Can Pakistan Survive Without Economic Aid?

President Trump started the year 2018 with a bang. On the very first working day of 2018, President Trump sent out a barrage of tweets against Pakistan. He claimed that over $33 billion sent in foreign aid to Pakistan had gone down the drain. The President accused Pakistan of cheating the United States out of their money. He believes that Pakistan has been playing a double game with the United States. On the one hand, they have been accepting money from America. However, at the same time, they have been protecting the people that work against American interest.

America wanted Pakistan to act against groups like Tehrek-e-Taliban, and the Haqqani Network. However, Pakistan has repeatedly failed to do so. In fact, these are the groups who send terrorists across the border into Afghanistan where American soldiers are attacked. Also, Americans seem to be unwilling to continue providing money to a country like Pakistan where Islamic extremists have repeatedly locked up Christians for frivolous reasons using the infamous blasphemy laws from Pakistan.

This move by President Trump has sent alarm bells ringing in Pakistan. The reason behind this is that Pakistan has always been considered to be an aid-dependent nation. With the biggest contributor of aid now pulling out, the future remains uncertain.

In this article, we will understand the economic consequences of stopping this economic aid.

Aid Dependent Country

The first step is to understand the importance of foreign aid to Pakistan. The economy of Pakistan is completely dependent upon aid. The United States has been pouring money into Pakistan after the 9/11 attacks. However, the economic aid peaked in the year 2010 when President Obama decided to scale down the $3.5 billion in aid being sent to Pakistan. At the moment, the US sends close to $1 billion per annum. This too is likely to be eliminated as Donald Trump does not see any benefit in allying with Pakistan.

We need to put these numbers into context to understand their true impact on the Pakistani economy:

  • On an average, Pakistan has received $1.8 billion annually in economic aid. This number is small when compared to the fact that the GDP of Pakistan is close $175 billion.
  • On the other hand, money sent by expat Pakistanis has averaged at close to $1 billion per month. Although this cannot be considered as foreign aid, this too can be considered as being money that the United States has control over
  • The Pakistan economy has some power and potency. However, tax evasion is a norm in Pakistan. Hence the government has always been starved for money even though the rich people in the country are not.
  • Former Prime Minister Nawaz Sharif has been indicted on corruption charges. He is said to have raked in billions by evading taxes as well as embezzling the billions of dollars in aid money

The conclusion, therefore, is that Pakistani economy is not aid-dependent. However, the government is! The fact of the matter is that the government has used more than 50% of the foreign aid to pay down old debts. Hence, if the foreign aid were to stop, Pakistan would have to default on its sovereign debt. This would create mayhem in the private sector and wreck the local economy as well.

Possible Counter Measures by Pakistan

Many political analysts in Pakistan have been saying that foreign aid is, in fact, counterproductive to Pakistan. Many had suggested the voluntary abrogation of foreign aid in order to make the Pakistani economy more self-dependent. They believe that the foreign aid is only a way for the military and civil elite to receive huge sums of money from the foreign government. This money is then embezzled by these elite businessmen while the entire country has to bear the burden of debt.

It is no surprise that the Pakistani population is clamoring for anti-corruption measures. Many critics want to bring back the wealth that Pakistani ministers have stashed abroad. They believe that the tax proceeds from this wealth can be used to run the Pakistani establishment in the absence of foreign aid. However, this seems to be a tall order. The central bank of Pakistan has claimed that even now more than $25 million are being embezzled to foreign bank accounts every single day.

It is highly improbable that the Pakistan government will be able to recover any of this embezzled cash.

Money Can Be Used To Build Infrastructure

On the other hand, the United States seems to have a firm resolve this time. President Trump wants to kick-start a makeover of all the roads, bridges and ports in the United States. By reducing unnecessary expenses such as foreign aid to Pakistan, he can divert this money towards building infrastructure. If he is able to rebuild the inner cities, it is likely that the populist sentiment will drive him towards another term as the President of the United States.

To sum it up, the government of Pakistan has a real challenge on their hands. They need the economic aid to survive. However, they cannot be seen as being humiliated by the United States because that will start an internal revolution. Also, the United States is very serious about their cost-cutting agenda this time.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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