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Can Pakistan do without foreign economic aid?

Updated November 04, 2013

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- File Photo
- File Photo

Notwithstanding tall promises of doing away with the begging bowl and achieving self-sufficiency, governments of all kinds and creeds have accepted foreign economic aid at the drop of a hat.

Why? Was it to promote economic growth? Alleviate poverty? There is no credible evidence that foreign economic aid has accelerated growth or reduced poverty.

Professor Deaton, an expert on global poverty and foreign aid, is of the view that foreign aid does more harm than good. It corrupts governments and rarely reaches the poor.

Despite receiving huge amounts of foreign aid, Pakistan has failed to reach the stage of self-sustaining economic growth. In fact, most of the economic aid has been used to pay off debts. It is estimated that out of the total disbursement of $77.78 billion to Pakistan during 1961-2009, $45.05 billion (58 per cent) were returned to the donors as payment of previous debts.

Donors usually take a huge chunk of the loans back because of terms and conditions stipulated in the credit agreements.

The fact of the matter is that donors provide aid to meet their strategic and economic interests. The objective might be to benefit their powerful domestic interest groups or to buy political allies abroad or to continue conflicts and civil wars.

The rise and fall of foreign loan inflows to Pakistan best illustrates this point.

Pakistan hardly received any assistance in the 1950s. Credit then increased substantially in the first half of the 1960s because of mutual defence agreements (SEATO and CENTO). Following the 1965 war, the assistance was substantially reduced, and remained so till the beginning of the Soviet-Afghan war, when it picked up again and continued till the conclusion of the war, when it was abruptly stopped.

It remained so till 9/11 happened.

Since then, Pakistan has received a substantial amount of aid. However, now that the withdrawal of coalition forces from Afghanistan is on the cards, voices are again being raised to stop aid to Pakistan, and some uncomfortable (but very pertinent) questions are being asked.

It is apparent that giving aid is in the interest of the donors rather than the recipients. Furthermore, substantial variation in the flow of aid makes medium to long-term planning difficult, if not impossible. Therefore, why do countries take aid?

Pakistan, for instance, uses aid to meet a large portion of its investment and import requirements, and unless there is a radical change, this state of affairs is expected to continue in the short to medium term.

Already in the first quarter of 2013-14, the current account gap has widened to $1.2 billion (despite more-than-expected remittances from overseas Pakistanis), and exceeds the target agreed with the IMF ($900 million). Foreign exchange reserves have fallen by over a billion dollars in a month. Rising deficits and low foreign exchange reserves are a nightmare for foreign direct investment. Furthermore, the rupee has devalued drastically.

What option did the government have other than to approach the IMF for an emergency loan? Furthermore, in the medium to long term, Pakistan needs massive investment to improve its infrastructure, bridge the power shortfall, provide education and health facilities, reduce poverty, create jobs for millions of people, and, last but not the least, address the national security issues.

So what should countries like Pakistan do? Refuse aid? Cut the coat according to the size of the cloth! It is, undoubtedly, a sane advice, but is extremely difficult to follow. Most of Pakistan’s needs, as indicated above, are of an urgent nature, and cannot be postponed.

Mobilising resources, bringing back the billions parked abroad and broadening the tax net are all easier said than done. Despite all the sound and fury over the last five years, not a single dollar has been brought back from abroad. Indeed, the Governor, State Bank of Pakistan says $25 million are illegally taken abroad each day!

The drive to broaden the tax base has also failed to take off. Out of over 31,000 notices that were recently sent by the Federal Board of Revenue, two-thirds were returned undelivered, and less than 500 people filed their income tax returns.

Is trade not aid a solution to the problem? So far, this is just a rhetoric. Rich countries have failed to open their markets to poor countries. Indeed, they have used aid as a lever to gain access to the markets of the poor countries. Even if the rich countries open their doors, the world’s poorest countries would need substantial aid to benefit from the opportunity of trade.

What about the overseas Pakistanis? They have been very generous.

Without their support, the economic plight of the country would have been much worse. Pakistan can certainly tap into this valuable resource. However, it must be recognised that the overseas Pakistanis have never been given a fair deal.

So, to answer the question whether Pakistan can do without foreign economic aid, it seems that in the short to medium term, it would be difficult to manage without it. As for the long term, it is too long a period to forecast. Does this mean that it is all doom and gloom and that nothing can be done to retrieve the situation? Or that Pakistan should give up its efforts to live within its means or mobilise more resources or stop pursuing trade for aid?

Certainly not! Indeed, we should continue to pursue these options more vigorously. To borrow from Deaton, “global poverty is no longer a result of a lack of resources or opportunities, but of poor institutions, poor governments and toxic politics”. Pakistan would do well by reforming its institutions, improving governance, and purifying its politics.

Most importantly, every dollar received in aid should be judiciously used. And what could be a better cause than meeting some of the Millennium Development Goals for 2015, which Pakistan has voluntarily agreed to pursue but where it is substantially lagging behind.