Following up on our story ‘Does Khan & his FM Know How US now Sees Pakistan’, we all now know the United States has shared the transcript of the telephone conversation between Imran Khan and Secretary of State Mike Pompeo with Pakistan’s Foreign Office. The Foreign Office has backed away from accusing the U.S. of lying, which implicitly means that it was Foreign Minister Shah Mahmood Qureshi and the FO Spokesman who lied.   

 So much for the FM Qureshi’s bombast about the U.S. readout being ‘contrary to facts.’ Now he is talking about trying to use the opportunity of talking to Secretary Pompeo to ‘steer US-Pakistan relations towards betterment.’ 

 According to a report in The Nation “the transcript had ‘embarrassed’ the government who had challenged the contents released by the US State Department. The US, however, sent the transcript to Pakistan to ‘satisfy’ Islamabad that the State department’s release was not ‘incorrect’, the sources said. The US has not sent any comment with the transcript, the sources added. Senior officials at the Foreign Ministry told The Nation that Islamabad had decided not to take the issue further and bury it ahead of Pompeo’s September 5 visit.”

Why did we have to get into this unnecessary spat and cause undue embarrassment to ourselves. Do our leaders and their advisers not realize: one, that all such conversations are recorded and even if we don’t release our transcript the other side can do so? Second, we already have a trust deficit with the US, why do we want to increase it further over a non-issue? And finally, why engage in bombast and rhetoric to gain support at home at the expense of relations abroad?

On August 23, US Secretary of State Mike Pompeo spoke with Prime Minister Imran Khan. Soon after the Department of State released this statement: “Secretary Michael R. Pompeo spoke today with Pakistani Prime Minister Imran Khan and wished him success. Secretary Pompeo expressed his willingness to work with the new government towards a productive bilateral relationship. Secretary Pompeo raised the importance of Pakistan taking decisive action against all terrorists operating in Pakistan and its vital role in promoting the Afghan peace process.”

Immediately Pakistan pushed back against the statement through a tweet by the Ministry of Foreign Affairs: “”factually incorrect statement issued by the US State Department” regarding the discussion during the phone call, saying there was “no mention at all in the conversation about terrorists operating in Pakistan”.”

Foreign Minister Shah Mahmood Qureshi also insisted at a press conference ““The impression that has been given in their press release, in which they are mentioning “terrorists operating in Pakistan,” is contrary to the facts with reality. And I am saying this with full confidence.”

The US Department of State stuck to its statement. “When asked again by a reporter if the US government continues to stand by the readout, she [State Department spokesperson Heather Nauert] said: “We stand by our readout.”

It is one thing to keep repeating how Pakistanis resent the US and keep playing to the gallery at home. It is also important to understand the other side’s perspective. If Pakistan wants the international community especially the United States to understand Pakistan’s challenges, it will need be less confrontational and more accommodating on various issues including taking action against terrorism.

In a recent piece titled ‘Crunch time in Pakistan’ professor and author James Dorsey discusses in details Pakistan’s economic crises and that this time round drumming up support for an IMF loan will require Pakistan to do more and will Imran Khan be able to deliver on the counter terrorism front. “Securing international support for inevitable structural reform of the Pakistani economy will have to involve breaking with militancy, implementing international standards in anti-money laundering and terrorism finance, and pushing concepts of pluralism and tolerance that are anathema to the religious hard-right. For Mr. Khan to succeed, that seemingly will amount to having to square a circle.”

Further, “To secure IMF support, Mr. Khan will have to avoid blacklisting by an international watchdog, the Financial Action Task Force (FATF), and ensure removal from the group’s grey list by not only reinforcing anti-money laundering and terrorism finance measures but also rigorously implementing them. That would require both the acquiescence of Pakistan’s powerful military and a reversal of Mr. Khan’s publicly espoused positions. In many ways, Mr. Khan’s positions have been more in line with those of the military, including his assertion that militancy in Pakistan was the result of the United States’ ill-conceived war on terror rather than a history of support of militant proxies that goes back to Pakistan’s earliest days, than he has often been willing to acknowledge.”

Referring to the elections Dorsey notes, “the significance of the militants capturing almost ten percent of the vote and helping deprive Mr. Khan’s main rival, ousted Prime Minister Nawaz Sharif’s Pakistan Muslim League-Nawaz (PML-N), of votes in crucial electoral districts, according to an analysis of the Pakistan Election Commission’s results by constituency as well as a Gallup Pakistan survey.

According to Michael Bender, “Pakistan Is Taking a Dark Turn. It’s Time for a New US Policy.” Bender asserts that Washington needs to reassess its relationship with Islamabad. “For several years now, well-founded accusations of complicity in incubating and supporting terrorism have existed against the Pakistani government by the United States, India, Afghanistan, and even certain domestic constituencies within the country itself. At the beginning of this year, the State Department immediately suspended more than $250 million worth of security aid to Pakistan. The State Department cited the South Asian nation’s “failure to take decisive action” against various regional terrorist organizations, including the Haqqani Network and Tehreek-e-Taliban and its material support for such groups. Those accusations were further vindicated in June when Pakistan was placed on the Financial Action Task Force’s “gray” monitoring list owing to concerns over terrorist financing.”

Further, “The action was taken by Pakistan only after the U.S. included the Milli Muslim League as a part of Lashkar-e-Taiba’s designation as a Foreign Terror Organization, while several of the Milli Muslim League’s candidates merely switched parties or ran independently as a means of circumventing the ban, moves that the Pakistani government did not act against. The Pakistani government not only fails to take decisive action against domestic terrorist entities, it routinely engages in the opposite through implicit—as well as explicit—overtures of tolerance toward such entities. In June, the Pakistani government lifted a ban on Ahle Sunnat Wal Jamaat chief Maulana Ahmed Ludhianvi, unfreezing the movement’s financial assets and allowing its leader to purchase firearms and travel abroad.”

Finally, “Islamist radicals openly running for office, the military’s strongarm influence and actions, and the fact that the big winner of this election is a military-approved terrorist apologist who supports extreme blasphemy laws all demonstrate a cause for serious concern over a country that is currently a major U.S. ally in the region. The “Islamist radical” aspect of this reality in Pakistan presents a significant physical threat to U.S. personnel and allied Afghan forces in the region, given that these radicals are the same terrorist entities that the U.S. has fought against since the conflict in Afghanistan began in 2001.”

Every Pakistani Prime Minister’s first trips signify which countries they are trying to woo. During the Cold War, the country of choice was the United States. For the last two decades Saudi Arabia and China have been the countries of choice. After what have been viewed as the ‘establishment’s elections’ it is only to be expected that the army chief, not the selected Prime Minister, was the first to visit Saudi Arabia.

Just a few days after Saudi King Salman bin Abdul Aziz Al-Saud and Crown Prince Muhammad Bin Salman congratulated Prime Minister Imran Khan on his party’s victory in last month’s general elections, chief of Army Staff Gen Bajwa went on a three-day trip to the Middle East in which he went to Saudi Arabia and UAE.

During his trip to Saudi Arabia, the General met with Saudi Crown Prince Mohammad bin Salman. According to tweets by Inter-Services Public Relations (ISPR) Director General Maj Gen Asif Ghafoor, “Both discussed wide-ranging issues of mutual interest including regional security,” Prince Salman expressed “strong optimism about Pakistan’s ability to defeat the challenges at hand” and “[The] Crown prince also expressed his best wishes & support to the newly elected government.”

There are those who argue that Pakistan must maintain equidistance between Saudi Arabia and Iran, the former a close ally, the latter a neighbor.

There are others who say Pakistan needs to choose between one of these two countries. A recent piece by Abdulrahman Al-Rashed, former general manager of Al Arabiya news channel argued that “Imran must choose between Saudi Arabia and Iran.” According to Al-Rashed, “both Saudi Arabia and Pakistan share a special relationship with the US; while the relationship with Iran is no longer an option, because the PM cannot override US sanctions.” Further, “it is hoped that the relationship with Pakistan will be further developed, and given a greater role in resolving regional issues, such as Afghanistan, and putting pressure to bear on Iran to stop its interference in Pakistan itself, as well as in the region.”

Pakistan has always looked upon Saudi Arabia as one of its oldest and closest allies. Saudi governments have time and again helped bail out Pakistan by offering loans, hiring Pakistani labor and even helping Pakistan purchase military equipment. In recent years, however, the conflicts in Syria and Yemen have led to frictions with Pakistan being reluctant to send troops for either conflict. Pakistan has its own concerns about entering into Yemen war but we cannot blame our Saudi brothers either as they have been so generous to us over the years.

Before Imran Khan took over there were news stories about how the Jeddah-based Islamic Development Bank had been asked to provide Pakistan with over USD 4 billion in loans to aid with the dangerously low stocks of foreign currency. During the recent spat between Canada and Saudi Arabia, Pakistan sided with Saudi Arabia.

While Prime Minister Imran Khan may have offered to mediate between Iran and Saudi Arabia must be taken with a pinch of salt — like Pakistan’s offers to mediate between Israel and Palestine — what needs to be seen is will Pakistan continue its policy of balancing between Tehran and Riyadh or will economic and security compulsions force Islamabad-Rawalpindi to send troops for Yemen?

One of Pakistan’s continuing challenges for the last seven decades has been economic management. Influx of huge amounts of American aid, waiver of Pakistani debts have been buttressed by Saudi largesse, 12 International Monetary Fund (IMF) low-interest loans and high-interest Chinese loans.  However, Pakistan’s economy has yet to achieve stability.

For the last few years there have been those who view the China Pakistan Economic Corridor (CPEC), under China’s Belt and Road Initiative (BRI) as the panacea and way out for Pakistan.

There are others like the IMF and The Economist that have argued that until and unless Pakistan undertakes structural reforms, CPEC will only burden Pakistan with loans it cannot repay.

On the occasion of Pakistan’s 72^nd Independence Day, leading Pakistani-American economist, Atif Mian, Professor at Princeton, laid out – in a series of tweets- what are the challenges Pakistan faces and why CPEC is not a simple cure. 

Dr Mian is John H. Laporte, Jr. Class of 1967 Professor of Economics, Public Policy and Finance at Princeton University, and Director of the Julis-Rabinowitz Center for Public Policy and Finance at the Woodrow Wilson School. He has taught at University of California, Berkeley and the University of Chicago Booth School of business.

Professor Mian’s work focuses on the connections between finance and the macro economy. His latest book, House of Debt, with Amir Sufi builds upon powerful new data to describe how debt precipitated the Great Recession. The book was critically acclaimed by The New York Times, Financial Times, The Wall Street Journal,The Economist, and The Atlantic among others.

We have reproduced those tweets below:

“On Pakistan’s Independence Day 2018, why is the country still far from economic independence? (e.g. seeking its largest bail out ever this year). I will focus on last 5 years as an example. It will get a bit technical but I will try to be clear. Economic growth is almost entirely a function of ‘domestic’ productivity growth. What matters is investment in building your institutions and people. Instead Pakistani governments have increasingly looked ‘outside’ in what I would call an attempt at “import-led” growth. It doesn’t work.”

“The idea is to borrow from outside, and task another country with building your infrastructure or institutions, and hope some magic others. The latest example starts in 2013, when PML-N comes to power and decides to outsource growth to China. I will explain why it doesn’t work. “When government funds large infrastructure projects through China’s Belt and Road Initiative (CPEC in Pakistan), the external debt rises from USD 62 to 90 billion. The borrowing raises domestic demand “artificially”, making Pakistan more expensive and less competitive globally. “This is a variant of the famous “Dutch disease” and Pakistan suffered an extreme version of it. Poof? Real effective exchange rate (Pakistani prices relative to trading partners) increased by 20 plus % and total exports did not increase over past 5 years. To make matters worse, Pakistan’s “in-law” finance minister strips away independence of the central bank and sets the terrible policy of keeping the exchange rate appreciated. Now Pakistan has the Dutch disease, on steroids.”

“Meanwhile there is a blanket ban on any objective assessment of CPEC. Ask a question, and you would be accused of conspiring against national interest. Media feeds the frenzy that it is a “game changer” and a big bubble develops in the port city (currently largely sand) of Gwadar. Real estate bubbles further artificially raise domestic demand, & given the senseless exchange rate policy, it makes the Dutch disease sclerotic. Notice we haven’t even gotten into whether the huge borrowing is “sustainable”, the damage is being done before any repayment is due.”

“So let us talk about debt sustainability now. The first thing to remember is, you are borrowing in dollars, while most revenue from the projects are in rupees (think domestic transportation use and local energy consumption). This is a big problem for two reasons. First, the whole enterprise is exposed to exchange rate (ER) risk. A future depreciation of the currency, which is almost certain to happen given the inane ER policy, will jeopardize profitability. Second, the country must generate sufficient additional exports to pay back, or else it will be forced to become poorer in order to generate an export surplus to pay back. This, again, makes things more difficult given the Dutch disease in the first place. Another big question on sustainability is that the borrowing and spending deals are highly opaque. No one really knows what’s going on. For example, what is the cost of capital in CPEC? A loan contract may report a “concessional” rate of 2%. But is it really 2%? Consider this: There is no open bidding and Chinese companies decide everything. They charge USD 100 for equipment, but put in place lower quality equipment worth only USD 80. Guess what, the “true” cost of capital just went up to (2+20)/80=27.5%! There is a lot China and Pakistan can gain from each other. But deals have to be structured properly, with proper macro-prudential framework. Unfortunately, none of that was done. The government wanted a shiny new road real bad before the next election, which they lost anyways.”

Prof Mian ends his thread of tweets with: “Let’s hope for better economic sense this time.”