The US Secretary of State Hillary Clinton, observed last Wednesday that if Pakistan actually takes practical steps to make the Iran-Pakistan gas project a reality, then this would result in US pressure that could "further undermine" Pakistan's already vulnerable economy. Let us outline the nature of Pakistan's economic vulnerability and the policy implications of resisting US pressure.
The sovereignty of a country is not absolute. Its extent is a function of two variables: (1) The degree of economic dependence on its protagonist. (2) The ability to mobilize political support and economic resources both within the country and through alternative international alliances.
The architecture of Pakistan's economy as it has emerged in the last five decades makes foreign aid a key pillar of the economic edifice. This is because of two structural features of the economy: First the inability to generate adequate foreign exchange earnings to finance import requirements. Second, a domestic savings rate which at 12 percent of GDP is insufficient to finance its investment requirements: For a 6 percent GDP growth rate investment must be 24 percent of GDP. This problem is exacerbated by the fact that government revenues are inadequate to finance even the minimum expenditures necessary to govern.
The consequence of slow export growth and a low domestic savings rate is rising public debt, both external and internal. Thus the total public debt last year stood at about USD 80 billion. The pressure of this stock of debt on the country's exchequer can be gauged by the fact that debt servicing now constitutes 43.3 percent of Federal Government revenues. This means that if subsidies on key items as well as defence expenditures are maintained, then the entire operational expenses of the government and development outlays have to be financed through foreign aid. So acute is the fiscal pressure that last year the government had to finance 32.8 percent of the fiscal deficit through the device of borrowing from the State Bank which had to print notes to oblige.
These financial constraints of the government are placing severe stresses on society: (1) High inflation rates that are pushing food and basic necessities beyond the grasp of millions of citizens, leading to increasing numbers of suicides and burgeoning ranks of militant extremists. (2) Due to the government's financial inability to utilize even the existing capacity for electricity generation, there are continued power outages causing distress to citizens and industrial losses amounting to 2 percent of GDP. (3) Declining development expenditures and continuing recession is increasing poverty so that now as many as 40 percent of the population may be below the poverty line. (4) Federal fiscal constraints have resulted in a sharp reduction in the provincial share of federal revenue this year thereby putting pressure on the federal structure.
Winning space for sovereignty requires addressing in the medium term, the structural weaknesses of the economy, which successive governments, both military and civilian have failed to do so far.
In the meantime Pakistan needs to diversify its sources of both trade and aid. Britain and some of the European countries who have a less inflexible position on Iran can be approached. More important Pakistan needs to focus its economic relations on its region: India, Iran, China, and Russia. However to tap into these alternative sources, a major shift is required in Pakistan's national security paradigm. The policy of nurturing selected extremist groups as strategic assets, has created security problems in each of these countries: Pakistan based militant groups have spilled across our borders, East, North and West. Consequently neighbouring countries would be wary of putting up an economic rescue package to compensate for US pressure.
If Pakistan is to diversify the sources of aid and trade to win the space for sovereignty, it will have to give credible assurances to its neighbours, that it has turned a new leaf, and will stop playing what the world accuses it of: the double game.
Achieving the space for sovereignty requires paradigmatic changes in economic, foreign and security policies. Only then can Pakistan link up with the emerging economic powerhouses of Asia to build a future of peace and prosperity.