Waging Jehad On Borrowed Money

There's no easy answer to this, even though independent experts estimate that Pakistan may be able to sustain this battle for a month or so more. A very important key, however, lies in the 1999-2000 Pakistani Budget presented two weeks ago, which acceded a small 11 per cent increase in defence outlay despite the ongoing border battle. Most of the $27 million rise goes to cover for inflation and staff pay hikes. The lion's share of the government's total spending outlay of $12.6 billion went to defence-$2.8 billion-and debt servicing-$5.6 billion. In debt servicing, however, the rise came to $33 million.

So, why does a country with well-declared battle intentions accord a higher sum of money to debt servicing than to defence? Especially, with a consumer price inflation rate at 8 per cent? Force of circumstances is the obvious reason. Complains Haseeb Haider in The Nation, a prominent newspaper that has aligned itself with the Nawaz Sharif-led Pakistan Muslim League: "Despite an awkward geopolitical situation on the borders and a massive devaluation of 18 per cent during the last fiscal, the government has maintained the defence budget at the minimum possible level-a measure that would certainly satisfy the donors." That fits; after all, only 35 per cent of the defence budget, writes Absar Alam in The Nation, is met by national resources-the rest had to be met from loans and aid.

While Pakistan continues to resist western pressure to replace its bared fangs with a grimace, its economy turns the tables on its political ambitions. Even the highly respected and fairly independent newspaper Dawn said in its editorial: "The budget proposals may not be final since the imf demand for increases in the prices of utilities remains unimplemented. The people may well have to endure several mini-budgets during the course of the year." And in those mini-budgets will probably lie the key to Pakistan's rescue.

Pakistan has few options to intense hardship. Post the nuclear blasts in Baluchistan last year, it is thanks to these multilateral agencies and bilateral friends that Pakistan survived 1989-99, easily the worst year in its economic history. On November 12, 1998, foreign exchange reserves sank to a record $415 million, worth less than two-and-a-half weeks of imports. On March 31, 1999, thanks to resumption of imf funding, balance of payments assistance from World Bank (WB), an adb loan, refund of payments by the US for F-16 planes, and drastic reforms, the forex kitty swelled to $1.8 billion. Said the World Bank in its recent country survey: "All in all, Pakistan has gained a crucial breathing space."

But there is every danger of that space getting cramped too soon. Says Omar Asghar Khan, former trade union leader and independent economist who heads Sangi, an ngo: "Pakistan's economy centres on foreign loans. This budget depends a lot on foreign loans. So, if the donors back off, it will be very unfortunate for us." And the WB report talks of how Pakistan has lost face in the global creditors' and investors' circle. In 1998, for instance, even with a relatively freer economy, Pakistan managed to attract only about $500 million in foreign direct investment. Says Babar Ayyaz, independent economist: "While the impact of Kargil cannot be quantified just yet, this will affect the investment climate if it is not contained and even the flow of foreign aid will be hampered."

And then there are the warmongers. Explains M. Ziauddin, independent economist and bureau chief of Dawn: "There won't be any immediate impact on the economy because of Kargil, but parliamentarians from the ruling party have hinted that the military budget may be increased if needed. Even Pakistan People's Party's (ppp) former defence minister, Aftab Shah Mirani, has told the government that the military budget because of Kargil should be Rs 155 billion. The operation can be sustained for one month as it appears that preparations had started about two years ago and the impact must have been borne last year."

He could be right. In Global Development Finance, 1999, the WB forecast, quite correctly, a 3 per cent real gdp growth and 12 per cent export drop in 1998-99. But Pakistan had good luck on its side. Harvests were good in 1997 and 1998, partly due to favourable weather, and crude oil prices fell. Other world market prices contributed favourably to its terms of trade. And with sanctions choking off blood supply, Pakistan went in for major surgery in the financial economy and basic utilities pricing and distribution. As a result, loans poured in and fiscal and budget deficits were contained.

But beneath the veneer of normalcy lies an extremely fragile economy. With most of Pakistan having gone urban and the services sector comprising half the economy, visitors to Pakistan hardly notice the ills. But most of the gloss comes from a staggering $1.5 trillion black economy and smuggling, which is a lucrative $3 billion business. Even as the budget managed to postpone retirement of huge G-7 debt, it had to use the same funds to partly meet domestic debt, which is 35 per cent of the gdp. Domestic savings is a poor 12 per cent of gdp and poverty is alive and well. The WB report actually found some evidence of an increase in the incidence of poverty in the '90s, due to the slowdown in economic growth.

If border tensions escalate, the economy, mainly the rural and agriculture sector, would be the first to get hit. Says Ziauddin: "Already there is no production. Our farmland both in the Punjab and Sindh will be used as battleground and that will be the end of it." And income, as separate from loans, is drying up. Loan defaults have swollen to Rs 210 billion from Rs 140 billion. Pakistan's money-order economy depends heavily on remittances by Pakistanis settled abroad. Such remittances had dwindled after the nuclear blasts. There are now reports in the western media that Pakistanis settled in the US and UK have already stopped sending money because of Kargil.

Mainly to prevent poverty from escalating and keep voters happy in these troubled times, the Sharif government decided to gift a 20-25 per cent pay hike for its 3.5-million strong staff. But the private economy is languishing, even as labour force is growing by 3.3 per cent annually when population is growing by 2.8 per cent. Says Asghar Khan: "Like in every war, easily the most hit would be the common man. The ruling elite always make arrangements for themselves abroad."

Even under the threat of war, there are some who remain optimistic. Says Ayyaz: "What's important is that economies never totally collapse in those conditions. But growth stops. At worst, the budget, which hinges on the magic figure of 5 per cent, will collapse and throw out all other plans." Not all, though. Sums up Ziauddin: "An accurate estimate of the impact of the Kargil conflict on the economy depends on how long the operation is planned. But if it is a full war, then we are totally finished. We will be in a soup, there is no doubt about that." How many Pakistanis will keep their fingers crossed over his words?