After the Nuclear Test -
Defence Economics and Politics

From the BOARD OF EDITORIAL ADVISORS MS NASIM ZEHRA explores the reaches of politics in conjunction with defence economics in the aftermath of our nuclear tests

In a situation of chaos created by the government’s mistakes there is a myth-making industry at work. Mythical Ôrealities’ are being created. Both within and outside the government. Based often on myths the stories on how we got to this very precarious economic situation are varied and many. Myths obviously come easy. They make denial of reality possible. Equally they help legitimise assertions , even those based on half-truths, on selective perceptions.

Interestingly of the many myths that have been spun around the issue of the current economic crisis three are significant. The first myth coming from an angry government is that the press and ‘vested interest groups’ are to some extent responsible for the current economic chaos. Obviously as pressure grew those who should have taken responsibility for creating a run on the foreign exchange began hunting for scape-goats. First the Prime Minister maintained on July 11 that ‘rumour mongers’ are unpatriotic The Finance Minister turned to the press and to ‘vested interests’, blaming them for creating panic in the market arguing that the ‘fundamentals of Pakistan’s economy are sound.’

Earlier on July 8 acknowledging the problem the Finance Minister himself maintained that in case the international lending agencies decide to withhold loans and grants due to Pakistan, the government may be forced to arrange a moratorium on its debt repayment. Twenty-four hours later the Minister again admitted that there had been a delay in receiving ‘friendly help’ from Pakistan’s friends. The same day the State Bank cancelled the travel quotas asking travellers to buy foreign exchange in the open market. Within 48 hours the Karachi stock market crashed and in the open market the rupee lost 20%. The State Bank meanwhile continued with its directives galore. They came in quick succession increasing chaos and uncertainty.

Finally on July 14 the impact of impromptu decision-making was spelt out by the international rating house Standard and Poor’s. It awarded Pakistan a triple C rating . This brought Pakistan down two notches from a single B indicating a strong likelihood of a default by Pakistan within the current quarter on its foreign obligations. S & P attributed the economic crisis to sudden flight of capital from Pakistan, to the lack of foreign transfer from overseas Pakistanis , to massive financial transactions being undertaken through non-banking channels and finally to the inability to raise funds from Islamic countries.

In this round Pakistanis home and abroad , in the name of patriotism, are in no mood to overlook the government’s blunders. According to reports the 450,000 Pakistanis have only donated 4210 dollars of which 3000 have been donated by the Pakistani embassy and Consulate staff. Only $1210 has come from ordinary citizens. Many of them personally suffering the fall-out of this sudden freezing of dollar deposits they had come to their own conclusions. Without the help of the Pakistani press !

Beyond the foreign currency fiasco caused by bad decision-making there is a fundamental problem about bad 1economic management. Repeatedly articulated by economists at home and abroad, by the government’s friends and foes alike, this bad economic management has to do with successive government’s compromising on the economic reform agenda at the altar of imagined political expediency. At his July 13 testimony the US Assistant Secretary of State Karl Inderfurth merely repeated what Pakistani economists like Shahid Kardar have been repeating for over a year. Inderfurth maintained that ‘We (the US Administration) are deeply troubled that Pakistan’s leadership does not appear to be taking the necessary steps to deal with the country’s difficult economic position’. Pakistan been slow to implement tough economic reforms , mandated by the IMF and ostensibly espoused by the Prime minister..’

Through sheer mismanagement the government which needs to pay around 800 million dollars by end July to its creditors had managed to bring its reserves down to 700 million dollars. All indicators on the foreign currency front even now tell a story of desperation. Beginning with default on home-based foreign currency deposits of around $ 7 billion, government institutions like PIA are now also defaulting on some foreign loans.

The second myth meanwhile has been spun outside of government circles. Many writing and talking about the current economic crisis maintain that the current economic crisis is a direct outcome of Pakistan’s May 28 nuclear tests. Many , including government officials and even cabinet members , who had opposed the nuclear tests, are now on a ‘we told you so’ high. Ironically even from the government itself, to deflect public focus from its own blunders, insists the current economic crisis has been entirely caused by the sanctions imposed because of the nuclear test.

Privately even within government circles ‘armchair commentators ‘ are being blamed, for bringing the country to this pass, for pressurising the government to opt for the nuclear tests instead of accepting the Clinton package of 5 billion dollars over a 3-5 year period. For one, the Clinton package would have been a conditional one dependant entirely on US certification of Pakistan’s good behaviour vis-a-vis India and on non-proliferation. Two, the assumption that test-induced sanctions precipitated Pakistan’s economic crisis is completely incorrect. After all what sent the stock market in a tailspin and the rupee on a nose-dive are not the economic sanctions.

The government’s cardinal error in fact was perhaps, not freezing of the foreign exchange accounts. It was more the manner in which it was done.

Instead of taking the people in confidence, explaining the problem of foreign exchange shortage and assuring them that the accounts would initially be frozen for only a month, taking concrete steps to retain depositors confidence by allowing them transaction on for example up to 10% of their deposits, the Finance team chose to be extremely bureaucratic about it. It was in fact the absence of any homework done by the economic team on how the foreign exchange accounts were to be managed in the post-test phase that caused the confidence crash. Every step taken by the government since the flight of millions of dollars from accounts of those reportedly close to the government till the week ago and State Bank decision to cancel foreign exchange travel quota clearly established that the government was simply into impromptu decision-taking. Between the Prime Minister’s statements, the Finance Minister’s assertions and the State Bank's circulars, the country’s top economic manager had reassured the government during the pre-test Cabinet meetings that even in the case of sanctions the government could manage safely on the economic front for about 6 months. Yet it was within less than 5 weeks that panic and confusion had gripped the markets and the government. They must be held accountable.

Obviously the nuclear test was not going to change any fundamentals of what for years has been declared a precarious economic situation. The tests alone did not even precipitate the crisis. What triggered the crisis of confidence was clearly the just a thoughtless move on the foreign deposits front .. The almost chronic precariousness of Pakistan foreign exchange situation was best explained by the Finance Minister himself. Conceding the possibility of a moratorium he told reporters on July 8 that ‘We get three billion dollars and we pay back three billion dollars. If we only get 1.5 billion dollars where are we going to get the other 1.5 billion dollars. ‘And yet such unthinking moves on the most fragile aspect of Pakistan’s economy were criminal. Similarly the failure of the government to systematically provide information to the press on critical factors that were to effect the market confidence also accelerated the crisis of confidence which in turn translated in Rs60 plus to a dollar. To minimise the impact of speculative reports coming from Washington regarding IMF funding and the government in Islamabad should have organised daily background briefings to the Pakistani press corps on the developments on the IMF front and on Washington’s thinking on the sanctions. The government alone must be held responsible for all the negatives that suddenly erupted on the economic scene. Attributing it to the nuclear test is nave if not intellectually dishonest.

Finally of course there is a freshly prepared third myth floating around, the myth that only signing the CTBT will bring us loans from international lending agencies like the IMF. The authors of this myth claim that conceding to the G-8 demand that Pakistan sign the CTBT will be in Pakistan’s national interest. This myth is premised on the erroneous assumption that unless Pakistan capitulates IMF’s ESAF funding will not come through, that resisting G8 pressure forcing Pakistan to sign the CTBT is futile. Already indications from Washington seems to disapprove this pessimistic assumption. It appears the G-8 will not like to take responsibility for a total collapse of Pakistani economy forcing it to default on its major debt.

Similarly on the question of Pakistan’s national interest, it is simplistic to assume that Pakistan’s security as well as its bargaining power on the international arena will not be compromised by unilaterally signing the CTBT. Conceding the linkage between acquiring international financing and between signing the CTBT will haunt Pakistan in the long run.

Such linkage will be invoked by the G-8 for all lending to Pakistan. The CTBT is merely the tip of the ice-berg. Ultimately through using this linkage the G-8 would force Pakistan to give up the nuclear option.

Pakistan’s commitment to giving up the nuclear option must be there, Islamabad must make all the efforts to promote nuclear disarmament, but first within the South Asian context.

In addition to undermining Pakistan’s bargaining leverage ,signing the CTBT in the hope that it will help solve Pakistan’s economic problems overlooks the more fundamental problems that our economy faces, primarily of bad management. No amount of foreign funding can wish away this almost chronic problem of bad management.

Essentially convenient accusation and simplistic solutions are being bandied around . That everyone , even the myth spinners are concerned about the country’s future , about that there is no doubt. Yet when cool-headedness is most required rising mind temperatures, within and outside the government can hardly help. For a government who has been criminally irresponsible in taking Pakistan through a phase of historic challenge and opportunity, this must be a time of harsh self-accountability. Not of scape-goating time through myth-making.

In the post-test phase the most formidable challenge faced by the government has been to avert a default.. Having precipitated a menacing economic crisis by its ill-planned steps after the May 28 nuclear test, the Nawaz Sharif government has been frantically sending out SOS signals.

Fortunately for the government independent thinking within the Washington-led G-8 governments and the international lending agencies including World Bank and IMF may provide Pakistan some Ôbreathing space.’ That instead of a forced default, one prompted by G-8 sanctions Pakistan will go in for a managed moratorium seeking rescheduling of its debt liabilities. In the next three months alone over US $ 2billion of principal and interest is due.

The most revealing fact regarding the current state of Pakistan’s economy is that in the immediate context the Pakistani government finds itself completely paralysed on the solution front. It can therefore turn only to external sources, to its friends and to the multilateral agencies, for any support aimed at damage-minimisation.

It is therefore not surprising that during the month of July Pakistanis had tuned into Washington awaiting the IMF decision on releasing the 226 million Enhanced Structural Facility (ESAF) tranche to Pakistan. At the crucial July 13 meeting of the Board of Directors no decision regarding Pakistan was taken. IMF is still in consultation with the G-8 countries.

Although the IMF Middle East Director Paul Chabrier has already presented a report on his recent Pakistan visit to the IMF Board reportedly recommending that on technical grounds IMF must go ahead with the ESAF package since Pakistan has fulfilled most of its commitments to IMF.

The IMF Director’s possibly positive recommendations notwithstanding earlier reports from Washington had indicated that the IMF had let it be known unofficially that without a green signal from the US, IMF will not be able to release any funds to Pakistan. Obviously after the position regarding use of sanctions as a policy tool to prevent Pakistan and India from weaponizing their nuclear capabilities, adopted by the P-5 in Geneva, the G-8 in London and in the UN Security Council Resolution 1172, the release of multilateral finances to Pakistan was turned into a completely political issue. The G-8 led by the United States are now eager to give ‘teeth’ to their crudely thought-out sanctions policy aimed at promoting their non-proliferation agenda, now seemingly forever dead in South Asia. In Washington reportedly the IMF First Deputy Managing Director Stanley Fischer at a press conference on July 13 has established direct linkage between Pakistan’s nuclear tests and the delay in the release of already approved IMF loan payments to Pakistan.

However, fortunately some serious thinking within the US Administration seems to have detected two flaws with the sanctions policy which has already begun to take effect vis-a-vis Pakistan. Already approximately 1.2 billion dollars due for release to Pakistan have been withheld since June.

Added to this have been government-created problems leading to capital flight and declining remittances from overseas Pakistanis. As Pakistan stands on the verge of a default, one that could send the rupee tumbling down to a three plus figure vis-a-vis the dollar and create unprecedented economic, political and humanitarian crisis, Inderfurth’s testimony does convey re-think within the US Administration.

One, Indurfurth undertakes on behalf of the US government that the waiver that the Administration seeks from the Congress and the Senate on the sanctions already in place against India and Pakistan, will only be utilized ‘in the event that there were a serious and unintended consequence to a specific sanction ‘such as impending financial collapse leading to economic chaos and political stability..’ Two, Indurfurth maintains that ‘We would like to guard against an overwhelmingly disproportionate effect of sanctions on one country versus another; ideally the sanctions should have roughly the same effect on India as they do on Pakistan.’ Fortunately both these points will work against G-8 preventing the release of IMF funds to Pakistan. The US Administration has finally acknowledged that economic sanctions evenly imposed will have asymmetrical impact on the two countries- Pakistan with less than 700million dollars and in effect already defaulting on foreign obligations whereas India with reserves of above $25 billion .

Although Inderfurth did reiterate Washington’s position that Pakistan and India should be encouraged to sign the CTBT, the Fissile Material Control Treaty (FCMT) and should opt for non-weaponization of their nuclear capabilities, he did underscore the importance of ‘constructive engagement’ with both India and Pakistan.

In Washington concrete steps favouring lifting of sanctions have already been taken. For example, even if under pressure from the US farmers already on July 9 the US Senate voted to exempt from sanctions credit and guarantees provided by US authorities to support food and medicine exports.

As a logical corollary to the American position articulated by Karl Inderfurth Washington is unlikely to oppose the release of the IMF September tranche. However it will be conditional on Pakistan showing its willingness to sign the CTBT. The pressure on Pakistan to sign the CTBT will therefore continue. Pakistan’s position of entering into a dialogue regarding CTBT, non-weaponization, non-development and non-deployment of missiles remains unchanged. It is willing to enter into a dialogue on all these issues within the context of South Asian security. It however cannot be pushed into signing the CTBT in exchange for the release of an already approved IMF tranche. Any surrender at this stage on what Pakistan may view as a necessary position to safeguard its security may essentially be the beginning of capitulation on many other nuclear-related issues that the G-8 may seek in exchange in exchange for loans.

Fighting its case on merit Pakistani government through Nawaz Sharif’s personal letters to President Bill Clinton and to the President of the World Bank, argued that the international community could not punish Pakistan for a situation initiated by India. Also it was maintained that loan suspension was not technically justified given that Pakistan had not violated any terms of its agreements with either the IMF or the World Bank.

For all the blunders committed by the Nawaz Sharif government on the economic front in the post-May 28 phase none may provide G-8 or the IMF any legal or moral justification to wilfully underwrite a Pakistani economic disaster. However in the world of sheer power play the western countries have decisively linked release of international loans to steps taken by Pakistan towards disarmament. Unfortunately a country operating in a Ôsoft political mode’ after taking a bold decision to undertake the nuclear tests, may be tempted to gradually cave in to international pressure.