Economics of Diplomacy

In Blog, Economic Security, National Security
September 8, 2022
Syeda Zahra Shah Subzwari
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Pakistan’s foreign policy is in disarray since no country has emerged to give special concessions to its people in the face of growing inflation and a balance of payments crisis. The new coalition government may have attempted to resurrect its foreign policy difficulties, but it appears to have yielded little. Pakistan’s current economic and foreign

Pakistan’s foreign policy is in disarray since no country has emerged to give special concessions to its people in the face of growing inflation and a balance of payments crisis. The new coalition government may have attempted to resurrect its foreign policy difficulties, but it appears to have yielded little. Pakistan’s current economic and foreign policy dilemma stems from decades of unsustainable policies. Decades of untenable military and economic expenditure reliant on foreign, primarily the US, terminated partly due to shifting geopolitics.

Pakistan has often sought financial assistance from international institutions or friendly nations in the Middle East and China as it does not seem to produce enough revenue and resources through taxes and economic development. The new coalition government pledges to boost US-Pakistan ties and the world to ease some of the country’s economic woes. However, doing so would also require Pakistan to reassess its diplomatic and security policies, particularly concerning US and China, which may be impossible in the short term.

The Pakistani ruling elite’s practice of bartering strategic and security considerations to superpowers in exchange for minimal economic help will have little influence on a country the size of Pakistan. And as recent history has shown, this strategy is likely to result in a domestic reaction and state and political upheaval, depriving the country of the stability it requires to succeed.

The International Monetary Fund (IMF) continues pressuring Pakistan to hike energy and fuel costs, increase tax collection, and make significant budget cuts. Pakistan’s bilateral and multilateral partners have little motivation to continue subsidising Pakistani’s disastrous macroeconomic policies. Pakistan’s economic suffering, as well as greylisting by the Financial Action Task Force (FATF), has demonstrated the efficacy of economic discipline.

The lines of communication used to feed the US, and coalition forces were the principal sources of leverage Pakistan had and now has lost since the US’s withdrawal from Afghanistan, even though the US would want counter-terrorism involvement in the region. Pakistan’s attempt to rebalance to the West has had little impact as Pakistani pundits close to the ruling coalition have spread the notion that concessions to the US, such as drone launching or overflight privileges, may be swapped for economic relief measures, for all that has had marginal influence.

Pakistan owes about $130 billion in foreign debt, $23 billion of which must be returned within the following year. Continued dependence on borrowing will force us deeper into debt. The foreign exchange reserves are currently at $9.8 billion, up from $2.3 billion in June, thanks to a $2.3 billion transfer from China. In addition, the IMF has agreed to disburse $1.17 billion. We are, nevertheless, on an unsustainable course. This is an excellent example of debt trapping: taking out lesser loans to finance larger ones. Realigning the economy to meet the constraints set by foreign lenders stifles development and weakens economic sovereignty.

Pakistan’s foreign policy is at a fork in the road. Its ruling class understands the importance of avoiding being entangled in the US-China power conflict. And while it has taken significant action against international terrorist groups operating in the country, it has also limited its capacity to defy the West strategically. Fear of US secondary sanctions, for example, is one of the factors why the country’s commercial and governmental organisations are hesitant to purchase subsidised Russian petroleum. In contrast, India has increased its Russian oil imports with no repercussions from the West. Significant domestic economic and governance changes will eventually enhance foreign direct investment, shape mutually beneficial trade alliances, promote sustainable and equitable economic development, and increase national might.

Pakistan and China’s alliance has a lot to do with economic security; China is pouring billions of dollars to finance a wide range of infrastructure projects, including highways, railways, power plants, and, most importantly, the seaport of Gwadar in Pakistan’s Balochistan. It also is mindful of concerns directed towards India related to security and geo-strategy and aims to limit the US influence in Asia. Both countries express CPEC to be revolutionary in regards to different extents. The endeavour, however, is not without challenges, and despite Pakistan’s more active economic foreign policy, it is unlikely to result in a substantial shift away from Pakistan’s rentier state scenario.

Pakistan must accept that it cannot continue to live paycheck to paycheck. Band-aid solutions will not suffice; instead, efforts must be directed at strengthening our export base. We must find a method to bridge these gaps and recognise that foreign policy and the economy are inseparable. Pakistan must broaden its export basket and become more competitive without relying on low-value exports, pushing to decrease trade constraints, abolish subsidies, and establish a business-friendly climate. Reforms must target wasteful spendings, such as the non-combat defence budget, land grabs, and government handouts. Pakistan needs to develop a coherent crafty foreign policy beyond its security and defence policy.

Pakistan presently earns most of its money through disproportional taxes, affecting the poor significantly more than the affluent. The budget attempts to tax the agriculture, retail, wholesale, and property-owning classes. These are common-sense policies that need implementation if we are to create a self-sufficient economy. Why is it that the only thing that appears to save us from defaulting is a foreign loan or bailout? Instead of vilifying the IMF for imposing stringent requirements, our economy should be designed so that we do not need to rely regularly on foreign lenders.

Pakistan’s economy takes second place in the country’s political demands; For example, the departing government in April imposed a price freeze on fuel. To address the issue, a targeted and systematic strategy is required to address the matter, which necessitates difficult decisions. Each new leader is battling for their political survival. It is unclear whether they will take place. They are however, overdue and Pakistan keeps on living on borrowed money.