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Report by:
Lt General Bhopinder Singh (Retd)
Port Blair
21 Dec 2018
Situationally, Pakistan finds itself in an economic quagmire that is reminiscent of India in 1991. A deadly combination of historical mismanagement of the economy and unfavourable external factors precipitate a potential meltdown that can lead to desperate measures. The 1991 situation was triggered by the swelling fiscal imbalances of the '80s that had reached an alarming stage of unsustainable deficit levels, corollary devaluation, and a severe investor-confidence crisis. The Gulf war had exacerbated the situation with spiralling oil-import bill. The net result was a severely depleted forex reserve that could barely finance three weeks of crucial imports. The looming crisis had all the probability of an embarrassing sovereign default in debt repayments.
Amongst the several desperate moves initiated, a tactical though insufficient tranche was sourced from the IMF, which served as a short-term breather. Multilateral agencies were shying away from further assistance, as did the option of borrowing from other countries given the prevailing perception and the structural rigidity of the Indian economy. Then in an audacious and unprecedented move, the Chandrashekar government recognised that it had run out of time and options – moved a proposal to pledge sovereign gold. The successive Narasimha Rao government with Manmohan Singh as the Finance Minister, recognised the severity of the situation and the dire consequences of not persisting with the radical proposal, went ahead and pledged 46.91 tons of gold to raise the tide-over money. This crisis also bore the invaluable boon of 'Liberalisation' that soon ushered in structural reforms, benefits and elbowroom to unleash the Indian economy with the much-needed dexterity, prudence and acumen. Soon the government repurchased the pledged gold and in a glorious circle of irony, 18 years later as the Prime Minister, Manmohan Singh government bought 200 tons of gold to strengthen and diversify the sovereign assets. Today India sits comfortably with well over $400 billion forex reserve and over 570 tons of gold reserves. The saga of Indian economic reforms, option-management and recovery hold invaluable lessons for Pakistan as it undergoes an eerily similar crisis.
Pakistan is reeling under a crippling foreign debt of $100 billion. Devaluation of the Pakistani Rupee due to balance-of-payment concerns has happened four times since last December and led to further inflationary pressures on the common man and debt-servicing is the immediate concern, as of now. Pakistan potentially requires an approximate kitty of $12 billion to tide-over its sovereign commitments and therefore the usual stop-over in 'friendly capitals' like Riyadh (ostensibly to attend the 'Future Investment Initiative Conference') and frenetic parallel pitching for its record 13th International Monetary Fund (IMF) package. However, unlike the Indian crisis of 1991, the Pakistanis have to deal with the additional angularity of geopolitical pressures from the US (increasingly reluctant, assertive and still the largest donor to multilateral agencies like IMF), on the terms of a bail-out package for Pakistan. The US has understandable concerns about Pakistan's debt-servicing woes, especially if they pertain to honour the China-Pakistan-Economic-Corridor related investments. US Secretary of State Mike Pompeo's no-holds-barred threat that it would be 'watching' IMF transaction to Pakistan as 'there's no rationale for IMF tax dollars — and associated with that, American dollars that are part of the IMF funding — for those to go to bail out Chinese bondholders or China itself', complicates matters for Islamabad, as it does have a substantial China-related debt component.
Besides IMF, the only two other Pakistani sources are the Chinese and the Gulf Sheikhdoms. China has already lent $5 billion in the last fiscal itself, while Riyadh has recently committed a package of $6 billion ($3 billion to address the immediate balance-of-payment crisis and another $3 billion in one-year deferred oil payments). Crucially while Riyadh was battling its own insecurities and international perception issues following the Jamal Khashoggi affair, Imran Khan's presence and steadfast commitment in supporting the Saudi propped, International Military Counter-Terrorism Coalition has given the Saudis, a much-needed reassurance. The Pakistanis maintain a contingent of its military in the Kingdom to protect the ever-wary Saudi royal family. The Pakistani military component had played a decisive role in the 1979 seizure of the Grand Mosque in Mecca. Today both the Saudis and the Pakistanis are concerned about their fractured relationship with the US, and in that sense, a quid pro quo of financial help, in exchange for guaranteeing security is an imminently plausible barter. Imran Khan would want to minimise the package from IMF, as the conditions attached to the IMF package could jeopardise his political aspirations of an 'Islamic welfare state'. Already the expression 'duplicitous' has been affixed on the Pakistani narrative as far as the US is concerned, and the same has been confirmed by the global money-laundering watchdog agency, Financial Action Task Force, which has placed Pakistan on its 'watch list'.
Given the complexity, intensity and the previous track record of its national handling – far more expansive, holistic and far-reaching reforms in the Pakistani governance would be required to navigate it back from the brinks of definite disaster. Besides the obvious tightening, disciplining and 'liberalising' of its failing economy, Islamabad would be expected to recalibrate its foreign policy, terror-sincerity, regional misadventures and rein-in certain institutionalised impulses that have regressed the Pakistani narrative to its current fate. The 'free world' and the multilateral institutions are increasingly mandating corrective sovereign behaviours, policies and democratic instincts, before making commercial commitments. The cheque-book diplomacy of the Saudi's and the Chinese are a lot more transactional and easy in the short-run, however, in the long run, it runs the risk of a 'debt-traps' that could have humiliating consequences for the recipient country. So far no break-through policy-correction announcement in the domain of economic or foreign policy has emanated from the PTI government. Imran Khan has the political numbers and time on his side to make the hard-decisions and course-correction, but only time will tell if he can do what India did in 1991. (Author is former Lt Governor of Andaman & Nicobar Islands and Puducherry. The views are strictly personal.)
Lt General Bhopinder Singh (Retd)
Port Blair
21 Dec 2018
Situationally, Pakistan finds itself in an economic quagmire that is reminiscent of India in 1991. A deadly combination of historical mismanagement of the economy and unfavourable external factors precipitate a potential meltdown that can lead to desperate measures. The 1991 situation was triggered by the swelling fiscal imbalances of the '80s that had reached an alarming stage of unsustainable deficit levels, corollary devaluation, and a severe investor-confidence crisis. The Gulf war had exacerbated the situation with spiralling oil-import bill. The net result was a severely depleted forex reserve that could barely finance three weeks of crucial imports. The looming crisis had all the probability of an embarrassing sovereign default in debt repayments.
Amongst the several desperate moves initiated, a tactical though insufficient tranche was sourced from the IMF, which served as a short-term breather. Multilateral agencies were shying away from further assistance, as did the option of borrowing from other countries given the prevailing perception and the structural rigidity of the Indian economy. Then in an audacious and unprecedented move, the Chandrashekar government recognised that it had run out of time and options – moved a proposal to pledge sovereign gold. The successive Narasimha Rao government with Manmohan Singh as the Finance Minister, recognised the severity of the situation and the dire consequences of not persisting with the radical proposal, went ahead and pledged 46.91 tons of gold to raise the tide-over money. This crisis also bore the invaluable boon of 'Liberalisation' that soon ushered in structural reforms, benefits and elbowroom to unleash the Indian economy with the much-needed dexterity, prudence and acumen. Soon the government repurchased the pledged gold and in a glorious circle of irony, 18 years later as the Prime Minister, Manmohan Singh government bought 200 tons of gold to strengthen and diversify the sovereign assets. Today India sits comfortably with well over $400 billion forex reserve and over 570 tons of gold reserves. The saga of Indian economic reforms, option-management and recovery hold invaluable lessons for Pakistan as it undergoes an eerily similar crisis.
Pakistan is reeling under a crippling foreign debt of $100 billion. Devaluation of the Pakistani Rupee due to balance-of-payment concerns has happened four times since last December and led to further inflationary pressures on the common man and debt-servicing is the immediate concern, as of now. Pakistan potentially requires an approximate kitty of $12 billion to tide-over its sovereign commitments and therefore the usual stop-over in 'friendly capitals' like Riyadh (ostensibly to attend the 'Future Investment Initiative Conference') and frenetic parallel pitching for its record 13th International Monetary Fund (IMF) package. However, unlike the Indian crisis of 1991, the Pakistanis have to deal with the additional angularity of geopolitical pressures from the US (increasingly reluctant, assertive and still the largest donor to multilateral agencies like IMF), on the terms of a bail-out package for Pakistan. The US has understandable concerns about Pakistan's debt-servicing woes, especially if they pertain to honour the China-Pakistan-Economic-Corridor related investments. US Secretary of State Mike Pompeo's no-holds-barred threat that it would be 'watching' IMF transaction to Pakistan as 'there's no rationale for IMF tax dollars — and associated with that, American dollars that are part of the IMF funding — for those to go to bail out Chinese bondholders or China itself', complicates matters for Islamabad, as it does have a substantial China-related debt component.
Besides IMF, the only two other Pakistani sources are the Chinese and the Gulf Sheikhdoms. China has already lent $5 billion in the last fiscal itself, while Riyadh has recently committed a package of $6 billion ($3 billion to address the immediate balance-of-payment crisis and another $3 billion in one-year deferred oil payments). Crucially while Riyadh was battling its own insecurities and international perception issues following the Jamal Khashoggi affair, Imran Khan's presence and steadfast commitment in supporting the Saudi propped, International Military Counter-Terrorism Coalition has given the Saudis, a much-needed reassurance. The Pakistanis maintain a contingent of its military in the Kingdom to protect the ever-wary Saudi royal family. The Pakistani military component had played a decisive role in the 1979 seizure of the Grand Mosque in Mecca. Today both the Saudis and the Pakistanis are concerned about their fractured relationship with the US, and in that sense, a quid pro quo of financial help, in exchange for guaranteeing security is an imminently plausible barter. Imran Khan would want to minimise the package from IMF, as the conditions attached to the IMF package could jeopardise his political aspirations of an 'Islamic welfare state'. Already the expression 'duplicitous' has been affixed on the Pakistani narrative as far as the US is concerned, and the same has been confirmed by the global money-laundering watchdog agency, Financial Action Task Force, which has placed Pakistan on its 'watch list'.
Given the complexity, intensity and the previous track record of its national handling – far more expansive, holistic and far-reaching reforms in the Pakistani governance would be required to navigate it back from the brinks of definite disaster. Besides the obvious tightening, disciplining and 'liberalising' of its failing economy, Islamabad would be expected to recalibrate its foreign policy, terror-sincerity, regional misadventures and rein-in certain institutionalised impulses that have regressed the Pakistani narrative to its current fate. The 'free world' and the multilateral institutions are increasingly mandating corrective sovereign behaviours, policies and democratic instincts, before making commercial commitments. The cheque-book diplomacy of the Saudi's and the Chinese are a lot more transactional and easy in the short-run, however, in the long run, it runs the risk of a 'debt-traps' that could have humiliating consequences for the recipient country. So far no break-through policy-correction announcement in the domain of economic or foreign policy has emanated from the PTI government. Imran Khan has the political numbers and time on his side to make the hard-decisions and course-correction, but only time will tell if he can do what India did in 1991. (Author is former Lt Governor of Andaman & Nicobar Islands and Puducherry. The views are strictly personal.)
