from Global Economy in Crisis

Economic Challenges Add to Pakistan’s Woes

Daniel Markey, a former State Department specialist on South Asia, says Pakistan "is going through another series of really tough times" brought on by the economic downturn that has hit the country, and by the continuing problems fighting the Taliban and al-Qaeda.

October 24, 2008

To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.

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Economic Crises

Daniel Markey, a former State Department specialist on South Asia, says Pakistan "is going through another series of really tough times" brought on by the economic downturn that has hit the country severely, and by the continuing problems in fighting the Taliban and al-Qaeda. "The country is facing this enormous problem of domestic violence, terrorism, and militancy at the same time," Markey says. "And all this is coming during the political transition of President Asif Ali Zardari, who is having to try to scramble and pick up these pieces. There are probably just too many problems all at once."

Pakistan is going through a major economic crisis right now, and is beginning talks with the International Monetary Fund (IMF) to try to get some help. At the same time, it has a major terrorism problem on its hands, and the Pakistani parliament yesterday passed a rather ambiguous resolution against terrorism, which also called for dialogue with terrorists. Is Pakistan in as bad shape as it looks to the outsider?

I think Pakistan is going through another series of really tough times, and this is a continuation of the turmoil and transition that we’ve seen over at least the past year and a half. The economic downturn has caught Pakistan-as it has many other countries-but it’s caught Pakistan at an even worse moment because Pakistan is facing all these other challenges. I would say to your question ’yes.’ The short answer is Pakistan is facing an unusually difficult period in its history.

Now, Pakistan’s economy until recently was doing quite well, wasn’t it?

It was. The Pakistanis had sustained a period of about five years of 7 percent growth until relatively recently. And their downturn appears to have been forced by a combination of factors, some of them having to do with that growth, and many of them not. The pieces that had to do with the growth were because the economy was growing, inflation was also rising, and the demand for energy was also going up in a way that the government had not anticipated. Throughout the past decade, very little investment had been made to try to meet Pakistan’s energy needs. So prices of energy were all going up.

"There are probably just too many problems all at once. It would require a superhuman personality to manage all of this effectively."

When you say energy, you mean mostly imported oil?

Well, a lot of it was the imported oil, but I think it’s underappreciated the extent to which Pakistan suffers from a scarcity of electricity, which is not provided by oil but by larger power plants. And that has hit all sectors and it hurts their manufacturing sector because in many instances even major cities go many hours a day without adequate electricity-or any electricity. So, a lot of these things have snowballed. You add to that the global uptick in energy prices--and that does relate to the oil prices--and the global uptick in food prices, and the fact that the Pakistan government had long subsidized the purchase of energy. That hit their reserves, and it’s created a reserves crisis. And then you add the political instability, which has rocked their stock markets over the past year because of a lack of investor confidence. Many people, including many wealthy Pakistanis, have pulled their money out of the Pakistani stock market, which sent the market tumbling. The market is down something like 40 percent from its high of the past few years. So all of these things are coming together, and as you mentioned, the country is facing this enormous problem of domestic violence, terrorism, and militancy at the same time. And all this is coming during the political transition of President Asif Ali Zardari who is having to try to scramble and pick up these pieces. There are probably just too many problems all at once. It would require a superhuman personality to manage all of this effectively.

He’s looking for help; the government is looking for help from many sources right now. There was a meeting of this group called "Friends of Pakistan." What is that group?

Crisis Guide: Pakistan

Friends of Pakistan was a group that was formed on the margins of the U.N. General Assembly in New York in September. It includes a number of countries that have regularly, throughout Pakistan’s history, been helpful to Pakistan, particularly in economic crises. These include Saudi Arabia, China, the United Arab Emirates, the United States, Europeans, and I believe the Japanese. So it’s a wide range of countries that have an interest in Pakistan and would like to see Pakistan succeed, as they watch this economic crisis unfold. What’s interesting so far about the Friends of Pakistan group is that it hasn’t put cash on the table, it hasn’t jumped in and helped to erase Pakistan’s crisis. And instead it is taking a somewhat harder line and waiting to have some greater confidence that Pakistan itself is undertaking the kind of structural reforms of its economy that would make it a sounder bet to put money into, even in the near-term. That in turn has turned Pakistan to the IMF, in part to actually have the IMF bail it out but also in part to try and give these countries greater confidence that if Pakistan can meet IMF conditions, then it’s probably a better bet for China or Saudi Arabia to follow suit and also provide cash to Pakistan in the near-term.

The United States has an aid program to Pakistan. Where does the United States stand on this?

Yes, the United States has had a significant assistance program to Pakistan basically since 2002 that has amounted to roughly $300 million per year in civilian assistance, and $300 million on the military side. Additional assistance has been pledged in a variety of other instances to help the earthquake rebuilding after 2005. Then more recently to help in the tribal areas, the United States helped set up some development programs there. So, there are on the order of hundreds of millions [of dollars] on the civilian side per year the United States has in the assistance program to Pakistan. But the thing that’s important to recognize is that that’s distinct from money that would be put up to help Pakistan avoid a reserves crisis, or a balance of payments crisis. The money that the United States has allocated in its assistance programming is, much of it, in the way of actual programs, like education programs or infrastructure programs.

I’ve read that Pakistan says it needs about $4 billion right up front to cover its current foreign debts, and going to the IMF for as much as $10 billion. Would the IMF put stringent conditions on any help?

Well, I think the primary issue has been the question of subsidies. The main reason that Pakistan has run into this reserves crisis is that the government has been massively subsidizing the cost of oil. So when oil prices hit $140 per barrel during the summer, in Pakistan oil was selling for something like $70 per barrel. So the government was essentially eating $70 for every barrel. Now that oil prices have gone down, this has reduced the need for subsidies, and Pakistan has already taken steps to reduce them. Oil is now not so bad, but subsidies continue on electricity, which is distinct from oil. And I think there are other areas that the IMF will probably want to see some macroeconomic reforms to establish greater confidence that Pakistan would put its economy on a sounder footing. I’m less familiar with what else the IMF might be looking for.

Presumably if the IMF and Pakistan make an arrangement, that might encourage countries like China and Saudi Arabia to help out.

I think that’s right. I think that’s at least what the Pakistanis are hoping for at this stage. I’m guessing that the Friends of Pakistan probably came together and determined that they didn’t want to go down the same path that some of them have gone down historically, which is that they’ve been the crisis lender to Pakistan, but they’ve never seen any return on their investment. So they want to make sure that they have some confidence. This is not only because they want to get their money back--don’t think that China or Saudi Arabia are that concerned about that--but what they’re most concerned about is that they’d like to make sure that the money doesn’t get looted, that it doesn’t get lost to corruption, and that it actually goes to help solve Pakistan’s deeper economic problems. If we go back to the 1990s, one of the reasons the civilian governments of Pakistan have failed was because they routinely ran into economic crises of this sort, and they lost the confidence of their people, and the governments would fall. Nobody wants to see Pakistan return to that cycle of deep political instability that we saw in the 1990s, and so they are trying to break out of it. The question is whether, in this instance, the Zardari government can actually pull itself together and accomplish that. Today, that’s still a little bit up in the air.

Let’s talk a bit about the connection between the economic crisis and the war on terrorism. That’s a grand term, I know, but there are problems with the terrorists, specifically with the Taliban groups helped out by al-Qaeda. Why is there seemingly such reluctance among the parliamentarians to fully back trying to put down the Taliban. This constant talk about "dialogue" doesn’t seem to get anywhere.

There are many different reasons, because there are many different groups who propose dialogue for different reasons. But, I think if you boil it down, there are a couple of important reasons: One would be that while from a U.S. perspective the Taliban and other terrorists are obviously the enemy, from a Pakistani perspective, they have historically seen differences among these groups, many of whom are Pakistani citizens. The Pakistanis have a different attitude about attacking them because they are Pakistanis. They perceive a need eventually to reach some sort of a settlement because they believe that the elimination of these groups is probably impossible. So rather than seeing them as an enemy to be destroyed, they see them as an adversary that needs to some degree to be accommodated, and brought into the fold.

Now there are other Pakistani parliamentarians who are actually sympathetic to the aims and the goals of the Taliban, so they fall into a different category. And then there are some who simply believe that tactically it’s beneficial to establish that the government in Pakistan is not the problem, the Taliban are the problem but that only by attempting good faith negotiations will the Taliban be exposed for the real threat that they are, and then the government will end up being in a better position, on a sort of moral high ground, from which it can then convince a wider portion of the Pakistani people that the Taliban, or related groups, have to be fought and brought down militarily.

Another question that always comes up. When I first began as a journalist in the 1960s, Pakistan was a major ally of the United States. Among the countries in the world, one always counted on Pakistan. Why is the United States so unpopular in Pakistan these days?

Well, the anti-Americanism in Pakistan I think is traceable to at least three strands. The first is the most obvious, which is the product of the globalization of jihad, of Islamist extremists’ rhetoric and mentality. That is obviously anti-American and has been spread through Pakistan over the past several decades through madrassas [religious schools], through the campaign associated with building up the Taliban or the mujahadeen in Afghanistan. The second piece is very, very different-the anti-Americanism among Pakistan’s more liberal elite. It’s tinged with a kind of a leftist, anti-imperialist mentality, which is not a heck of a lot different from what you’ll find in much of India. People are skeptical of the United States as the world’s sole superpower, and they see abuse of American power. That’s another piece of it. So they criticize the United States even though many of those individuals are actually, in many ways, sympathetic to the broader aims of liberal American values.

The third piece, and this is one that’s really changed over time, is Pakistani nationalists. They used to see the United States, at various earlier stages in Pakistani history, as a very helpful ally, particularly in serving Pakistan’s security interests against India, because the United States had more or less allied with Pakistan and the Soviet Union had more or less been on the side of India. So, through the Cold War, many of Pakistan’s nationalists saw the United States as very helpful. Subsequently though, the United States stopped supporting Pakistan in the same way, and in particular refused to sell F-16 fighters to Pakistan and pulled away from Pakistan at the end of the war in Afghanistan.

Because of the nuclear testing?

Because of Pakistan’s nuclear development, not yet tests. Those came in 1998. These nationalists in Pakistan, hawkish, strategic thinkers both within the military and outside, then became very much more skeptical of the value of working with the United States. So that group, which I think had been the staunchest supporters of cooperation with the United States, then turned away. So we were hit with this sort of triple-whammy where all levels--left, right, center--have reasons why they denigrate partnership with the United States. And that has been the pervasive discourse within Pakistani politics.