Pak army agrees to budget freeze...

Paran Balakrishnan | Updated on June 11, 2019 Published on June 11, 2019

...but whether the country’s financial woes would persuade it to smoke the peace pipe with India remains to be seen

It’s close to being the ultimate sacrifice for the Pakistan Army. No, we’re not talking about laying down lives on the fields of battle. This sacrifice is about giving up the annual hike in the military budget. The move was finally confirmed Tuesday when Pakistan’s Minister of State for Revenue Hammad Azhar presented an austerity budget involving all-round belt-tightening.

Before the budget, there’d been weeks of stony silence from the military even when it became clear every arm of government faced hefty cuts because the economy is in such pathetic shape. Under such circumstances, could the armed forces budget be left untouched? Only a few commentators dared suggest the idea.

The signal the armed forces would bow to what the government described as a “critical financial situation” came last week when Pakistan Army Chief Qamar Bajwa declared the military would “be foregoing (the) routine increase in (the) annual defence budget.” The armed forces haven’t agreed to actual cuts but they’ve accepted a seeming freeze and the pampered officer corps will even forego their yearly increments. Of course, Pakistan’s armed forces pulls in cash under so many different heads it’s hard to tell if the spending freeze will actually take effect or not.

For Pakistan, going slow on defence spending is an indication of just how big a hole the economy is in. The government hopes to hike tax revenues by 35 per cent, a tough task in a country where only a fraction pay taxes. The economy’s grim state was highlighted in the pre-budget Economic Survey.

The outgoing government fixed ambitious targets for the economy that might never have been possible to attain but they were missed by huge margins. The only sector that surpassed targets was livestock, which obviously wasn’t a huge cause for jubilation. GDP growth was a pallid 3.29 per cent compared to the targeted 6.3 per cent.

For the 2020 financial year, growth’s been fixed at just 4 per cent. Industrial growth clocked 1.4 per cent, vastly undershooting the 7.6-per-cent target. Services did slightly better at 4.7 per cent but even that fell short of the 6.5-per-cent goal. Agricultural growth crawled at a measly 0.85 per cent.

No easy money

Making a pilgrimage to the IMF is hardly a new experience for Pakistan. But this time round, the world’s a vastly different place from earlier years. A hostile Washington administration has made good on its threats to cut Coalition Support Funding to the armed forces so one easy money avenue is closed for the moment. With Washington leaning on it, the IMF has been extra-stern about loan conditions imposed on Pakistan.

Significantly, last month Pakistan appointed Raza Baqir, who worked for the IMF for nearly two decades, as central bank governor, inevitably spurring speculation the IMF had sent its viceroy to ensure Islamabad stuck to its tough terms.

The situation has been made worse by Prime Minister Imran Khan’s initial refusal to accept the economy is well and truly up the creek. At first, he made it a point of honour Pakistan would not go with a begging bowl to the IMF and made pilgrimages instead to Islamabad’s few rich allies like Saudi Arabia and China. As a result of his travels, Pakistan’s received $9.2 billion from Saudi Arabia, China and the UAE.

Nevertheless, finally, Khan was forced to concede reality and called in the IMF, which after tough negotiations offered $6 billion. Another $2 billion is expected from the Asian Development Bank. The IMF made it clear it won’t be paying the first tranche of cash till its conditions are implemented in the budget. The IMF has also insisted Pakistan’s currency find its own level and just before the budget’s presentation, the rupee fell to 151.92 to a dollar. Meanwhile, the Pakistan Stock Exchange has been in free-fall, sliding from a 2016 peak of 52,000 to 34,280 on Monday.

In the short run, the IMF’s insistence on belt-tightening will only worsen the plights of business and citizens. The IMF has insisted, for instance, on an end to exporters’ tax breaks, which is likely to slam industries like textiles. Edible oil prices have also been hiked.

Pakistan has been working hard to convince its lenders that times have changed and it’s working hard to lower tensions with India. Indeed, Khan’s been making doveish noises, trying to cloak himself as a peacemaker compared to the hawkish Narendra Modi.

The question is will Pakistan’s dire economic situation convince the people who matter (the armed forces) that one way forward would be to abandon its quest to keep pace with India? Pakistan’s defence budget this year is about $11 billion compared to India’s $68 billion. But India’s defence spending is at a more affordable below 2 per cent of GDP. By contrast, even Pakistan’s official defence budget is 4 per cent of GDP. And that’s a very incomplete picture.

For instance, pensions are outside the main military budget and so are anti-terrorism funds. The forces also get cash from what’s called the Public Sector Development Programme. Arms purchases are from some other part of the government budget. Estimates are defence gobbles up 20 per cent of the government’s budget.

Bear in mind, Pakistan has consistently kept up its defence spending even though economically it’s fallen behind its neighbours. In 1995, Pakistan’s exports totalled $11.6 billion that rose to $21 billion by 2017. By contrast, Bangladesh, once the poorer of the two countries, had exports worth $34 billion in 2017 and aims to push that to $39 billion this year.

Peace prospects

It may be too optimistic to think Pakistan’s financial woes could ever persuade the military to smoke the peace pipe with India. However, there are strong external forces at work here. The Chinese are worried the money being poured into the China-Pakistan Economic Corridor will be wasted unless Pakistan becomes stable internally. A large chunk of Chinese investments are being made in Khyber Pakhtunkhwa and Baluchistan, two troubled provinces. Between last July and this April, foreign investment nosedived 51 per cent to $1.3 billion, a drop of 51 per cent from the year-earlier period.

Similarly, the Americans need Pakistan to bring the Afghan Taliban to the table but they’re also less willing than ever to put up with the country’s sheltering of terrorists. Some months ago, ex-Norwegian prime minister Magne Bondevik travelled to Kashmir where he met Hurriyat and other leaders. Soon afterwards, Bondevik travelled to Pakistan, prompting a flurry of speculation about back-channel negotiations.

Commentators in Pakistan forecast the economy will remain feeble for at least three years. Could that weaken the powers-that-be to a point where they’d be amenable to outside pressures? For that to happen, the thinking of Pakistan’s ruling elite would have to undergo a top-to-bottom sea change.

Published on June 11, 2019
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