proxy war against USSR through economic support from the USA and Saudi Arabia. As a result, Pakistan started its terror factory producing Mujahideen and used the liberal US and Saudi aid to support its ailing economy. The US assistance increased ten folds – from around US$60 million in economic and development assistance in 1979 to more than US$600 million per year in the mid-1980s. From 1980 to 1990, a total of US$5.29 billion in aid was provided that included US$3.1 billion in economic assistance and US$2.19 billion in military assistance. In 1979, Pakistan GDP was US$19.688billion, and in just one year, it increased to a whopping US$30.938 billion. The per capita income grew by 47 per cent in one year, and the GDP recorded a steady growth of five to seven per cent throughout the 1980s. Thus, General Zia-ul-Haq legitimised his dictatorial regime and found ways to fund his revenge against India without straining the economy.

The increase in Saudi aid resulted from the 1979 Islamic revolution in Iran and the Soviet invasion of Afghanistan. The Iranian revolution triggered Saudi’s intent to control Sunnism in Pakistan while the Soviet-Afghan war gave them a mechanism to do so through the funding of Ahl-e-Hadith and Deobandi madrassas. Consequently, the number of madrassas in Pakistan tripled between the mid1970s and mid-1990s. Thus the funds received were used for spreading Wahhabism and radicalisation rather than real education amongst the masses. Thus, recruits and ready money helped Pakistan in establishing the terror factories. Hence, terrorists were nurtured as strategic assets. Moreover, it allowed Pakistan to produce terrorists and push its agenda of fomenting proxy war in Kashmir.

The 1990s and the Era of Debt Crisis

The US involvement in the Gulf War and the collapse of the Soviet Union helped Pakistan to carry on with its plan of proxy war in the Indian Jammu and Kashmir unabatedly. 1990 saw the diversion of terrorists from Afghanistan to Pakistan. India’s financial crisis of the 1990s helped Pakistan increase its proxy war efforts without risk of retaliation. However, the US shift in focus to Iraq led to the drying down of the much-wanted aid. The Gulf crisis resulted in a decline in remittances. The defence spending of over 9 per cent during the military regime of General Zia ul Haq left no room for development. The imbalance between defence and development spending soon started haunting Pakistan. Soon after the mysterious death of General Zia, democracy was introduced by the Pakistan military in 1988. However, within two years, the elected government was dismissed. It created political uncertainty, and the economy started slipping. By 1994, Pakistan external debt soared to US$49.5 billion, almost 73 per cent of the GDP. The Soviet withdrawal in 1989 from Afghanistan and the Taliban regime coming to power in 1996 provided Pakistani security planners with the much-wanted strategic depth. However, by this time, the probability of external debt default started gathering momentum.

May 1998 nuclear test resulted in economic sanctions on Pakistan and triggered massive capital flight. By the turn of the century, the external debt soared to US$63 billion, almost 81.2 per cent of the GDP. The 1999 Kargil fiasco also saw the return of the military government in Pakistan under General Parvez Musharraf. Like General Zia, he, too, was looking for another windfall to happen. Sure enough, the terror attack on 9/11 in the US precipitated the Global War on Terror (GWoT). This time, the US was back in Afghanistan to oust the same Taliban it had helped gain power in Afghanistan. Under General Parvez Musharraf, Pakistan readily agreed to be the frontline state to support the GWoT. He turned his back on the Taliban and saw their government falling in Afghanistan. However, to retain the umbilical cord, safe sanctuaries were provided to the selected Taliban.

The 2000s: Second Windfall

The support provided by Pakistan in terms of bases and transit facilities for the US Afghanistan operations led to the second windfall for the beleaguered General Musharraf. He was suitably rewarded. His military regime was legitimised, the US crippling economic sanctions were eased, and a new tranche of aid was guaranteed. After 9/11, Pakistan has been the highest recipient of the US aid programme till 2010. However, the bulk of the aid has been for security-related purposes. It provided almost US$62.2 billion from 2002 to 2007.

Despite the tensions with India over the attack on the Indian Parliament on 13 December 2001, Pakistan was able to manage its economy well till 2006. But, General Musharraf’s actions of Lal Masjid and the sacking of Chief Justice of Pakistan in 2007 resulted in mass protests forcing him to cede space to democracy and finally led to his ouster. Moreover, the run-up to the elections in 2008 saw the assassination of Benazir Bhutto of the Pakistan People’s Party (PPP). It only added to the political uncertainty. PPP under Asif Zardari, the husband of Benazir, came to power riding the sympathy wave. However, he was not prepared to deal with the 2008 economic crisis. Had it not been for the second windfall, Pakistan would have slumped into the category of a failed state.

2008 Onwards: The Steady Slump

In 2009, the US Congress, as part of its renewed commitment to Pakistan to fight the GWoT approved the Enhanced Partnership for Pakistan Act (commonly known as the Kerry-Lugar-Berman bill). The bill aimed to separate the security and development plan from unpredictable geopolitical and military events. US$7.5 billion over five years (FY2010 to FY2014) was authorised to improve Pakistan’s governance, support its economic growth, and invest in its people. In addition, between 2008 to 2010, the IMF disbursed credit worth US$5.2 billion to tide over the 2008 economic crisis.

The strains in Pakistan-US relations started showing signs once Pakistan was put under greylist by the Financial Action Task Force (FATF) in 2008. The relationship got further strained on the revelation that Pakistan was hiding Osama bin Laden, the Al Qaeda chief, at Abbottabad. After 2011, US Congress became stringent about authorising aid and linked it to Pakistan’s counter militancy and extremism efforts. As a result, in 2011, Pakistan decided to end the IMF programme. However, soon after the 2013 elections, the Nawaz Sharif government agreed to a bailout package from the IMF to the tune of US$6.6 billion, given the grim economic outlook.

The ‘Pivot to Asia’ strategy brought in by President Obama in 2012 changed the strategic discourse and cooled the Pakistan-US relationship. Pakistan seemed to have lost its status as a foreign policy priority for Washington under Trump Presidency. It desperately needed funds to remain afloat. The Chinese President Xi Jinping flagship Belt and Road Initiative (BRI) project launched in 2013 was seen as a panacea to Pakistani’s woes.
The pullback in the Pakistan-US relationship started in late 2018 when President Trump requested Islamabad facilitate US talks with the Afghan Taliban. However, Washington has been wary of Pakistan’s alleged duplicitous game supporting US-Taliban talks while providing sanctuary to Taliban elements. Pakistan, on its part, blames the US for the delusional relationship and wants Washington to remove the sword of FATF. The research paper “Bearing the cost of global politics- the impact of FATF greylisting on Pakistan’s economy” authored by Naafey Sardar estimates that Pakistan has lost US$38 billion due to FATF greylisting. The hybrid government of Imran Khan, duly supported by the Pakistan Army, is finding it difficult to bring the Chinese virus hit economy on its track.

Current Contexualisation

Pakistan remains poor, with inflation at 10 per cent and unemployment rates at an all-time high of 8 per cent. The acute food, water, and energy shortages have also added to the woes of Imran Khan-led Pakistan Tehreek-e-Insaf (PTI) hybrid government. Although the IMF and Pakistan have an unhappy history, Imran Khan had no option but to seek a bailout from the IMF due to its balance of payments crisis and sharply declining foreign exchange reserves. However, the COVID-19 crisis has impacted the economy badly. Therefore, the current budget presented in June 2021 relegated austerity measures imposed by the IMF macroeconomic stabilisation programme. With eyes on the 2023 elections, PTI intends to propel economic growth. However, the challenge for finance minister Shaukat Tarin is to fund the burgeoning debt servicing, development, day-to-day administrative functioning, and defence.

Pakistan economic survey 2021 presented a rosy picture of economic recovery from the slump of 2019 to 2021 (-0.47 per cent to 3.94 per cent). The budget pegged the fiscal year (FY) 2022 economic growth at around 4 per cent. However, the bean-counting of resources presents a different picture. The Pakistan defence budget allocation of PKR1.37 trillion (US$8.78 billion) for FY 2021–22 is a 6.2% increase over the original FY2020–21 defence expenditure of PKR1.29 trillion. It is about 16% of the government’s total expenditure for FY2021–22.

On the other hand, interest payments on debt are likely to grow by 3.9 per cent and account for PKR 3.06 trillion (US$200 billion), or 36 per cent of budget expenditures (refer to Figure 1 for Pakistan’s debt). Through the act of Parliament, Responsibility and Debt Limitation Act 2005, the government has the onus to limit the debt to 60 per cent of GDP. However, currently, the ratio stands at 78% of Pakistan’s US$303 billion GDP. Tarin seems confident of negotiating with the IMF on the current account deficit that is likely to swell by PKR 3.42 trillion or almost 6.3 per cent of the GDP.

Praying for the Third Windfall

Given the financial mess, Pakistan seems confident of leveraging its geostrategic and military advantages to get concessions from the IMF in the form of more loans. The US drawdown, the Taliban takeover of Kabul and the grim political situation provide yet another strategic opportunity for Pakistan to play the centre stage, and it is leaving no stones unturned. The Foreign Minister Quereshi can be seen cantering between China, Qatar, Central Asian Republics while engaging with Turkey and Saudi Arabia besides engaging with the US, UK, Russia and EU.

The sudden turn of events in Afghanistan has created more uncertainty. The frozen state of Afghanistan economy may create problems for the Taliban government. Taliban remains a banned organisation according to UNSC resolution 1333. Hence, propping up the Taliban against the international consensus may not be possible for Pakistan. Given its grim economic condition, any diversion of funds will attract FATF spectre. Pakistan desperately needs aid from China and its other benefactors if it has to play the role of Kingmaker in Afghanistan. It can ill afford to risk its economy by providing economic assistance to the Taliban. Moreover, the refugees’ influx, grim internal security situation and low FDI inflow have been a cause of concern for the Pakistani planners. Afghanistan remains a ‘magnificent obsession for the Pakistani hybrid government. But handling this ‘fatal attraction’ without the third windfall may be ambitious.