Economic Security: Pakistan’s Fatal Weakness Plus

Today, Pakistan (and, perhaps, the world) are focused on seeing how the International Monetary Fund (IMF) will charter the country’s next steps. The Pakistani Rupee (PKR) is in free-fall, prices are skyrocketing, and confidence – be it from the public, investors, and perhaps the government itself – is at rock-bottom.

Pakistan’s anemic economy (relative to the country’s size, population, and potential) is a critical security vulnerability. It is not only an issue of lack of funding for procurement, but a weak (and imploding) PKR is also a limiter on vital defence imports across both in-house projects and off-the-shelf purchases.

Pakistan needs foreign or hard currency like USD to procure high-tech weapon systems; but weak exports force a greater supply of PKR on the market to fund said imports. However, without exports (which drive the market’s acquisition of PKR), the PKR will keep dropping in value.

Basically, as time moves forward, Pakistan’s ability to procure modern weapons will dwindle alongside its monetary and fiscal health. Thus, the conclusion of the analysis is that decades of poor political, economic, and governance decisions by both civilian and military leaders have critically wounded Pakistan’s defence stature. Where solutions necessitate “all-hands-on-deck” effort, Pakistan’s failures have been a result of “all-hands-on-deck” governance, neglect, undue interference in the economy, and a disdain for nurturing accountability culture. The following are three areas where these failures manifested the most:

Energy Dependence

To reach austerity, Pakistani governments (especially the PTI) targeted the import of consumer goods, like cars, appliances, and luxury items. While a strain on Pakistan’s outbound hard-currency flows, these have not been the biggest culprits. Yes, the policies that propped the PKR up did, in a way, provide a subsidy of sorts to those who consumed imports (e.g., Pakistan’s affluent and elite classes), but curbing them would not have decisively addressed Pakistan’s primary “expense” – i.e., energy.

Pakistan is a perennial energy importer. In 2021, for example, Pakistan reportedly imported $19.32 billion USD in various fuels. Fuels are, by far, the single largest point of import by a factor of over three times (or 3X) compared to the next largest import, electronic equipment (at $5.99 billion USD).

Now, in of itself, energy dependence is not unique to Pakistan. Many countries, including the world’s top technology centers and industrial powers, have depended (and continue to do so) on energy imports. But, to take a crude (pun not intended) perspective, these other countries (like Japan) used the energy to push high-value industrial output for domestic and overseas use. Thus, energy was an energy expense to drive profit in the areas that Japan excelled in when it came to global trade.

In Pakistan, the energy consumption was functionally non-productive. Yes, when digging into the details, one can agree that energy is essential to light homes and warm stovetops. This was essential to societal wellbeing, but without exports, Pakistan paid for the lifestyle on credit (i.e., loans), not exports.

This cannot have been a new observation. With a growing population (and rising energy needs), a capable decision-maker would have foreseen the risk of a deficit. This risk would have galvanized them (as far back as the 1970s and 1980s) to drive investment towards value-added industries, especially at the time when the West (especially the United States and Canada) were looking to transfer the production of consumer goods to the developing world. Perhaps, acting on this reality sooner could have helped Pakistan eliminate the need to import consumer items and, in turn, capitalize on the explosion for consumer demand through the 1990s and 2000s to drive hard currency gains.

So, what went wrong? Why did it “miss out?”