On The Brink Of Default: The Impact of Foreign Aid on Pakistan’s Economy

Pakistan has been facing a number of economic challenges in recent years, including a large trade deficit, high levels of inflation, and a growing debt burden. These issues have raised concerns about the country’s ability to meet its financial obligations, leading some to speculate about the possibility of a default.

One of the main factors contributing to Pakistan’s economic troubles is its large trade deficit. In 2021, Pakistan’s trade deficit was $36.1 billion. According to official trade data, Pakistan’s exports have decreased by 5.8% in the first half (July-December) of the fiscal year 2022-2023.

The Pakistan Bureau of Statistics (PBS) reported that exports fell to $14.25 billion during the first six months of the current fiscal year, compared to $15.13 billion during the same period in the previous fiscal year, 2021-2022. This is due in part to the country’s heavy reliance on imports, particularly of fuel and food, as well as a decline in exports.

The trade deficit can have a negative impact on the country’s economy by increasing the country’s debt, decreasing the value of its currency, and limiting the growth of its economy. This deficit is the result of a combination of factors, including the country’s heavy reliance on imports, particularly in the areas of fuel and food, as well as a decline in exports.

In an effort to address the deficit, the government had historically relied on foreign aid dating back to the 1950s, when the USA and Pakistan signed a Mutual Defense Assistance Agreement, which included the provision of $75 million in military aid. Since then, Pakistan has relied on aid from the USA, China, and Saudi Arabia, among others, to finance its budget and development projects. While this aid has been crucial in helping Pakistan to meet its basic needs, it has also led to a lack of self-sufficiency and a dependency on foreign aid to finance its economy.

One of the main reasons Pakistan receives so much foreign aid is due to its role in the ongoing conflicts in its neighbouring countries, which is used as a pressure group. For example, Pakistan has been heavily involved in the conflict in Afghanistan, which has been ongoing for over four decades. This conflict has resulted in a large number of refugees fleeing to Pakistan, putting a strain on the country’s resources and infrastructure.

Similarly, the ongoing conflict with India over the region of Kashmir has also led to a significant influx of refugees into Pakistan. On the other hand, Iran and Pakistan also share a complicated relationship history, marked by periods of tension and cooperation. However, the reliance on foreign aid has had several negative effects on Pakistan’s development and stability.

Firstly, the reliance on foreign aid has resulted in a lack of self-sufficiency and ownership over the country’s development. Pakistan received a relatively high amount of foreign aid, at 2.3% of GDP in 2019 (pre-covid), compared to 0.2% and 1.1% for India and Bangladesh, respectively. This dependence has led to a lack of motivation to pursue sustainable development plans and achieve self-sufficiency.

Secondly, the use of aid has been plagued by issues of accountability and transparency, leading to corruption and mismanagement. This is evidenced by Pakistan’s relatively low score on the corruption perception index, at 41 out of 100, compared to a higher score for India and slightly lower for Bangladesh.

According to the 2021 Corruption Perception Index (CPI) released by Transparency International, India ranked 86th out of 180 countries, with a score of 40 out of 100 (0 being highly corrupt and 100 being very clean). Pakistan ranked 116th with a score of 32, and Bangladesh ranked 139th with a score of 28. It is worth noting that higher rankings indicate lower levels of perceived corruption.

Thirdly, the constant need for aid has also hindered the government’s ability to implement necessary structural economic reforms. This is reflected in Pakistan’s relatively low GDP growth rate, averaging 3.5% annually from 2010 to 2020, compared to higher rates for India and Bangladesh. Lastly, the dependence on foreign aid has also made it more difficult for Pakistan to attract foreign investment. In 2019, the country received $1.9 billion in foreign direct investment, a significantly lower amount than the $74 billion and $4.5 billion received by India and Bangladesh, respectively.

In conclusion, Pakistan’s dependence on foreign aid has had several negative effects on the country’s development and stability. The country’s reliance on foreign aid has led to a lack of self-sufficiency, a lack of transparency and accountability, a lack of motivation for economic reforms, and a lack of foreign investment. This can be seen by comparing Pakistan with its neighbouring countries, India and Bangladesh, which have a lower dependence on foreign aid, better economic performance, and better transparency and accountability.

In order to decrease the trade deficit, the government has to work on increasing exports, decreasing imports, and attracting foreign investment to boost the economy. That can only be possible when Pakistan overcomes its negative effects on its economy. Political instability and security issues in Pakistan have made it difficult for the country to attract foreign investment, which has limited its ability to grow its economy and increase exports. For Pakistan to thrive in this economic turmoil, it is much needed now than before to work on resolving its conflicts with neighbouring countries and positively change its identity.