No Other Option

By Amir Zia

Monthly Hilal

June 2014

The lingering economic crunch has been manifesting itself on all the key fronts, including the defence allocations, which are on a steady decline in relation to the GDP and the total current expenditure since fiscal 2000 

At a time when Pakistan remains stuck in a low-to-modest growth and relatively high-inflationary cycle since fiscal 2008, allocation of resources for the country's vital needs – from development to defence – remains a challenging task. The proposed budget for 2014/15 (July-June), with a total outlay of 3.936 trillion rupees, reflects this harsh reality.

In the coming fiscal, the government has earmarked almost one-third of the total proposed expenditure of 1.325 trillion rupees just to pay interest on foreign and domestic loans. This allocation alone is enough to highlight the battered state of economy and constraints in the budget making exercise. No wonder, the combined allocations for the two other important heads -- the Public Sector Development Programme at 525 billion rupees (federal share) and Defence at 700 billion rupees -- are lower than what Pakistan spends on its interest payments alone. 

Pakistan's crippling energy crisis, the continued political instability, poor security environment, terrorism, and rampant crime in major cities, including the commercial hub of Karachi, have emerged as the biggest impediments in luring foreign and domestic investments that remain vital to boost economic growth and increase the size of the Gross Domestic Product (GDP).

The lingering economic crunch has been manifesting itself on all the key fronts, including the defence allocations, which are on a steady decline in relation to the GDP and the total current expenditure since fiscal 2000.

In real terms, Pakistan's defence allocations remain more or less capped since early 2000-01 despite the traditional security challenges vis-à-vis India on the eastern front and the new unprecedented internal security threat in the form of the Al-Qaeda-linked-and-inspired foreign and local militants, who want to bring down the state and see the armed forces as their number one enemy as it is the main obstacle that can thwart their designs.

According to the latest Economic Survey of Pakistan, all through the 2000s, Pakistan defence budget has remained pegged at 3.1 percent of the GDP, compared with 5.6 percent during the decade of 1990s and 6.5 percent during the 1980s. 

If in the fiscal 1992-93 – during Prime Minister Nawaz Sharif's first stint in power – the defence allocations were at the 6.3 percent of GDP, they are now hovering at around 3.0 percent. The pattern of this downward slide in defence spending started during the former military-led government of Pervez Musharraf, who slashed it to 3.9 percent of the GDP during the initial years in power and later to 3.3 percent. By the time he resigned from the office, Pakistan's defence budget was 2.9 percent of the GDP in fiscal 2008. This was done during the times of robust economic growth which was hovering at 7.0 percent on an average for five consecutive years from 2003-07. 

In terms of the current expenditure, the defence budget has been around 15 to 16 percent since fiscal 2009, though in the proposed budget for the coming financial year, it is at 20 percent.  

“It is a myth that the defence gets the lion's share… the fact is that it has been on the decline both in relation to the country's GDP and the current expenditure,” said Dr. Ishrat Husain, former governor of the State Bank of Pakistan. “It is the debt servicing which devours the bulk of the country's resources, leaving little for development, and other important sectors including health and education,” said Husain, who is now the dean and director of the prestigious Institute of Business Administration, Karachi.

In the rupee term, the annual increase in defence allocations only offsets the impact of the double-digit inflation and the rupee's decline against the dollar. This annual increase aims to sustain and maintain the existing level of the armed forces' operational capacity, leaving little to modernize its weapons or invest on the strategic development.

However, defence spending remains at the centre of intense public debate and scrutiny with many analysts questioning whether a cash-strapped country like Pakistan be spending that much on its armed forces. There is no dearth of those academics, civil right activists and politicians who advocate slashing the defence budget and diverting resources to the development and social sectors even when the country is in a state of war with the extremist forces.

One can empathize with this view, but unfortunately the campaigners for defence budget cuts miss the overall security challenge, which Pakistan faces both on its external and internal fronts.

On the external front, while the desire for peace with neighbours, including India, is the cornerstone of Pakistan's foreign policy, the state has to maintain a minimum deterrence to safeguard its frontiers against any possible aggression. Unilateral lowering of guards by slashing defence budget is not an option when the country's traditional rival is spending a seven times higher amount to modernize and equip its armed forces with a focus on Pakistan. The challenge has become graver with the victory of Hindu hardliner Narendra Modi in the recent Indian elections.

It is not the question of taking a plunge into a never-ending conventional arms race with its big neighbour, which is also responsible for introducing nuclear weapons in South Asia. Rather, Pakistan has been forced to respond to these extreme external security threats in a measured manner. Indeed, India, with its sheer size of the economy and high growth rate in recent years, remains better placed in its bid to modernize and equip its armed forces, but Pakistan even in these difficult economic times has to maintain the delicate balance, which is fast titling in New Delhi's favour.

The answer to this predicament in the mid to long-term is in fixing the economy, increasing the size of the GDP, boosting growth by creating an environment conducive for foreign and domestic investment, developing the human resource and thus making more resources available for development and the social uplift as well as for defence. This also requires controlling the staggering transmission and distribution losses of the electricity worth nearly 300 billion rupees alongwith stopping the financial hemorrhage in the loss-making state-run institutions including the PIA, Steel Mills and Pakistan Railways.

The government also needs to improve the country's tax-to-GDP ratio, which remains at a dismal nine percent ; the lowest in the region.

However, the goal of economic turnaround will remain unattainable if the government fails to tackle the unprecedented internal threat of terrorism and extremism on a war-footing. This issue is directly linked to the security and has a heavy price tag – not just in the form of operational expenses needed to fight the elusive terrorists from the rugged mountainous region up in the north to the major cities and towns, but also in the form of the lost economic, business and investment opportunities and damage to the infrastructure. The latest economic survey quantifies these direct and indirect losses suffered during the last 13 years at the staggering figure of $102.51 billion.

Pakistan remains unable to exploit its economic potential and huge reservoir of human resource to the maximum mainly because of the grave law and order crisis. When foreign and local investors and business – people feel insecure even travelling to, or within, Pakistan, all the talk of pushing the economy in the realm of high growth trajectory remains nothing but a pipe-dream. Incidents such as terror attacks on vital defence installations, security personnel or the latest one on the country's largest airport in Karachi, have indeed tarnished the brand Pakistan and transformed it into one of the World's most dangerous places.

To restore the 'brand Pakistan,' and make it attractive for investment and business, Pakistan has to defeat the scourge of terrorism and extremism at every cost. And in this make-or-break fight to defend Pakistan, restore peace, establish the writ of the state and the rule of law, security forces remain not just our main stay, but the real vanguard.

Prime Minister Nawaz Sharif, considered a pro-business leader, should know it best that peace and stability are the prerequisite for economic revival, growth and the overall prosperity of the nation. How his government manages to support the armed forces and the other security agencies in this war for Pakistan is the question. Pakistan needs to invest on its defence if it wants to win this internal war, guard against the possible external threats and revive its economy. There is no choice other than to make our defence impregnable.