Pakistan:The Post-Chagai Challenges

Smruti S. Pattanaik,Researcher,IDSA


The euphoria and enthusiasm exhibited in the aftermath of Pakistan's nuclear test seem to be evaporating in the face of the growing reality of the imminent economic crisis. Pakistan's nuclear tests were a response to India's nuclear tests, and were undertaken largely due to domestic political pressure and the insatiable desire of the Pakistani political elites to seek parity with India. According to Pakistan's view-point, the threat that had emanated from India's nuclear test was nullified after Chagai. Neither the Opposition nor the government behaved responsibly, being fully aware of the economic situation of the country. The seventeen days debate that followed India's nuclear tests saw unprecedented rhetoric, mostly coloured by religious fervour. Prime Minister Nawaz Sharif, of course, had very few options left to defer the nuclear testing. Whether Pakistan's India-centric defence establishment would have allowed such a proposition is a different matter altogether. The issue whether Pakistan would demonstrate its nuclear capability or maintain its ambiguity was debated and evaluated in futuristic terms. Pakistan's decision was well calculated, thus, its economic fallout should be wholly blamed on both the ruling elites and the Opposition who failed to recognise the state of the economy. The hectic diplomatic activity before the test which was evident from the visit of the Chief of the Army Staff (COAS) to China, Nawaz Sharif's talks with Muslim Arab countries and the pressure put by the US and UK could not have prevented Pakistan's decision to go nuclear.

While striving for parity with India what Pakistan failed to recognise is that the two countries are not only of different sizes geographically but also their economies are different, thus, the consequence of the nuclear tests would be dramatically different for both. Before analysing the economic fallout of Chagai, the purpose behind Pakistan's tests has to be analysed to assess whether Pakistan could have deferred its nuclear test or could have abandoned it. In this context, the question that arises is, has the nuclear test furthered Pakistan's security or given an advantage in the solution of its bilateral disputes with India? The answer is negative. Rhetoric apart, Pakistan has added to its domestic insecurity due to the economic fallout which might have a spillover effect on its external security.

Motive Behind Pakistan's Nuclear Test

Pakistan's nuclear test proved that the basic parameter of Pakistan's decision making structure prevented any rational decision. It was evident that emotions took precedence over rationality. Given the huge mandate Nawaz Sharif had (which he never fails to boast of) in the last election, he at least had enough scope to take a prudent decision and carry it through, had the Army been supportive. The dynamics of the domestic politics of Pakistan would not have allowed any independent decision in such a major issue where the Army can be sidelined. The advent of the democratic system after Zia's death has not marginalised the Army's role in politics. It still can be described as a Damocles sword dangling over the fate of the political leadership, and which can at any time, step in as the saviour of the country. To take an independent political decision in the matter of defence is an unrealistic proposition. Given the dynamics of Pakistan's politics it is difficult to asses whether the decision to go for overt nuclearisation was prudent or irrational. Sharif could not have sidelined the religious fundamentalists who were demanding a "fitting reply" to Pokhran II. The rhetoric reached such a height that a nuclear test became associated with the question of parity between Hindus and Muslims, with it being referred to as a "Hindu bomb," to which only an Islamic bomb could be an appropriate challenge. The histrionics displayed by the former Prime Minister, Benazir Bhutto, in a public rally, challenging Sharif to test, can be termed as a display of irresposibility. Moreover, all the political parties were so enthusiastic that they used the platform of an "all party conference" to build up public pressure on the government and even set a timetable to start an agitation against Sharif. Underplaying all these factors, the reason, however, that was given to the international community was that the statements made by Indian leaders pushed Pakistan to carry out a nuclear test to secure its territorial integrity. The reasoning sounds not only unconvincing but illogical to the people who are aware of the dynamics of Pakistan's domestic politics. Saner voices arguing against the test were marginalised and populist politicians and radical fundamentalist elements prevailed over them.

The case for a nuclear test, as the government boasts, was advocated on the basis of national consensus. Here a question arises in one's mind: consensus of whom on such an important issue? Does it require the affirmation of the vast majority of the illiterate population who do not understand what it is to possess a deadly weapon like this? Did anyone bother to enlighten them on this question? If not, what consensus are the political elites are talking about? As has been rightly observed by one columnist "...consensus became another name for imposed conformity which was witnessed in centrally controlled and state commanded systems which only recently disappeared in the blackhole of oblivion."1 Pakistan went ahead with its test to "restore the strategic balance" in the subcontinent. Speaking on Radio Pakistan after the nuclear test, Foreign Secretary Shamshad Ahmad Khan said, "Our decision to exercise the nuclear option was an expression of self-defence. In restoring this strategic balance, Pakistan has given only a bare minimum response."2

Pakistan glorified its nuclear capability and sought to take pride in the fact that it is the first Muslim country to possess such capability. The religious jingoism was overtly displayed probably to whip up a sympathetic consideration to accrue economic benefits from Muslim countries by displaying faternity on the basis of Islamic solidarity. This is evident from the speech given by Sharif outside the Masjid-i-Shohda. Addressing a public meeting there, he said, "Not only the whole nation, but the whole Islamic ummah (community) hailed Pakistan for its great achievement and expressed their happiness over the decision."3 He further declared on June 2, that "those who thought that Pakistan is a failed state had been made to eat their words. The world has now learned to respect Pakistan." Foreign Minister Gohar Ayub Khan termed the Indian nuclear tests and subsequent provocative statements by Indian leaders as undeclared war against Pakistan4 which compelled Pakistan to decide in favour of the nuclear test. In their campaign they were supported by their long-standing trusted ally, China. The official newspaper China Daily blamed New Delhi for the perilous nuclear arms race in South Asia by prompting Pakistan to carry out tit-for-tat tests in response to the Indian tests. But it is an acknowledged fact that Pakistan had the nuclear capability since 1987. Had that not been the case, it would not have been in a position to demonstrate its capability within seventeen days. Moreover, the nuclear tests have exposed Pakistan's capability (strength or vulnerability) to its enemy. Probably nuclear ambiguity could have given Pakistan an edge where the enemy would have been left with no choice but speculating about its nuclear capability.

It is incorrect to portray Pakistan's test as only a knee-jerk reaction to the Indian tests. Pakistan has taken a decision to go nuclear after analysing the relative advantage and disadvantage of such a decision. Not only did the radical elements push this decision, but the newspapers through editorial and columns, articulated a pro-nuclear stand. As a columnist wrote, "This spontaneous upsurge for the cause of the country almost amounts to a renewal of faith in Pakistan, a kind of rebirth at a time when only days earlier the general feeling was one of despair and despondency on account of violence, corruption and mismanagement." He rightly summed up the national sentiment by these words, "A rare opportunity has come our way to remake ourselves and the nation."5

The sane voices were few. Kamran Shafi, a columnist, cautioned the government about the possible fallout. In an article titled "After the Event", he wrote, "A mature and an efficient state has several other courses open to it, than merely the one suggested by the enemy. And here I have to revert to the complete and utter failure of the leadership, the opposition's included, to exploit the small boy belligerence of the Indian government to our own advantage."6 Echoing a similar opinion, Mahbub-ul-Haq, well known Pakistani personality, warned, "It would be a grave mistake to go nuclear when the entire international pressure is on India. If Pakistan goes for a nuclear test, international pressure would be directed towards us. It would help India escape the global condemnation."7 The aftermath of the tests portrays a different picture altogether. Statements were made asserting that sanctions will make Pakistan self-reliant. The emergency, frozen forex accounts, Kalabagh Dam, austerity measures after the nuclear tests have brought more criticism than accolades to the government after the nuclear tests.

Challenges Ahead: Sanctions by Donor Countries

Sanctions imposed by Japan include: (i) grant-in-aid for all new projects is frozen except emergency and humanitarian aid and assistance for grassroots projects. (ii) Japan will "continuously examine" loan programmes to Pakistan from international financial institutions such as the World Bank. In the fiscal year to last March, Japan's yen loans to Pakistan totalled Yen 32.0 billion ($231 million) and grants came to Yen 5.7 billion. Direct investment totalled Yen 7.6 billion.8

Germany also froze its aid programme. Last year Germany had supplied Pakistan with 72 million marks ($40 million) of aid, half of which was in the form of non-repayable grants.9 The US has imposed sanctions on military sales that include previously purchased items which would not be delivered. Neither the US government nor the US banks will provide credit. Among the countries that have imposed sanctions on Pakistan, the share of the US and Japan is only 0.4 per cent and 9.42 per cent respectively in the total foreign resources of Pakistan. The US and Japan shared 15.5 per cent and 6.6 per cent respectively of total exports of Pakistan and 10.7 per cent and 8.9 per cent of its total imports respectively, while Switzerland, Canada, Australia and England share 5.4 per cent of the total foreign aid.10

The imposition of sanctions raised Pakistan's short-term liabilities by 62.68 per cent in less than three years, shooting up from $7,895 billion in June 1995 to $ 12,844 billion by the end of March 1998. Moreover, Moody's rating has put Pakistan's foreign currency debt from B3 to B2. This is likely to discourage foreign capital investment.

The International Monetary Fund (IMF) held back a $1.6 billion financial package to Pakistan following the decision of the G-8 countries.11 These loans were approved under the Enhanced Structural Adjustment Facility (ESAF) and Extended Fund Facility (EFF). However, the final decision regarding cancellation or approval of the third tranche will be taken by the Board of Directors after the IMF completes its review of Pakistan's budget. Though all the members of the G-8 countries do not back the US sanctions, they supported the US decision to hold back lending by international financial institutions to India and Pakistan until they join the non-proliferation regime. Indicating the thinking of the US Executive Director on the IMF board, a US Administration official bluntly said, "We do not want Pakistan's economy to collapse as a result of sanctions. However, we are not going to allow Pakistan to come to us and tell us that if the IMF does not release the third tranche, Pakistan is going to let its economy collapse."12

The country needs $5 billion a year to meet its debt servicing and current account deficit. Though it is more likely that Pakistan would prefer a moratorium, an escape clause is allowed by the Paris Club, which reschedules debt payment by a country in economic trouble, rather than outright default. However, any rescheduling or a moratorium on debt repayment will have to follow a massive devaluation of the rupee, import restrictions and further cuts in defence expenditure.13 Japan, Australia and six European countries have threatened Pakistan that in case the country defaults in paying back the loans, these countries will immediately withhold loans worth more than Rs 24 billion meant for current development projects. The Japanese aid pipeline amounts to Rs 16 billion whereas aid offered by European countries amounts to more than Rs 8 billion.14 The current account deficit of $4 billion is because of external debts, which is more than 70 per cent of the Gross Domestic Product (GDP); debt service ratios have also been very high at around 25 per cent.15 The federal budget has a 6.2 per cent budget deficit with the revenue collection deficit growing to Rs 65 billion.16

At present, Pakistan's total external debt is about US $43.54 billion, out of which $30.70 billion comprises foreign debts and $12.84 billion short-term liabilities which includes $11.02 billion foreign currency accounts and the rest comprises commercial loans from the UAE, China and bonds issued by the government.17

Measures Taken by the Government

On May 29, through a Presidential order, emergency was imposed, suspending the fundamental rights.18 This was done on the pretext of a threat posed by external aggression to the security of Pakistan. As explained by the government later, this step had become a necessity in the event of economic sanctions being imposed by the donor countries. An ordinance was promulgated under Article 89, Clause 1, which was called Temporary Restriction Ordinance 1998. Under this Act, it was stated that "notwithstanding anything contained in the protection of Economic Reforms Act 1992 (XII of 1992), but subject to section 3, it is hereby provided that: during the period in which a proclamation of emergency under Article in force, the various protections contained in the said Act, or any other law for the time being in force, or in any agreement or contract for or in relation to foreign exchange, or the right to bring, hold, sell, withdraw, transfer, pay or take out foreign exchange (forex) shall remain suspended. "Clause 3(1) provided that "government by rules make provision for regulating dealings and payments in foreign exchange and such rules may, without prejudice to the generality of foregoing, empower State Bank of Pakistan to grant permission to make or receive payments in foreign exchange, or to permit the conversion of foreign exchange into rupees either on a case to case basis, or on the basis of a classification of various types and categories."19 To enforce this without any hassles, on May 29, the government declared a bank holiday, fearing that people will make forex withdrawals. However, the government provided that the foreign currency accounts can be converted into rupee accounts on a voluntary basis at a special rate of Rs. 46 to a dollar against the official rate of Rs. 44 per dollar. Though restriction on forex is going to provide relief for the time being, it is not going to help in the long run. According to the Central Revenue Board (CBR), the $11 billion forex deposits are a liability on the government against the $1.3 billion reserves. In terms of local currency, these deposits amount to well over Rs 500 billion. They are equal to the size of Pakistan's annual budget.20

The freezing of foreign exchange accounts has dissatisfied the general public. Moreover, this dissatisfaction has magnified after a report containing the story that many people close to the government withdrew huge amounts from their forex accounts before the restriction was clamped, appeared in the Press. The common people who had put their hard earned money in these accounts have suffered the most. Now, in the time of need, they are forced to convert it into Pakistani currency at a government approved rate which is far lower than the market. They are unable to send money to their children who are studying abroad. Uncertainty prevailed regarding the duration of this restriction on forex though it was announced to be in force for four months. The State Bank of Pakistan (SBP) also suspended encashment of Foreign Exchange Bearer Certificates (FEBCs) and Foreign Currency Bearer Certificates (FCBCs) including payment of profit on foreign exchange. But people were permitted to encash these in Pakistani rupees.

The economic challenge that confronts Pakistan is enormous. The austerity measures that were announced after Chagai are marked by tokenism and are largely considered as inadequate and cosmetic. The Prime Minister's Secretariat, a 400-room luxurious building which was abandoned as a mark of austerity, has no buyer to purchase it. It is reported that the capital development authority is spending an extra Rs 40 million to refurbish the Prime Minister's new Secretariat. A 50 per cent cut in non-salary non-development expenditure was announced by the government which is estimated to be a Rs 10 billion saving out of a federal budget outlay of Rs. 550 billion. The Prime Minister announced that Pakistan's foreign missions have been cut by 50 per cent. Other austerity measures announced include cost incurred on stationery by the government which has been reduced to half. No official visits will be permitted at the expense of the state except essential ones. No official function is to be held in hotels. Four Governor's houses in the four provincial capitals are to be turned into state guest houses. It was declared that the palatial state guest houses in Lahore, Karachi and Rawalpindi are to be sold and the money would be used for debt repayment and other development projects.21 In reality, the austerity measures amounted to nothing. Measures like giving up the use of foreign cars would not help the cause as they will still incur expenditure for their maintenance. The PM's gift of his Boeing 737 to Pakistan International Airlines (PIA) cannot be included in the austerity drive because the PIA had made payments for the aircraft. However, in the midst of these cosmetic austerity measures, corruption in high places is not an exception but a growing menace to the fragile economy. Even the Prime Minister owes a huge amount in taxes. But recently he has offered his non-profitable industrial assets as a part pay back of his taxes at a price which is ridiculously high. Many of the people who are close to him have been the ones who have evaded taxes. All this creates a question of credibility which Sharif may find difficult to handle.

In the national agenda announced on July 11, Prime Minister Sharif vowed to recover loans from defaulters. The total amount to be recovered from the defaulters is estimated at Rs. 170 billion. Out of that, only Rs 15 billion has been recovered. Even though the government has vowed to recover the loans, it seems to be an extremely difficult task because of the cumbersome process involved, like seizure of assets, etc. Sometimes the seizure of assets is not sufficient to recover the money because mostly the assets are overvalued and the bank will stand to lose more than it recovers if it acquires the assets. What is seemingly most difficult is the fact that out of the total bad loans, Rs 120 billion are outstanding against 100 influential people.22

The government announced 50 per cent cut in all expenditure except development and salary components of governmental departments, autonomous bodies and corporations, etc. General Sales Tax has been imposed not only to collect taxes from traders and businessmen with annual sales turnover of Rs 5 million but also to bring them into the tax net. Exchange requirements of all federal/provincial Ministries, it was decided, were to be considered on a case to case basis. The SBP has withdrawn authority delegated to authorised dealers (banks) to make payments on account of the suppliers credit, etc.

The critical moment of the impending economic crisis, however, has not made jingoistic statements quiescent. Finance Minister Sartaj Aziz proudly asserted that Pakistan has increased allocation for defence by Rs 11 billion (the total defence budget is Rs 145 billion) which is 8.5 per cent higher than that of the current year. It is also higher than that of India.23 India has announced a 14.13 per cent hike in defence spending. The defence expenditure stands hiked from Rs 36,099 crore (revised estimates 1997-98) to Rs 41,200 crore in the coming year. The real increase is 7.13 per cent after adjusting it to the inflation rate of 7 per cent.24 The government plans to impose 5 per cent "defence duty" on all imported items.

The SBP on July 9 moved a circular which required approval for remittances, including repayment under "Pay as You Earn Schemes", buyers credit and loans, remittances on account of principal and interest payments. This further includes letters of credit (LCs) or advance payment, royalty and technical fees, dividends, advertisements, membership of social clubs, repayment of loans and remittances of profit and disinvestment of shares and securities. The federal government in order to revive the economy, later decided to issue three-year dollar bonds to foreign currency account holders to restore confidence in the market. Foreign currency holders would be eligible now to convert their dollar holdings into dollar bonds with a maturity of three years and annual interest rates between 7 and 8 per cent.25

Agriculture tax was increased. Other provinces were asked to follow the example of Punjab and match their rates and system in the agricultural system so that this year's target of Rs. 2.2 billion is met. This is likely to create dissatisfaction among the people who are overburdened with price rise and inflation. It appears that Nawaz Sharif is sitting on a powder keg which is just waiting to explode.

On June 11, Sharif presented the much publicised "National Agenda." He promised to take over the 12,500 hectares of land gifted to landlords by the British. Though it sounds like a revolutionary step, its implementation will be very difficult. To occupy this land and distribute it, the government can use law enforcing authorities but as far as keeping the land under occupation is concerned, the tenant may find it difficult because of the money and muscle power of these rich landlords.

The government announced the trade policy for 1998-99 in which it made an attempt to bring the trade deficit to zero by boosting exports to US $10 billion so as to reduce the impact of sanctions. The policy is guided by the principle: "exports should pay for imports". The facility of imports against foreign currency demand draft not exceeding US $10,000 or equivalent for import of all importable items, will now be restricted only for crude oil, POL products, books, journals, magazines and periodicals. Second hand machinery such as sugar plants, cement plants, oil refinery, chemical plants, thermal power plants, hydel power plants, cranes, road rollers and machine tools which were locally manufactured will not be importable.26

Realities of Pakistan's Economy

The deposits in foreign currency accounts totalled about $11 billion, including about $7 billion in resident foreign currency accounts. So overall external liability at present is close to $36 billion, including $4 billion of non-resident swap funds and deposits of non-banking institutions in foreign currency accounts.27 Moreover, the budget made a provision of Rs 145 billion of foreign assistance.28 According to Commerce Ministry sources, during the fiscal year ending on June 30, the country's total exports amounted to $8.52 billion as against the imports of $10.05 billion. The country's exports during June 1998 amounted to $685 million showing a decline of 1.6 per cent when compared with the exports of $689 million in the month of May.29 Direction of trade is limited to a few countries. More than half of total trade (import plus export) is concentrated in Organisation for Economic Cooperation and Development (OECD) countries, around 62 per cent of which is with the USA, Japan, Britain and Germany. Or in other words, they can exercise control over 32 per cent of total trade. The composition of trade from them has a strategic importance for the manufacturing activities.30 The following tables reflect both imports and exports of Pakistan and the components of the balance of payment

Major Export and Import Markets of Pakistan

(Percentage Share)

Countries 1993-94 1994-95 1995-96

Export Import Export Import Export Import

Japan 8.0 11.8 6.7 9.6 6.6 10.7

USA 14.4 10.6 16.2 9.4 15.5 8.9

Germany 8.0 7.0 7.0 6.8 6.8 5.8

UK 7.8 4.9 7.1 5.1 6.4 4.4

Saudi Arabia 3.5 5.4 2.7 4.9 2.4 5.9

Kuwait 0.4 5.3 0.3 5.8 0.3 6.4

France 4.1 4.0 3.3 2.4 3.1 1.9

Dubai 6.3 1.5 4.0 1.8 4.7 1.6

South Korea 2.7 3.7 3.3 3.2 3.2 2.8

China 0.8 1.1 1.1 4.4 1.7 4.6

Malaysia 0.7 0.6 0.6 8.8 0.5 7.2

Hong Kong 7.3 0.4 6.6 0.4 9.1 0.4

Others 36.0 34.1 41.1 37.4 39.7 39.4

Source: Economic Survey, 1997-98 Ministry of Finance (Karachi), Government of Pakistan, p.80 and 82

Components of Balance of Payments

(As Percent of GDP)

Year Export Imports Trade Deficit Workers Current

Remittances Account


1994-95 13.34 17.04 3.70 3.06 4.07

1995-96 13.46 18.25 4.79 2.26 7.07

1996-97 (E) 15.52 18.70 3.18 2.45 4.99


Source: Economic Survey, 1997-98, Ministry of Finance, Governemnt of Pakistan p. 152.

Dollarisation of the economy due to encouragement by the governmental policy pursued for the last seven years has resulted in foreign currency constituting a bulk of the total bank deposits which in the present circumstance can be termed as a blessing. To make matters worse, the SBP has withdrawn the authority delegated to the banks to release foreign exchange for overseas travel which had an annual limit of $2,100. Immediately after the ban was imposed on foreign currency accounts, the rupee dipped further against the dollar.31 Due to inflation, many small and medium savers who had saved in foreign currency, suffered the most. This meant immense difficulties to the ordinary Pakistanis who are confronted with soaring prices, inflation and confusion on foreign exchange accounts. Due to popular dissatisfaction, the government which had earlier frozen the foreign currency accounts, revived these but the restriction from withdrawing in dollars continues. In the budget, concessions were given to the foreign currency account holders who would be allowed to enjoy immunities given to their accounts only if they invest their money in the stock market.32

Foreign currency accounted for 45 per cent of total bank deposits. US dollars alone claim around 80 per cent of all foreign currency accounts. According to a report, $200 million were transferred on the night of May 28, reportedly by those close to the government, who were informed before the clamp on the foreign currency was enforced. Around $500 million find their way out of the country through informal channels.33 The delay in making public the names of those who are involved in this siphoning away of forex has put a question mark on the credibility of the government. It is reported that people are procuring foreign currency from the open market and sending it abroad in this panic situation, anticipating the worst to come. Remittances which averaged about $140 million a month, came to a trickle mainly because of the differential rates between the official and market rates. Inflation was around 11 per cent in the past two years.34 However, now it is claimed to have been contained at 8.2 per cent which seems highly unrealistic.

All the LCs through domestic and foreign banks have been withheld as State Bank foreign exchange reserves have depleted below the danger level. The government has already failed to meet its short-term debt obligations to two foreign banks amounting to $500 million, thereby forcing these banks to roll over the swap funds which had matured recently. The banks had no option but to agree with the government. These restrictions were imposed notwithstanding Pakistan's accession to Article 8 of the IMF which Pakistan had signed in 1994. This Article prohibits signatories from imposing restrictions on payments and transactions, engaging in discriminatory arrangements and multiple currency practices without IMF approval. The application of this clause could also automatically lead to the suspension of aid from the IMF.

It was reported that some countries have refused to accept imports through LCs of some Pakistani banks, unless these LCs are endorsed by foreign banks. Moreover, as a result of downgrading of international credit rating agencies, foreign banks have increased their risk insurance. This increase has severely trimmed the margin of the trade.35 The US Administration has also issued executive orders to prohibit American banks from extending loans or credits to Pakistan and India. The Export-Import (Exim) Bank, which has recently reopened in Pakistan will no longer be a credit guarantor. This would mean a loss of $293 million credit guarantee which it was supposed to provide. Overseas Private Investment Corporation (OPIC) and Commodity Credit Corporation (CCC) facilities will no longer be there to back private sector lending.

While appealing to overseas Pakistanis for generous contributions to the National Self-Reliance Fund (NSRF), Prime Minister Nawaz Sharif said, "Sanctions have been imposed against Pakistan due to the historic decision for an honourable self-defence...All Pakistanis must come forward to take full advantage of this God given opportunity of making their homeland self-reliant and an honourable member of the community of nations."36 The appeal could not get the required dividends as is evident from the response it got from the expatriates in the US. About 450,000 Pakistanis settled in the US contributed only $1.2 million towards the Prime Ministers Self-Reliance Fund through the National Bank of Pakistan (NBP) reflecting a crisis of confidence. The Prime Minister appealed the expatriates to send at least $1,000 each to their families within 30 days to help the government.

The Iranian Foreign Minister during his visit to Pakistan just after the nuclear tests offered political support in speeding the pace of development in the areas of petro-chemicals and refining oil. Immediately after the nuclear tests, Finance Minister Sartaj Aziz and Chief Minister Shahbaz Sharif visited Riyadh to persuade the Saudi leaders to use their good office to influence the IMF and, at the same time, sought help to overcome the economic crisis. Contrary to the government's expectation, the Arab states confided that they themselves have little or no resources left and can pledge only a limited amount provided it is not touched by Pakistan for two months.37 During Sharif's visit later, the agenda for discussion in Saudi Arabia was Pakistan's energy requirements which takes away $2.5 billion worth of precious foreign exchange. He asked Arab businessmen to finance the infrastructure related development projects which had been hurt badly after sanctions were imposed by both the US and Japan. The UAE recently said that it would allow more Pakistanis to work in the Emirates, which would help stabilise the remittances position, besides creating more job opportunities. However, financial help from friendly Muslim countries was very little. Finance Minister Sartaj Aziz said that "even if we get oil worth $ one billion on deferred payments, its impact on balance of payment will not be more than $200 million during the first quarter of 1998-99". Cash balance of payment support from friendly countries may not materialise immediately due to their own difficulties.38

The contingency plan made public includes assistance sought from friendly Muslim countries. This includes import of oil from Saudi Arabia, Kuwait, the UAE and Qatar and palm oil from Malaysia on deferred payment, providing relief of about $1.5 billion. The surplus fund by four Arab countries has to be placed with the State Bank for a period of 2-3 years, augmenting reserves. Their participation in the privatisation of state enterprises is to be encouraged. These countries will provide greater employment opportunities to the Pakistanis.39

In the recently unveiled budget of Pakistan, revenue collection to finance the budget and its disbursement is made in the following manner. The total budget outlay is proposed to constitute Rs 606.3 billion. Out of it, own resources comprise Rs. 408.7 billion (include a tax revenue collection target of Rs 338.2 billion); foreign borrowing Rs 142 billion; bank borrowing Rs. 43 billion; disbursement which is developmental Rs 110.6 billion; other non-development Rs. 54.4 billion; defence Rs 145 billion; debt servicing 275.6 billion.40 However, at present, the government intends to defer expenditure heads on non-development and is still discussing the possibility of deferring on debt servicing, though Pakistan is anxious to pay its old loans so as not to damage its image as a borrower. An analysis of the budget reveals that foreign borrowing, debt servicing and revenue collections seem highly unrealistic propositions: Rs 275.6 billion debt servicing amounts to 45 per cent of the total budget which is extremely difficult to achieve. Moreover, in the face of sanctions, the foreign borrowing will be almost nil. Rs 338 billion revenue target in the financial year 1998-99 would be unrealistic. As per the reputation of the Central Board of Revenue (CBR), in the last two years, it could not attain twice revised targets which were set at Rs 324 billion initially and then Rs 297 billion, and so far the CBR has collected only Rs 290 billion. Six per cent growth in GDP is an impossible target.

It is more unlikely that Pakistan would be bailed out if it does not sign the non-nuclear proliferation treaties like Comprehensive Test Ban Treaty (CTBT) and nuclear Non-Proliferation Treaty (NPT). It has been given hints by the US to sign the CTBT for the resumption of loans by the IMF. Pakistan is heavily dependent on aid compared to India. Aid finances up to 20 per cent of Pakistan's imports, as compared to 10 per cent for India. IMF official Paul Chabbier, Director of the Middle Eastern Department, pointed out that Pakistan stands to lose more from the recall of $11 billion short-term loans from various institutions, further reduction in foreign exchange reserves, investor shyness, World Bank, IMF loans being affected, etc. The real worry is short-term high interest debt that Pakistan has contracted to service its $50 million debt—the impact of sanctions will be much greater than in the case of India.41 It is estimated that the World Bank will hold back $750 million assistance, the IMF the balance of $1.22 billion out of $1.6 billion assistance under the ESAF/EFF programme and the Asian Development Bank (ADB) the $1.8 billion promised between now and the year 2000 to Pakistan.42

The government recently gave permission for the opening of new foreign exchange accounts, but the past actions have reduced the government's credibility. Nobody wants to make an investment, because in spite of the existing sureties, the forex accounts were frozen overnight after the nuclear tests. Pakistan is going to feel the pinch of sanctions next year. For the year 1999, the proposed lending plan consists of $785 million from the international financial institutions. This includes seven projects: one in the agricultural sector, one in the power sector, three in the social sectors, one in the infrastructure and one in the reform of the tax system.43

Certain over-optimistic elements in Pakistan still hope that sanctions will not last for another six months. Their optimism can be attributed to the recent US decision to waive sanctions on agricultural products due to intense pressure by the agriculture lobby.44 However, the US knows that this is the right time, when pressure can hurt. So it is not keen on lifting the sanctions. The US Senate approved on July 15, a measure that would give President Clinton authority to waive most of the economic sanctions against nuclear rivals India and Pakistan for up to one year. It provides a waiver on anything but military sales.45 But it depends on US non-proliferation policies and how it wants to go about in achieving success. Amidst the sanctions, what is bothering the US is Pakistan's committment to non-proliferation of both weapons and technology to other Islamic countries, especially Iran. Such apprehensions have become more credible after the recent revelation by North Korea that it has sold some nuclear technology to fight back US sanctions. In the event of this disclosure, and analysing it in the context of the imminent economic crisis, there is a possibility that US apprehensions might come true.

Domestic Political Challenges

Apart from the economic health, Pakistan's political health is a cause for concern to Nawaz Sharif. The nation which was united behind him when Pakistan went for the nuclear tests, suddenly stands divided over the issue of emergency, suspension of forex accounts, law and order situation in Sindh and on the issue of the Kalabagh Dam. The Kalabagh Dam is the potential challenge to Sharif. It has divided the country on party lines, and all the parties except the Pakistan Muslim League (PML-N) stand united on this issue. All the small provinces—Sindh, Balochistan, NWFP—are committed to not allowing the dam to be built. Similar resolutions were passed in the Provincial Assemblies, endorsing this view. The whole issue has blown up into a demonstration of power between the provinces and federal government and against the domination of Punjab. Punjab, for obvious reasons, is aligned with the federal government. Many PML legislators are opposing the Kalabagh Dam. It is not very clear from where Sharif will arrange the required resources to build this dam whose estimated cost is around $6 billion. However, there are certain reports which claim that the Chinese are interested in building this dam.

The nuclear tests have not strengthened Pakistan's internal security. Karachi has become a killing field between the Altaf and Haqqiqui groups, with both sides accusing each other. The Mohajir Qaumi Movement (MQM) which is a coalition partner of the PML in the federal government has been threatening to quit the partnership if the PML does not honour its agreement. Corruption and scandals are gaining centre-stage. Most of the blame for the internal problems is bestowed on foreign involvement. In an interesting article published in The Nation, Amar Jaleel wrote about this foreign involvement in the context of the bomb blasts in Sindh. "For lawlessness, corruption and then total frailty, each government would exclusively hold you responsible...therefore, in order to survive, they would keep you alive at any cost, and would absolve themselves from responsibility."46 The PML is already facing problems in the NWFP because of overbearing central interference in provincial matters. The Awami National Party has now forged alliances with ethnic parties like the Pukhtoonkhwa Milli Awami Party in Baluchistan which may cause problems for the PML government later. In Baluchistan, both Pakhtuns and Baluchs are being alienated because of central intervention in controlling indigenously generated economic resources. In Sindh, the situation is more volatile because of intra-Mohajir fighting which has turned Karachi into a battlefield. The MQM (Altaf) has absolved itself of all responsibility for the carnage and alleges that it is due to the direct involvement of federal law-enforcing authorities. This has put the PML-MQM alliance under pressure. In Punjab, the cleavages based on conflicting constituencies of class and caste are creating a serious crisis for the PML. Moreover, the Chief Minister's personalised style of functioning has alienated many PML legislators in the formulation of policies. Many of these legislaters are dissatisfied though they are not likely to split the party because of the Fourteenth Amendment Act.

Indo-Pak Relations

Nuclear Pakistan has not added anything significantly to its advantage on the issue of Kashmir. It has become a much publicised affair in Pakistan that the nuclear tests have brought the Kashmir issue back to the international agenda. But the resolutions adopted in the UN Security Council and the P-5 meetings have not got Pakistan the anticipated dividends on the issue. The Kashmir issue was mentioned in the P-5, G-8 and Security Council resolutions and both the countries were asked to solve all outstanding issues, including Kashmir. Showing his disappointment, Pakistan's UN Ambassador Ahmed Kamal, said, "We cannot read any message in your resolution. You have once again abandoned your responsibility by asking us to find a mutually acceptable solution." India has ruled out any third party mediation and refused to receive the UN General Secretary's delegation in India recently and definitely this has not helped Pakistan. Of course, Pakistan was able to give its side of the problem and tried to propagate the idea that India is intransigent in resolving the Kashmir issue. Though many countries have volunteered their mediation, they have been refused politely by India.

The Kashmir issue is being referred to as a flashpoint in the subcontinent which might induce a nuclear war. Such comments from the international community can be attributed to certain remarks made by the leadership in both the countries. Pakistan would, however, like it to work in favour of its stand to press its point for a third party mediation. But what Pakistan fails to realise is that such statements reflect another facet of its leadership, that they are not responsible enough to possess nuclear weapons. Pakistan in order to show its genuineness in solving the problem should stop the proxy war in Kashmir.

Pakistan should not try to impress the world leaders that its nuclear test was concerned with its legitimate security concerns and that India should be blamed for initiating the nuclear race in South Asia. Expressing anger after Pakistan's tests, Bill Clinton said, "By failing to exercise restraint in response to the Indian tests, Pakistan lost a truly priceless opportunity to strengthen its own security." The US had offered Pakistan about US $5 billion in economic assistance plus the F-16s. However, Clinton's offer lacked credibility which can be illustrated by the North Korean case. In 1994, US officials were able to forge a deal and accordingly Pyongyang agreed to "freeze" its nuclear programme in exchange for shipment of fuel oil and the promise of two nuclear reactors. But Congress balked at paying up, and the Asian economic crisis has slowed US efforts to find funding abroad. The US is about six months behind on delivery of fuel oil and North Korea is now threatening to resume its effort to build a bomb. This is certainly not an example that will impress the Pakistanis.

The recently concluded South Asian Association for Regional Cooperation (SAARC) summit which give an opportunity to both the Prime Ministers to meet informally has not brought any positive results as anticipated. The stand of both countries is incompatible. India's insistence on a bilateral framework and Pakistan's stand for international mediation has made the solution of the Kashmir problem difficult. However, Pakistan scored a point after the failure in the informal bilateral talks, by declaring that they are futile exercises. But as is evident, with the preconceived belief that bilateral talks cannot solve the problem, Pakistan can reassure itself each time that the Kashmir issue cannot be solved bilaterally. And prolonging the process of a mutually acceptable solution would not help Pakistan since the whole issue of normalisation of relations, including trade, has been held hostage to the solution of the Kashmir issue.

The nuclear tests have not enhanced Pakistan's political manoeuvrability in Kashmir except for the fact that it has boosted its morale but at the cost of its economy. Pakistan has rejected India's proposal of no first use (of nuclear weapons). This gives rise to an apprehension—would Pakistan use its nuclear weapon in a war with India? A nuclear weapon is a weapon in the hands of the political leadership, and without their approval, it cannot be used. But given the internal dynamics of Pakistan's politics and the role of the Army, the decision regarding its usage cannot solely be dependent on the political leadership. But Pakistan cannot use its weapon without causing the destruction of the whole of Pakistan. Thus, what is required now is confidence building measures (CBMs). It will be difficult to solve the half century-old problem within a few months. But bilateral talks have to continue. Effective CBMs cannot be achieved unless Pakistan stops sponsoring terrorism in Kashmir. With the killing of people from minority communities, India will be compelled to take stern action against the terrorists. Any third party mediation will not help the problem because, even if they are permitted to mediate, the onus of agreeing to any settlement depends on both the countries. The role of a third party can only be limited to act as a facilitater or initiator of talks and no third party can impose its decision on these countries. If the third party role is just that of an initiator or facilitater, there would be no dearth of such personalities in both the countries who can act as observers and referees.


Given the present situation, both the countries have to strive to fight the sanctions. They can trade between themselves and reduce the pressure of the sanctions. Thus, bilateral trade should take precedence over Kashmir. Pakistan is facing a serious economic crisis and should look at the problem realistically rather than emotionally. The intransigence of Pakistan over the Kashmir issue has made any optimism regarding bilateral trade redundant. Nawaz Sharif in an interview said, "Trade without trust means nothing. It will be a very temporary affair. If you want to make it permanent, we have to address the root cause and Kashmir remains a root cause".47

Even after detonating, a credible delivery system is needed. If sanctions persist for some time, it will be very difficult for Pakistan to sustain its weaponisation programme because of domestic economic pressure. Pakistan had a credible nuclear deterrence even before detonating. Its declared nuclear status has not made any difference to its capability. Rather, it is vulnerable now to external pressure to sign the CTBT before it can expect any World Bank loans to overcome the economic crisis. The civil society has to play an important role in depoliticising the atmosphere to erect a confidence building mechanism to improve Indo-Pak relations. The politicians are motivated by political mileage for their actions. So it will be difficult for them to seek any realistic solution on the Kashmir issue without it bringing them the required political dividends. Knowing the limits of the political leadership, it is the intellectuals and educated masses who should take the lead in reducing tensions. Given the level of antagonism that prevails in both the countries, it is difficult to rise above mutual suspicion. The civil society failed once when it could not persuade the political leadership not to detonate bombs and if this time they fail to educate the public about the positive side of Indo-Pak cooperation, and try to reduce bilateral tensions, they will not be forgiven. Because any future war will definitely be disastrous and the responsibility will squarely lie on the civil society.



1. Syed Talat Hussain "Let Them Speak, For They are Free," The Nation, June 6, 1998.

2. SWB, Part 3, (Asia Pacific), FE/3241, June 1, 1998, p.A/1.

3. Ibid., p. A/2.

4. Ibid., p. A/3.

5. The Nation, June 3, 1998.

6. The Nation, June 6, 1998. Also refer to an interesting piece on Pakistan's nuclear tests in the same newspaper, "A Layman's Conference on N-Tests."

7. Mariana Babbar, "Critical Mass," Outlook, vol. 4, no. 20, May 25, 1998, p. 33.

8. The News, June 1, 1998.

9. Ibid., May 29, 1998.

10. The News, June 1, 1998.

11. Under the IMF loan facilities, $1.6 billion loan is to be given in three years and released in three tranches. US $208 million was given to Islamabad in October 1997, the second tranche of US $180 million released in March 1998 and the third one of US$27 million was due in July 1998. Refer The Nation, June 14, 1998. The sanctions will not affect the World Bank loan of US$808 million for the outgoing year. Disbursement has already been completed.

12. POT, vol. 26, no. 173, July 28, 1998, p. 2191.

13. Newsline, July 1998, p. 26.

14. POT, vol. 24, no. 170, July 24, p. 2151.

15. Jayanti Ghosh, "Pakistan's Economy in For a Jolt," Frontline, vol. 15, no. 2, June 6-19, 1998, p.

16. The Nation, June 1, 1998.

17. The Nation, June 12, 1998.

18. On July 14, an amendment was made to the Presidential order of May 29 that restored all the fundamental rights except Articles 10, 15, 16, 17, 18, 19, 23-25. Article 10—safeguards to arrest and detention; Article 15—freedom of movement; Article 16—freedom of assembly; Article 17—freedom of association; Article 18—freedom of trade, business or profession; Article 19—freedom of speech; Article 23—rights of citizens to acquire hold and dispose of property; Article 24—protection of property rights; and Article 25—equality of all citizens before law, POT, vol. 26, no. 175, July 30, 1998, p. 2213.

19. The Nation, May 29, 1998.

20. The News, June 8, 1998.

21. Austerity measures include voluntary surrender of the ruling party Parliamentarians of their allowances and medical expenses, and monthly salary by the Cabinet. Governors and Chief Minister who have been provided with official aeroplanes should restrict their use only for where national airline planes would not go. Primacy to education is given where the expatriate Pakistanis are requested to pay US$10 per month and Rs 500 for local Pakistanis to improve literacy. In addition to this, the government announced agricultural loans and loans to unemployed youth. For details of Prime Minister's speech, see The Nation June 12 and 13, 1998.

22. The News, June 23, 1998.

23. According to the Pakistani budget statements, the defence expenditure is divided into two heads: (a) for defence administration, the government has allocated Rs 263.5 million (b) for defence services, the government has allocated Rs 144,736.5 million. The second largest chunk of Pakistan's defence expenditure goes to defence procurement which involves forex. India has made 14 per cent higher defence allocations than its previous budgetary estimates but 70 per cent of the total increase was made for salaries. The actual increase comes to around 4.10 per cent. Refer The Nation, July 14, 1998.

24. In proportion to GDP there has been no increase in the defence expenditure. It still stands at 2.46 per cent of the GDP (1998-99), the same as in the previous fiscal year. Hindustan Times, June 2, 1998.

25. POT, vol. 26, no. 173, July 28, 1998.

26. For details of trade policy, refer to the text in The News, June 23, 1998.

27. The News, June 26, 1998.

28. POT, vol. 26, no. 174, July 29, 1998, p. 2210.

29. The News, July 10, 1998.

30. The News, June 1, 1998.

31. The Nation, July 13, 1998, The market rate stands at upwards of Rs 60 per dollar. This means a gap of Rs 14 per dollar between the official and the market prices. Travellers cheque can be issued to those having foreign currency accounts.

32. For details regarding foreign currency accounts, which were allowed to be opened again, see The Nation, June 7, 1998.

33. Newsline, July 1998, p. 25.

34. Frontline, vol. 15, no. 2, June 6-9, 1998, p. 19.

35. Most foreign banks have started charging 4.5 per cent premium on LCs as against 1.5 per cent previously, a triple increase in the amount. The News, June 26, 1998.

36. The Nation, June 4, 1998. While announcing the National Agenda on June 11, Prime Minister Sharif announced incentives for the overseas Pakistanis. According to the scheme 25,000 residential plots have been made available in Islamabad, Karachi and Lahore and the expatriates are required to make payments in foreign exchange by September 30. Anybody remitting $100,000 or $50,000 to his homeland will be allowed tax and duty exemptions amounting to Rs. 400,000 and 200,000 respectively on purchases. But this exemption has to be claimed before June 30, 1998.

37. n. 12.

38. n. 28, p. 2211.

39. The Nation, June 13, 1998.

40. The Nation, May 29, 1998.

41. The Nation, May 29, 1998.

42. The News, June 3, 1998.

43. The voting power of G-8 countries in the World Bank and IMF is the following. Canada-3.01 per cent; France 4.18 per cent; Germany 6.92 per cent; Italy 2.74 per cent; Japan 10.69 per cent; Russian Federation 0.26 per cent; United Kingdom 5.00 per cent; United States 15.29 per cent. Percentage of total voting power is 48.9 per cent. It is most likely that Australia, Austria, Belgium, Finland, Iceland, Ireland, Netherlands, New Zealand, Norway, Portugal, South Africa, Spain, Sweden and Switzerland will go along with the decision of the G-8. Alam Haider, "In the Line of Fire," Newsline, July 1990, pp. 99-100.

44. India imported $154.3 million worth of farm produce from the US in 1997. Pakistan imported $385 million worth of farm produce in 1997 from the US. Pakistan planned to purchase up to $250 million worth of US grain this year. The sanctions had frozen $88 million in wheat credits for Pakistan this year and threatened up to $350 million in new credits for next year had the sanctions been enforced. Agricultural products are exempted from the sanctions which were passed in the US Senate recently.

45. n. 18, p. 2226.

46. Amar Jaleel, "Seventh Explosion" The Nation, June 13, 1998.

47. Pakistan Times, June 14, 1998.