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Joshua Snider

Mohammad Waqas Jan

November 28th, 2022

Pakistan’s Aid Diversification Challenge

1 comment | 5 shares

Estimated reading time: 7 minutes

Joshua Snider

Mohammad Waqas Jan

November 28th, 2022

Pakistan’s Aid Diversification Challenge

1 comment | 5 shares

Estimated reading time: 7 minutes

The influence of aid donors in Pakistan continues to be politically sensitive. Joshua Snider and Mohammad Waqas Jan examine different aspects of the issue and argue that aid diversification in the country requires an elusive balance between its long-term national vision and short-term political gains and opportunities.

 

Amidst the ongoing political uncertainty and turmoil in Pakistan, the long-standing issues of aid dependence and its strategic diversification have once again taken centrestage. Pakistan’s increasingly polarised media and policy spheres have framed this discussion as a growing friction between her international foreign policy commitments on the one hand, and the domestic interests of a local populace which demands greater socio-economic development and financial freedom on the other.

As a result, the politics surrounding Pakistan’s aid receipts and its debt-servicing obligations have remained contentious for nearly every Pakistani government, including the recently set up Shehbaz Sharif government. This is evident in Pakistan’s delicate balancing act, in an increasingly polarised international system, between its short-term political gains and its longer-term vision for national growth. For instance

Pakistan has recently grown closer to China – a source of vital Foreign Direct Investment (FDI) and supply-side infrastructure projects – but it still relies heavily on legacy partners, such as the US, which lead the multilateral lending institutions that finance key parts of its budget.

Together, Pakistan’s international partners play a vital role in shoring up Pakistan’s foreign reserves while ensuring that it holds the required liquidity to meet its ballooning debt obligations. Yet, donors can also exert considerable influence and leverage over a declared nuclear weapons state which is host to the world’s 5th largest population, and lies at the crossroads of the Indian Ocean, Persian Gulf and South and Central Asian regions.

Looking at the changing domestic political landscape, long-entrenched economic issues, and growing regional challenges (such as the recent in-flux of Afghan refugees), this post argues that simplistic diversification positions such as the ‘China solution’ paint an incomplete picture. They neither fully explain the role and priorities of Pakistan’s development partners, nor the scale of its reliance on legacy partners and institutions. To meaningfully diversify away from legacy Western partners and Western-backed multilateral institutions, Pakistan will need to look deep within to assess its own long-term and short-term priorities while engaging its emerging partners in diversifying the range of activities they fund.

The Long Durée of Aid Dependency

Lensink and White (1999) define aid dependency as a situation in which foreign aid is necessary to achieve the development objectives of a specific country. The consequences of aid dependence can include a lack of sovereignty to the extent that a foreign state or multilateral creditors exert undue influence in key areas of macroeconomic planning. Aid dollars, however, can shore up liquidity reserves, meet budget shortfalls, finance international debt repayments and be channelled into vital areas such as health, education and infrastructure; in Pakistan’s case, aid is used for all these purposes.  And while aid represents a very small percentage of Pakistan’s GDP (0.8% of Gross National Income in 2019) it still meets crucial gaps in public spending.

This condition (or perception) of aid dependence is what leads to calls for donor diversification or self-sufficiency. While Pakistan is a large middle-income country with solid growth potential, and not ‘aid reliant’ in a classic sense, it does have a high debt–GDP ratio, which impacts the state’s capacity to finance domestic spending. In 2012, Ahmad and Mohammed likened Pakistan’s aid dependency on the US (particularly in the 1980s) to a version of ‘Dutch disease’, whereby the inflow of US aid dollars created elite dependency, greater graft and a generally less competitive economy.

Pakistan’s reliance on Western donors, notably the US, has been a source of tension, both within Pakistan and in the US. From Pakistan’s perspective, the securitisation and conditionality of US aid have made it politically unpopular. And from the US perspective the alleged misuse of aid funds has raised questions amongst the policy elite on the efficacy of US aid.

The composition of Pakistan’s foreign debt and the list of its main lenders provide some insight into the complexity of the problem and the limits of the diversification agendas. According to the OECD, Pakistan’s foreign debt comes from the following sources: 48% multilateral, 41% bilateral and 21% commercial. These statistics belie some important facts. First, the biggest category of aid utilisation is the 33% of Overseas Development Assistance (ODA) devoted to structural support for the Pakistani economy, which includes interest payments on sovereign debt. Second, despite the official disaggregation between bilateral and multilateral sources a vast majority of this debt is either Western or Western-backed, meaning debt from non-Paris Club members accounts for a very small percentage of Pakistan’s overseas borrowing. The country has a long history of borrowing from the IMF,  which includes the recently resumed bailout request that had presumably stalled under the previous government.

Aid Diversification Agendas

Aid diversification narratives have been championed by numerous Pakistani governments, including the government of Imran Khan. Khan rose on a wave of populist support, remaining highly critical of Pakistan’s legacy partnerships. The focus on aid diversification was driven by many factors, ranging from the perception that Pakistan was perhaps too beholden to legacy partners to pent-up popular frustrations surrounding the geopolitics of the contentious US-led Global War on Terror.

The mainstay of Pakistan’s aid diversification agenda has been its burgeoning relationship with China. Over the past decade, China has become Pakistan’s most important economic partner with the US$62 billion China–Pakistan Economic Corridor (CPEC). Framed as a win-win, less conditional and de-securitised alternative to Western aid, the project is aimed at allowing Pakistan to reconfigure regional supply chains to its advantage. China’s interests in Pakistan appear less transactional and less donor-driven than Western aid on the surface, e.g., the latter’s insistence on Western ‘Democratic’ values. Hence the narratives about Sino-Pak ties as being more ‘independent’, ‘equitable’ and ‘all weather’ as opposed to Pakistan’s on-off, ad-hoc and troubled relationship with the US.

In addition to China, the Gulf Countries Council region has emerged as a smaller if no less important node in Pakistan’s donor diversification agenda. As we noted in a recent article, the Pak–UAE relationship is strategically important to both states and, in the aid sphere, the UAE has undertaken activities ranging from bilateral loans to shore up liquidity resources, to the UAE-PAP program which funds a variety of projects that include public health and infrastructure development. Similarly, the Pak–Saudi bilateral relationship is increasing including aid mechanisms. And currently, Pakistan and Saudi Arabia are in discussions over a possible US$3 billion liquidity support loan from the Kingdom.

Future Challenges

It is important to note that while diversification is important, Pakistan’s aid diversification agenda faces practical limits. For example, Western aid more often includes mechanisms and budgetary support to fund social policy and socio-economic development programmes compared to China’s, and the scale of Gulf-based aid is small relative to Pakistan’s needs. However, like elsewhere in the global South, Western funding for social programming is channelled through a sprawling network of foreign NGOs and local development partners modelled along Western ‘Civil Society Organisations’. The relationships between these NGOs and their foreign benefactors, as well as sections of Pakistan’s elite, have been a source of populist backlash, led by perceptions that civil society community does not always act in the national interests.

Beyond aid diversification, sound economic stewardship that addresses the country’s external debt situation, creates less reliance on foreign borrowing (and the interest payments thereon) and establishes a bigger reservoir of funds to finance the state’s activities, is needed.

Whereas the threats of debt-trap diplomacy, be it from China or the US, remain very real for Pakistan, there is a definite need to balance supply-side investments against more immediate demand-side pressures.

In essence, what is required is that elusive balance between a longer-term national vision and more immediate short-term political opportunities and temptations. Going by the recent rise in instability and polarisation in Pakistan, this is likely to pose a monumental challenge for whoever manages to stay in power long enough to tackle these issues.

 

Banner Image © Mackenzie Marco, 2019, Unsplash.

The views expressed here are those of the authors and not of the ‘South Asia @ LSE’ blog, the LSE South Asia Centre, or the London School of Economics and Political Science.

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About the author

Joshua Snider

Dr Joshua Snider is Assistant Professor of International Security Studies at UAE National Defense College in Abu Dhabi. His research focuses on non-traditional security and state responses to religious extremism and the governance of counter-radicalisation programmes in the MENA and Indo-Pacific regions.

Mohammad Waqas Jan

Mohammad Waqas Jan is a Senior Analyst at the G5 Internet Observatory in Islamabad. He holds hands-on research experience in South Asian Peace, Conflict and Security Studies with a key emphasis on China’s rise, the Kashmir conflict, nuclear signalling/posturing and the importance of socially constructed norms and historicised narratives in diplomatic relations.

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