Pakistan’s Economic Crisis

Our guest blogger is Caroline Wadhams, National Security Senior Policy Analyst at the Center for American Progress Action Fund.

pakistan-rupee.jpgWhile much of the recent attention on Pakistan has been focused on the fight against Al Qaeda and the Taliban, Pakistan’s economic crisis has largely been under the radar screen. This crisis has the potential to be even more destabilizing to Pakistan’s democratically elected government and the population than the terrorist threat.

Pakistan’s economy is in free-fall. Inflation is at 25 percent, causing dramatic food price spikes and hitting Pakistan’s poor the hardest. Pakistan’s government faces mounting fiscal and trade deficits, and Pakistan’s foreign exchange reserves have fallen to $6.9 billion, enough to pay for only an estimated nine weeks of imports. The repercussions of bankruptcy could be devastating for Pakistan’s efforts to combat the militant groups, to provide for its people, and to move forward in its democratic transition.

On Monday, the Center for American Progress released a report (pdf), Partnership for Progress: Advancing a New Strategy for Prosperity and Stability in Pakistan and Region. We argue that the United States has failed to focus on the other drivers of Pakistan’s instability apart from the militant threat, such as its economic problems. Nor has the US leveraged the resources, influence and expertise of other countries, including China and Saudi Arabia in tackling Pakistan’s challenges. We propose that the U.S. assist Pakistan through an integrated, international effort rather than trying to impose U.S. solutions. Not only do we have our own economic crisis to deal with, Pakistanis perceptions of Americans are so dismal as to often discredit any American efforts in Pakistan.

Fortunately, it appears that the United States and the international community are beginning to recognize that Pakistan’s problems affect us all, and that they need urgent assistance. Yesterday, the Friends of Pakistan group, which includes the U.S., Saudi Arabia, China, the United Arab Emirates, Turkey, the United Nations, the European Union and others, met for the second time in Abu Dhabi to discuss ways to assist Pakistan economically. While no aid was pledged at the meeting, officials at the session drafted a framework to promote economic development and financial stability in Pakistan, and agreed to follow-up sessions in January and February. On Saturday, the International Monetary Fund agreed to provide a $7.6 billion emergency loan to Pakistan, contingent on Pakistani economic reforms that will hopefully restore some measure of investor and donor confidence.

Our report contains a series of recommendations to assist Pakistan in addressing its economic problems, such as creating a comprehensive inter-agency development strategy that focuses on Pakistan’s education and vocational skills training, health care quality and access, the energy sector, and water shortages. We propose convening an economic donors’ summit with key regional investors to facilitate increased trade between Pakistan, its neighbors and other key countries. While no Pakistani or American administration can afford to ignore the immediate short-term threats posed by militants based in safe havens on Pakistan’s border with Afghanistan, addressing Pakistan’s long-term economic challenges will be a crucial task for the incoming administration and new Congress.