Pakistan has a hostage problem. It is captive to Taliban in its own territory. The economic system is plagued by investment-saving gap. As a consequence, economic stability is dependent upon financial support by multinational lenders, the US and its allies. In such a complex situation its tough to apply the writ of the state in letter and spirit.
Some political parties opine that US drone attacks are sabotaging the peace process with the Taliban, and, in protest, these are demanding a halt in NATO supplies to Afghanistan. When NATO supplies were stopped a couple of years back, there were no direct flows from the US (CSF money) for almost a year, as well as help under the Kerry Lugar Bill was also stopped. IMF standby facility was halted anyways at that time, and nothing much was coming from other multilateral lenders either.
The CSF money ($900mn due in remaining fiscal period) is good for building reserves but its absence would not crumble the foreign exchange reserves. Although the US has significant say in the IMF; the latter may still abide by its facility extended to Pakistan in case of political friction between Pakistan and the US. Some other multilateral flows may come whereas some may not.
With current account deficit of 1-2 percent of GDP ($2.5-5 bn), the economy is resilient enough to withstand a year without CSF and some multilateral flows. We can improve the current account further by some import compression. The economy needs investment, both foreign and domestic, to generate growth and provide employment. And that is contingent upon the law-and-order situation, which is bleak in Khyber-Pakhtunkhwa, Balochistan and the business hub, Karachi.
Plus, in order to ensure macroeconomic stability it is imperative to put the fiscal house in order and for that the rich need to pay their due share of taxes. We also need to keep moving on the track of improving economic ties with the rest of the world; China and Turkey are our new economic partners and there is a need to improve these relationships. More importantly, to address the gravest issue facing Pakistan today, that of energy, funding from multilateral agencies is a must and Pakistan cannot afford to lose at this front.
Nonetheless, broadening tax base and building trust of investors takes time; and requires writ of the state as a prerequisite. We need to define our agenda of talks with the Taliban. There cannot be a state within the state.
Concurrently, relationship with the US should not turn so sour that Pakistans relationship with the IMF and the rest of West ends being maligned. At the time of writing this column, the talks between the Ministry of Finance and the IMF continued for the fourth day; but no statement was announced by either party. There is some kind of a hush-hush, as this silence is unusual. Some sources reveal that talks have broken down on the issue of currency adjustment, which means the rupee can see a battering against the USD in coming days.
Hence, the imperative is to find a midway so as to not sway away much from the US and yet keep Taliban calm. There is massive trust deficit among all the three parties--Pakistan, Afghanistan and the USA. The recipe, in the meanwhile should be to continue talk and fight at the same time.
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