Now that the Kargil crisis is over, is it finally time to ask: Was Kargil a terrible misadventure for South Asia's not-so-friendly neighbours? Especially for Pakistan, since the IMF finally took the dreaded decision of postponing a $280 million loan.
International experts insist the Fund shelved its loan tranche more due to Islamabad's laxity in tax collections (18 per cent behind target), less because of US pressure. Still, the decision sent shivers up the spine of the Pakistani government and caused finance minister Ishaq Dar to rush to Washington to talk to IMF on July 21. The fourth tranche of the esaf/eff funding programme of $1.6 billion was expected early in August but Pakistan's failure to meet many conditionalities-reportedly, some 22 objections-has now pushed it to October, subject to another IMF review in mid-August.
Understandably, policy responses have tumbled out-the State Bank of Pakistan has been empowered to transact dollars directly, in a bid to shore up the rupee. A steep general sales tax on all fuels and power, an income tax crackdown on the feudal lords, thrashing out disputes with independent power producers, and privatisation will follow to make up for the time lost on Kargil.
And, of course, the money. The Dawn estimates the war outgo at (Pakistani) Rs 35 billion. Along with a steep $7 rise in crude prices, this may raise the budget deficit to Rs 150 billion by year-end. Failure to generate revenues had led to a total debt of 95 per cent of gdp and a debt servicing of Rs 200 billion. Add a Rs 356 billion revenue target, which the IMF thinks will fall short by 20 per cent, and the economy is a near-basket case.
A feeling international experts echo. Prof Sumit Ganguly of Hunter College, City University of New York, believes this "singularly most foolish exercise by Pakistan" will widen the budget deficit and economic costs will be heavy. The economic despondency may go hand in hand with a political fallout. Ganguly says the Nawaz Sharif government will have to close ranks with the military. This may lead to increasing pressure to raise defence expenditure (defex). "The temptation will always be there, but obviously they don't have the resources." According to Hasan Askari Rizvi, who just finished his Quaid-i-Azam Professorship for South Asian Studies at the Columbia University, there's a perception of a diplomatic defeat and "the government is in a very embarrassing position". "Kargil can hardly be used as an argument for increasing defex," he says.
While India's defex has remained stable at 2.5 per cent of its gdp, Pakistan's been forced to cut it to 4 per cent in the current budget. Even that defex crowds out social and development spending by hogging 46 per cent of the revenue budget. In such a situation, says icrier professor Sanjaya Baru, even if India can comfortably squeeze in a 1 per cent point increase in defex, it would be extremely tough for Pakistan, roughly the size of 14 per cent of the Indian economy, to raise its outlay without affecting its already slowing growth, even as India's growing at 5 per cent plus. "For the first time since Partition, the Pakistan economy has fallen behind India's, a fact captured well in the latest Human Development Report," says Baru. Shelly Shetty, South Asia analyst for Duff & Phelps Credit Rating Company, adds that while there's concern over the slippage of the fiscal deficit target, India has a good standing and its stable outlook reflects its strong international reserves and favourable external debt position.
By contrast, in Pakistan politics comes before economics, not necessarily with reference to one particular administration, says Prof Stephen Cohen of Brookings Institution. "Kargil was a military success for Pakistan, but a great psychological and moral setback and you don't go for increased military spending to deal with that," he says.
Finally, of course, there's IMF. Woodrow Wilson scholar and former journalist Selig S. Harrison says that with increasing polarisation between the IMF and Sharif, "I'll be surprised if Sharif supports any kind of military adventures in future because his priority has to be to try and reach a settlement with the IMF." Currently enjoying its 17th IMF bailout, Pakistan has been known as a first-tranche country. This is the first time it's poised to go beyond the third-a distinction Sharif would neglect to achieve only at the cost of his political future.
