Pakistan is experiencing its most severe crisis in modern times. The nuclear-armed state is struggling with governmental ineptitude, an unstable economy, and devastating effects of climate change. Pakistan and its creditors in the West and in China face difficult decisions.

Political and military leaders in the nation have presided over decades of ineffective policymaking, widespread corruption, and widespread social unrest. The two major parties continue to fight endlessly, yet their policies are quite similar. The next elections are likely to be used as a pretext for more infighting rather than serious attempts to improve Pakistan’s situation. The populace has little hope in the governing elite to improve their lives. Politicians are busy serving their own interests and parties.

As things stand, Pakistan might go into default like neighbouring Sri Lanka, which has faced shortages of essentials like food and medicine.

Financial Circumstances

The prime minister of Pakistan must balance the books with little in foreign exchange reserves in the bank. Shahbaz Sharif’s administration did not cause the present situation, but he still has political ambitions and is acting desperately. Recent events including the post-pandemic vicious cycle in commodities, Russia’s invasion of Ukraine, a policy shift by the US Federal Reserve, and disastrous floods at home might all be contributing factors in the current economic crisis. The World Bank and the IMF have decided that Pakistan cannot be awarded additional loans without first undertaking long-term steps to ensure macroeconomic stability.

The foreign currency reserves of Pakistan dropped with only enough to pay for imports for three weeks. This is the 13th balance of payments problem Islamabad has faced since 1988, and the 23rd Fund program it has been a part in since 1958.

Twenty years ago, Pakistan’s economist Meekal Aziz Ahmed remarked, “Economic management in Pakistan has steadily deteriorated to the point where the economy has lurched from one financial crisis to the next. At the heart of the problem has been poor management of public finances and deep-seated unresolved structural issues in the economy that bad management and poor governance have exacerbated. The consequences are plain to see: macroeconomic instability, high inflation, poor public services, criminal neglect of the social sectors, widespread corruption, crippling power outages, growing unemployment, deepening poverty and a deteriorating debt profile.”

Pakistan has to implement changes to address its underlying structural difficulties if it is to overcome its economic troubles. “Borrowed growth” has done significant harm to the economy of the nation.

Recent years have seen a shift away from Western dependency, with financial aid coming instead from key strategic allies like as China, Saudi Arabia, and the Gulf States.

Incoming Funds

Saudi Arabia, China, the United Arab Emirates, and international financial institutions might immediately begin contributing billions of dollars. Although, if annual inflows are predicted to continue at different rates, the vast majority of these funds will just add to Pakistan’s existing external debts and annual debt payment commitments.

Pakistan’s petroleum sector is expected to be the primary recipient of Saudi Arabia’s potential $10 billion investment in the nation. It also plans to deposit an additional $2 billion with Pakistan’s national bank.

The United Arab Emirates is to provide $3 billion in finance, which includes the transfer of its $2 billion in foreign currency deposits held at the State Bank of Pakistan. Saudi Arabia also agreed to refinance loans from Chinese commercial banks to Islamabad, increase bilateral currency swaps, and provide $1 billion in oil on a payment plan. China is expected to pump in about $9 billion into Pakistan’s economy.

If the government does not significantly increase exports of goods and services, reverse the declining trend in remittances, and foster an atmosphere that is favourable to foreign investors, it might become trapped in foreign debts within a few years. With Pakistan’s deeply ingrained worldview, it’s hard to see the country learning anything.

Threat from Taliban

The ISI saw the Taliban’s triumph in Afghanistan as a chance to dominate Kabul, giving Pakistan great “strategic depth.” Pakistan may have thought it had accomplished its strategic aims in Afghanistan by putting a friendly militia in Kabul after the Taliban’s August 2021 coup. As a result, Pakistan hoped it would be better equipped to deal with the problem posed by the Tehreek-e-Taliban Pakistan (TTP). Nonetheless, the Taliban started to openly reject Pakistan’s interference in Afghanistan’s domestic affairs. Islamabad must now take action against the TTP since their client has openly bitten their hand that has fed them.

The TTP is not a unified group that can be easily disbanded and integrated into mainstream society and politics. This is especially the case when the ideology championed by the violent organization is well recognized.

Relationship with the United States

The United States’ and Pakistan’s relationship is also delicate. The situation escalated in April 2022 when Imran Khan blamed the United States for orchestrating the opposition’s vote of no confidence in him.

It would seem that the current connection between Pakistan and the Biden administration would continue, given the recent retirement of General Bajwa and the selection of his protégé, Gen Syed Asim Munir, as his replacement. After all, General Bajwa sent weapons and ammunition from Pakistan to Ukraine through Royal Air Force. The Biden administration has commented in support of Pakistan’s strategy of cracking down on the Taliban. But, Afghanistan has been called the “graveyard of empires.”

Murky Politics

Support for the Shehbaz Sharif administration seems to be waning. Although it is possible that Pakistan’s economy may recover from its current downturn, doing so would require the government to make unpopular fiscal choices before the general election later in 2023. The current administration’s attempts to prevent Imran Khan from voting have only served to make matters worse.

Relations with India

Although many in Pakistan and India may have been taken aback by Shahbaz Sharif’s apparent friendly overtures towards India, in an effort to improve his standing both at home and abroad, India’s response has not been encouraging because of Pakistan’s continued support for activities inimical to India. The Pakistani Army and the ISI may not appreciate Sharif’s gestures. Sharif has made a mistake for which he will be eventually held accountable. An elaborate and all-encompassing plan is necessary to address all issues.

Loans Repayment Restructuring

The figures are alarming: The country’s foreign currency reserves are only enough to cover imports for one to three weeks at a time. The national debt is almost 79 percent of GDP, or $270 billion. Keeping the lights on, so to speak, seems to be a challenge. Power outages around the nation have been severe.

The purpose of a IMF delegation to Pakistan was to attempt to finalize the release of a $7 billion aid package that was agreed upon in 2019. In an effort to comply with IMF criteria, the government recently abandoned exchange restrictions that had been artificially propping the rupee, sending it to all-time lows. Even if another billion or so is released from escrow, this will only be a temporary fix. It may not be pleasant, but a heavy dosage is necessary if Pakistan is to avoid default.

China is Pakistan’s largest bilateral creditor, holding nearly $30 billion in debt. China denies that its loans put developing countries in a “debt trap.” Pakistan has to get into debt restructuring discussions as soon as possible with China, the IMF, and the Paris Club of creditor countries.

Stark Future Scenario

What happens to Pakistan if its economy goes into free fall as a result to loan payments default or it runs out of foreign exchange reserves. Some of the possible effects include:

Currency Devaluation: If Pakistan runs out of foreign exchange reserves, the value of its currency (the Pakistani rupee) could plummet. This could make imports more expensive and cause inflation to rise, which would hurt the purchasing power of ordinary citizens and lead to economic hardship.

Capital Flight: If foreign investors lose confidence in Pakistan’s economy, they may withdraw their investments, causing capital flight. This could lead to a further depletion of foreign exchange reserves and exacerbate the economic crisis.

Reduction in Public Spending: If the government is unable to borrow or obtain loans, it may have to cut public spending, including on essential services such as healthcare and education. This could have serious consequences for the well-being of citizens and further erode public trust in the government.

Social Unrest: A severe economic crisis could lead to social unrest and political instability. This could exacerbate existing tensions between different ethnic, religious, and socioeconomic groups in the country.

International Pressure: Pakistan may come under pressure from international organizations and countries that have provided loans or aid in the past. This could include demands for economic reform, austerity measures, and political change.

Conclusion

The nation’s political culture has been so ingrained with the practice of relying on others. This demonstrates the failure of economic governance because it entails the cash-strapped nation lurching from one crisis to another, without being able to prevent the next one, and outsiders are regarded as band-aid solutions to its enduring economic issues. Above all, this strategy reduces the nation to the regrettable position of a supplicant whose ability to support its own economy rests on others rather than on itself.

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India’s defence industry is now capable of manufacturing wide variety of high-end requirements e.g. tanks, armoured vehicles, fighter aircrafts, helicopters, warships, submarines, missiles, electronic equipment, special alloys, special purpose steels, and variety of ammunition.

The value of indigenous defence production for Financial Years 2020-2021 and 2021-2022 was Rs 84,643 crore and Rs 94,846 crore respectively.

Domestic Procurements

The Government, in the last three years, ie, from 2019-20 to 2021‑22 and current year (2022-23 up to September, 2022), had accorded Acceptance of Necessity (AoN) to 163 proposals worth Rs 2,46,989.38 crores approximately, under various categories of capital procurement which promote domestic manufacturing as per DAP-2020.

The share of domestic procurement in the total procurement has seen an upward trend. In 2018-19, the domestic procurement stood at 54% of the total procurement; this figure jumped to 59% in 2019-20 and to 64% in 2020-21. In 2022-23, it has been increased to 68% for domestic procurement, of this 25% budget has been earmarked for procurement from private industry.

With focus of Government on indigenisation and procurement of defence products from the domestic resources, the expenditure on defence procurement from foreign sources has reduced from 46% to 36% in the last four years i.e. from 2018-19 to 2021-22.

Domestic Projects Realised

With focus on indigenisation and procurement from domestic industries, all the major areas of domestic defence production ecosystem such as weapons, ammunition, fighter aircrafts, helicopters, missile systems, warships, submarines, armoured vehicles, radars, communication systems, surveillance systems, etc. have benefited from the initiatives and also given boost to the growth of domestic industries including MSMEs and start-ups.

Many significant projects that have been produced in the country during the last few years include (alphabetically listed):

• 155 mm Artillery Gun system ‘Dhanush’
• 25 ton Tugs
• Advanced Light Helicopter
• Anti-Submarine Warfare Corvette (ASWC)
• Arjun Armoured Repair and Recovery Vehicle
• Armoured Personnel Carrier ‘BMP-II/IIK’
• Bi-Modular Charge System (BMCS) for 155mm Ammunition
• Bridge Laying Tank,
• Cheetah Helicopter
• Dornier Do-228
• Fast Interceptor Boat
• High Mobility Trucks
• INS Chennai
• INS Kalvari
• INS Khanderi
• Inshore Patrol Vessel
• Integrated Air Command and Control System (IACCS)
• Lakshya Parachute for Pilotless Target Aircraft
• Landing Craft Utility
• Light Combat Aircraft ‘Tejas’
• Main Battle Tank ‘Arjun’
• Medium Bullet Proof Vehicle (MBPV)
• Offshore Patrol Vessel
• Opto Electronic Sights for Battle Tanks
• Software Defined Radios (SDR)
• Su-30 Mk1
• Surface to Air Missile system ‘Akash’
• T-72 Tank
• T-90 Tan
• Unmanned aerial vehicles
• Water Jet Fast Attack Craft
• Weapon Locating Radar (WLR)

Further, for the first time, a Made-in-India Advanced Towed Artillery Gun (ATAG) howitzer gun developed by our industry was part of the 21-gun salute during the Independence Day celebration at Red Fort in Delhi.

Policy Initiatives to Encourage Self-Reliance

These projects are the result of several policy initiatives and reforms taken by Government in the past few years to encourage indigenous design, development and manufacture of defence equipment, there by promoting self-reliance in defence manufacturing in the country.

 These initiatives include:

• According priority to procurement of capital items of Buy Indian (IDDM) category from domestic sources under Defence Acquisition Procedure (DAP)-2020.
• Earmarking of 25% of R&D Budget for Industry led R&D.
• Establishment of two Defence Industrial Corridors, one each in Uttar Pradesh and Tamil Nadu.
• Implementation of Public Procurement (Preference to Make in India) Order 2017.
• Launch of an indigenization portal namely SRIJAN to facilitate indigenisation by Indian Industry including MSMEs.
• Launch of Innovations for Defence Excellence (iDEX) scheme by involving Start-ups & Micro, Small and Medium Enterprises (MSMEs).
• Launch of Mission DefSpace.
• Liberalisation of Foreign Direct Investment(FDI) policy allowing 74% FDI under automatic route.
• Notification of  four  ‘Positive  Indigenisation  Lists’  of  total  411  items  of  Services  and  three  ‘Positive Indigenisation Lists’ of total 3738 items  of Defence Public Sector Undertakings (DPSUs), for which there would be an embargo on the import beyond the timelines indicated against them.
• Opening up of Defence Research & Development (R&D) for industry, start-ups and academia with 25 percent of defence R&D budget.
• Progressive increase in allocation of Defence Budget of military modernisation for procurement from domestic sources, etc.
• Reforms in Offset policy with thrust on attracting investment and Transfer of Technology for Defence manufacturing by assigning higher multipliers.
• Simplification of Industrial licensing process with longer validity period.
• Simplification of Make Procedure.

Specific provisions have been introduced in DAP-2020 under ‘Buy and Make (Indian)’ and ‘Buy (Global – Manufacture in India)’ category, wherein indigenous production is carried out with Transfer of Technology (ToT) from foreign OEM.

To enable adoption of Artificial Intelligence in defence, Defence AI Council (DAIC) and Defence AI Project Agency (DAIPA) has been created. Further, an AI roadmap has also been finalised for each Defence Public Sector Undertaking (DPSU) under which 70 defence specific AI projects have been identified for development.

Government has notified the ‘Strategic Partnership (SP)’ Model which envisages establishment of long-term strategic partnerships with Indian entities through a transparent and competitive process, wherein they would tie up with global Original Equipment Manufacturers (OEMs) to seek technology transfers to set up domestic manufacturing infrastructure and supply chains.

The expenditure on defence procurement from foreign sources has reduced from 46% of overall expenditure in 2018-19 to 36.7% as per data till December 2022.

Research & Development

Defence Research & Development (R&D) has been opened up for industry, start-ups and academia with 25 percent of defence R&D budget earmarked, to promote development of defence technology in the country.

Defence Research and Development Organisation (DRDO) identified nine thrust areas for focused research, namely Platforms, Weapon System, Strategic Systems, Sensors & Communication Systems, Space, Cyber Security, Artificial Intelligence & Robotics, Material & Devices and Soldier Support.

Technology Development Fund (TDF) Scheme also funds industries, especially – Start-ups and MSMEs upto an amount of Rs. 10 Crore, for innovation, research and development of defence Technologies in the field of defence and Aerospace.

Defence Industrial Corridors

To achieve ‘Aatmanirbharta’ and realise the goal of ‘Make in India’, Government of India has established two Defence Industrial Corridors (DICs) in the country, one in Uttar Pradesh and other in Tamil Nadu. These are expected to attract investments in Aerospace & Defence sector and established a comprehensive defence manufacturing ecosystem in the country. Moreover, the respective State Governments have also published their Aerospace & Defence Policies to attract private players as well as foreign companies including Original Equipment Manufacturers (OEMs) in these two corridors. The two State Governments have already signed MoUs/Agreements with various industries for investment worth total value of about Rs 24,000 crore. Investments worth Rs 2,242 crore and Rs 3,847 crore have been made in Uttar Pradesh Defence Industrial Corridor (UPDIC) and Tamil Nadu Defence Industrial Corridor (TNDIC) respectively.

DPSUs carved out of OFB

The seven new DPSUs carved out of erstwhile Ordnance Factory Board have been incorporated as wholly owned Government companies under the Companies Act 2013 in October 2021. Government has taken steps to initially handhold and support these new defence companies in starting their business as corporate entities. In this regard, outstanding indents with erstwhile OFB were grandfathered and converted into deemed contracts valuing about Rs 70,776 crore for the next five years. These deemed contracts provide annual targets for delivery of products. Every year, 60% of amount pertaining to that year’s target would be paid by the Services to the new DPSUs as advance as per the terms and conditions stipulated in the deemed contract. The advances provide the working capital to the newly constituted DPSUs. With more functional and financial autonomy, these new DPSUs are focusing on widening their customer base, including exports to augment the volume of defence production.

Defence Innovations

An innovation ecosystem for Defence titled Innovations for Defence Excellence (iDEX) was launched in April 2018 to foster innovation and technology development in Defence and Aerospace by engaging Industries including MSMEs, Start-ups, Individual Innovators, R&D institutes and Academia. iDEX provides them grants/funding and other support to carry out innovations/R&D which has potential for future adoption for Indian defence and aerospace needs. Under iDEX, 233 problems have been opened, 310 Start-ups have been engaged, 140 contracts have been signed. ‘iDEX Prime’ framework under iDEX has been launched in 2022 to support Start-ups with Grant-in-Aid up to Rs 10 crore to enable the development of high-end solutions.

Till October 2022, a total of 595 Industrial Licences have been issued to 366 companies operating in Defence Sector.

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Mystery Over Terms and Conditions

The terms and conditions of the loans and projects being executed by China in Pakistan as part of CPEC have been a subject of controversy and criticism from some quarters. Some of the key concerns include:

• Interest Rates: One of the main concerns is that the loans being provided by China to Pakistan are on high-interest rates. Some estimates suggest that the interest rates are around 5-7%, which is higher than what Pakistan can obtain from international markets.

• Debt Burden: Another concern is that Pakistan’s debt burden is increasing rapidly as a result of the loans being provided by China. Some estimates suggest that Pakistan’s external debt to China could reach around $40 billion by 2025, which could put a strain on Pakistan’s economy and its ability to repay its debts.

• Lack of Transparency: There are also concerns about the lack of transparency in the terms and conditions of the loans being provided by China. Critics argue that the details of the loans and projects being executed under CPEC have not been made public, which makes it difficult to assess their impact on Pakistan’s economy and its people.

• Security Concerns: There are also security concerns surrounding some of the projects being executed under CPEC. For example, the Gwadar port, which is a key component of the project, has been a target of attacks by militants in the past.

Despite these concerns, the Chinese government and the Pakistani government have defended the project and its terms and conditions. They argue that CPEC is a vital project that will help Pakistan address its infrastructure deficit and spur economic growth. They also argue that the project is being executed in a transparent and responsible manner and that the security concerns are being addressed through appropriate measures.

Loan Repayments

The loans given by China for Pakistan’s CPEC projects are typically structured as long-term loans, with a repayment period of 20-25 years. However, the specific terms and conditions of each loan may vary depending on the nature of the project and the agreement between the Chinese and Pakistani governments.

Once a project is completed and starts generating revenue, Pakistan is expected to use that revenue to repay the loans. The repayment schedule is typically designed to be flexible, taking into account the cash flows generated by the project and the economic conditions in Pakistan.

The terms and conditions of the loans and the repayment schedule have been a subject of controversy and criticism about the lack of transparency. Critics argue that the high interest rates and the debt burden associated with the loans could put a strain on Pakistan’s economy and its ability to repay its debts.

Projects Under CPEC

The following is a list of the major projects that have been proposed or are currently under construction as part of CPEC:

Energy Projects:

• Port Qasim Coal-fired Power Plant (1320 MW)
• Sahiwal Coal-fired Power Plant (1320 MW)
• Engro Thar Coal-fired Power Plant (660 MW)
• Suki Kinari Hydro Power Project (870 MW)
• Kohala Hydropower Project (1100 MW)
• Gwadar Coal-fired Power Plant (300 MW)
• Matiari-Lahore Transmission Line (660 kV)

Infrastructure Projects:

• Gwadar Port and Free Zone
• Havelian-Thakot Motorway (120 km)
• Karachi-Lahore Motorway (1,152 km)
• Karachi Circular Railway (KCR)
• Lahore Orange Line Metro Train (27 km)
• Quetta Mass Transit System
• Multan-Sukkur Motorway (392 km)
• Thakot-Raikot Expressway (136 km)
• Dera Ismail Khan-Zhob Road (210 km)
• Upgradation of Karachi-Lahore-Peshawar Railway Line
• New Gwadar International Airport
• Gwadar Eastbay Expressway (19.5 km)

Industrial and Economic Zones:

• Gwadar Free Zone
• Rashakai Special Economic Zone (1,000 acres)
• Dhabeji Special Economic Zone (1,000 acres)
• Allama Iqbal Industrial City (3,200 acres)
• M-3 Industrial City (4,000 acres)
• ICT Model Industrial Zone, Islamabad (1,000 acres)
• Bostan Industrial Zone (1,000 acres)

Agriculture Projects:

• Modernization of Agriculture Sector
• Development of Fisheries and Fish Processing Plants
• Establishment of Livestock Farms and Meat Processing Plants
• Construction of Water Storage Dams and Irrigation Infrastructure

Telecommunication and IT Projects:

• Cross-border Fiber Optic Cable Network
• Upgradation of PTCL Network
• Construction of Data Centers

Health and Education Projects:

• Upgradation and Construction of Hospitals and Health Centers
• Construction of Universities and Technical Institutes

Note that this is not a comprehensive list and there may be other projects that are part of CPEC or proposed to be included in the future.

Projects Completed

Only a handful of projects under the CPEC have been completed or are near completion. Here are some examples:

• Gwadar Port: The Gwadar port is a key component of CPEC and has been completed. It is a deep-sea port located in southwestern Pakistan and is expected to serve as a gateway for trade between Pakistan, China, and other Central Asian countries.

• Thar Coal Power Project: Located in the Thar desert in Sindh province has been completed and is expected to add 660 megawatts of electricity to the national grid.

• Havelian-Thakot Motorway: A 120-km long highway that connects Havelian in Khyber Pakhtunkhwa province to Thakot in northern Pakistan. It has been completed.

• Lahore Orange Line Metro: A rapid transit system in Lahore, the capital of Punjab province, has been completed.

• Karachi-Lahore Motorway: A 1,152-km long highway that connects Karachi to Lahore. A portion of this motorway has been completed, and the remaining sections are under construction.

Many other projects, including energy projects, highways, railways, and special economic zones, are currently under construction or in the planning stage.

Projects Cancelled

Some projects under the CPEC have faced delays or cancellations due to various reasons, including changes in political priorities, security concerns, financial constraints, and environmental issues. The following are some of the major projects that have been reportedly cancelled or put on hold:

• Diamer-Bhasha Dam: The $14 billion hydroelectric dam project in Gilgit-Baltistan was dropped from the CPEC portfolio in 2018 due to disagreements over funding and ownership between Pakistan and China.

• Karachi Circular Railway (KCR): The $2.4 billion project to revamp the 43-km KCR track in Karachi has been stalled since 2018 due to land acquisition and financial issues.

• Matiari-Lahore Transmission Line: The 878-km high-voltage transmission line project was cancelled in 2018 due to financial constraints.

• New Gwadar International Airport: The $230 million project was reportedly delayed due to security and environmental concerns.

• East Bay Expressway: The 19.5-km expressway project in Gwadar was reportedly halted due to issues related to land acquisition and compensation.

Properties Pledged as Collateral

Pakistan has pledged national or state-owned properties as collateral for loans from foreign countries or organisations, notably from China, as follows:

• Port Qasim coal-fired power plant: For $1.5 billion loan to China’s Exim Bank.

• innah International Airport: For $238 million loan to Asian Development Bank (ADB).

•  Islamabad-Lahore Motorway: For $2.5 billion loan to China’s Exim Bank.

•  National Highway Authority: For various loans, including $300 million to ADB.

•  Gwadar Port: For $10 billion loan to China.

•  Karakoram Highway: For $325 million loan to China’s Exim Bank.

• Thar coal-fired power project: For $1.9 billion loan to China’s Exim Bank.

• National Power Parks Management Company: For $700 million loan to China’s Exim Bank.

• Lahore-Sialkot Motorway: For $275 million loan to ADB.

• Pakistan Steel Mills: For $500 million loan to Russia.

• Sukuk bonds: These are Islamic bonds that represent ownership in a tangible asset, as collateral for loans. In 2014, Pakistan issued $1 billion worth of Sukuk bonds and pledged them as collateral for a $1.5 billion loan from China’s Exim Bank.

Pledging of national or state-owned properties as collateral for loans can have economic and political implications, as it can lead to a loss of sovereignty and control over key assets.

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