Economic Security: Pakistan’s Fatal Weakness

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?”

Politicized Economic Decisions

Rather than approach the economy as an essential organic for ‘national wellbeing,’ Pakistan’s ruling elite (both political and military) used the economy as a ‘spoils of war.’

To understand this, here is a common real-world scenario. The winning political party will dedicate public funding to its core supporters. This will take place through infrastructure programs, like roads. However, little to nothing was done to study the value of these programs for the country, the goal was to get money into the hands of supporters (lest they change loyalties). In many cases, these programs fail to connect to a genuine long-term economic program, they just portray progress in a visible, but superficial way.

Arguably, the most egregious example of politicized economics was that of Zulfiqar Ali Bhutto. During the 1970s, Bhutto Senior’s “nationalization” scheme gutted Pakistan’s emerging private sector which, by that point, had begun specializing in manufacturing. However, echoes of this policy likely continue in the form of political hires, overstaffing state-owned-enterprises with unqualified and poorly trained individuals and other measures that simply strain the national exchequer.

Such decision-making is not limited to the PPP. The PML-N had instituted its own version of this through “Dar-nomics.” Ishaq Dar’s insistence on propping up the PKR through loans had made imports cheaper for the Pakistani market. Those involved in those import-driven businesses had basically gotten a subsidy, but at the cost of a loan that, once again, drains the national exchequer.

The military elite has also engaged in comparable policies. These manifest in the growing inefficiencies of Pakistan’s public defence sector. This sector operates thanks to the public exchequer, not due to a positive cash-flow model through exports and profit. To learn more, see Quwa’s analysis on this subject.

When the focus of the country’s elites is on competing for the ‘spoils of war’ and dividing it, then how can one expect it to think about economic development? Truly, the latter is a long-term endeavour contingent on a vision that transcends partisan bias or selfish gain but, rather, emphasizes the national interest. Yes, economic development does create winners and elites (as one can see across every G20 country), but not at the cost of the national interest. This is how the likes of China and India approach their economies.

So, if one could go back in time to 1971, a competent Bhutto Senior would not have hurt the private sector through ‘nationalization.’ Rather, he could have worked to protect these emerging actors in-exchange for their support for his political leadership (i.e., lobbying). In return, Pakistan could have steered its efforts to making its domestic producers globally more competitive so that they can export more and, in turn, drive their own profit as well as grow Pakistan’s foreign currency reserves.

Is this a “fair” economic model? No. However, it is the type of model that had grown across the West and, increasingly, in India. The point of this discussion is to highlight where Pakistan fundamentally differs from these other countries. The Pakistani ‘elite’ did not rise with Pakistan’s national interests; the two spheres are not co-dependent. Rather, they are separate. Elites can benefit even when national interests collapse, which one can see today with the country’s economic problems.

The ‘Debt-Trap’

One of the most damaging costs of Pakistan’s neglectful economic policymaking has been its dependence on foreign aid and loans. In other words, because the Pakistani elite could not be bothered to steer their country to generate the means to support itself, they sought the means from overseas.

History will attest to how that dependence on foreign money has compromised Pakistan’s ability to pursue its national interests. From dubious decisions by politicians and generals to a collapse in pursuing Kashmir, the decades are littered with examples of Pakistan functionally falling through.

However, the accumulation of debt has created a severe economic problem, i.e., Pakistan has lost much of its fiscal capability. For example, debt servicing could amount to upwards of 54% of Pakistan’s budget, i.e., PKR 5.2 trillion or (as of this article’s publishing date) $25.79 billion USD.

Pakistan will finance this amount by taxing its already stressed salary or middle class, selling off resource or mineral deposits to foreign investors, and through additional loans. The ongoing taxation policy would drive more of Pakistan’s educated class to migrate overseas (i.e., fuel a brain-drain). The sale of natural or mineral resource deposits would be a wealth-transfer to overseas as foreign corporations will drive most of the profits from such programs. Loans will further strain the overall situation.

Overall, Pakistan has reached an economic point that its leaders and, arguably, institutions (from laws to public policies) are not equipped to handle. In other words, the solution does not exist in the status-quo and, especially, not in the hands of the existing decision-makers. If this situation played out in a corporate entity involving shareholders, the latter would have categorically fired the executives, trimmed overhead (i.e., size of government), and aggressively focus on the areas that create valuable output.