US relations with Pakistan are being jeopardized by Pakistan’s economic conditions, which have recently worsened on account of the nation’s first sovereign default on payments to Independent Power Producers (IPPs). This new economic crisis is being cited as a greater threat to Pakistan’s stability than the ongoing Islamist insurgency in the northern Federally Administered Tribal Area (FATA) and could be a tipping point in the nation’s security environment.
In early May, the government of Pakistan failed to pay IPPs approximately Rs45 billion out of an outstanding Rs232 billion. The sovereign default is the result of the government’s inability to resolve a circular debt in its power sector, estimated to be in excess of Rs400 billion (approximately US$4.3 billion). The default may have significant ramifications for Pakistan’s sovereign credit ratings, a B-minus/stable from S&P and B-3/stable from Moody’s as of February 28, 2012.
The default has prompted power providers to begin “load shedding” via daily 5-10 hour rolling blackouts in urban areas and 18-20 hour blackouts in rural areas. In FATA, the poorest region of Pakistan and the one most affected by the insurgency, blackouts lasting 22 hours per day are not uncommon. Massive protests have targeted utility companies and government offices, and it is estimated that the energy crisis has resulted in a 4% loss of GDP compared to the 2% loss attributed to the insurgency.
Pakistan is the recipient of the second-largest USAID program valued at US$865 million in 2012, of which US$112 million is earmarked for improvements in energy supply and infrastructure. With an estimated US$24 billion in aid sent to Pakistan over the last ten years and few positive results to show for it, the US is quickly losing patience with its Major non-NATO Ally.
Pakistan’s sovereign default presents the US with several concerns. First, the inability of the government to provide a constant power supply has increased resentment amongst citizens who are unable to go about their daily routines. The increasingly restive populace provides insurgents and terror cells with an opportunity to manipulate public opinion for their own purposes. Secondly, the energy crisis illustrates the fragility of President Zardari’s administration and its inability to manage its finances, policies, and military. This makes for a weak Pakistani state and therefore, weak US ally in the fight against terrorism rooted in the country’s tribal areas. Finally, it sheds light on the ineffectiveness of many US foreign assistance programs in building a stronger, more secure Pakistan.
Pakistan’s first sovereign default in the energy sector hints at the shape of things to come. The government has been facing a balance-of-payments crisis and runaway inflation rates since 2008. A sovereign default is possible if the country does not figure out how to pay down its approximately US$1.4 billion in commercial debt and other foreign obligations. It is also an opportunity for the US to achieve certain objectives in its complicated partnership with Pakistan by:
Further reducing military aid. Pakistan is reliant on foreign assistance to prop up its military operations, with the US providing nearly US$2.4 billion in 2010. The US recently cut aid to Pakistan by US$800 million over its unwillingness to reopen ground transport routes to Afghanistan and for the 33-year jail sentence leveled against Dr. Shakil Afridi. Reduction in military aid by an additional US$800 million would convey the message that until Pakistan agrees to reopen transport routes and cooperate on other matters, the US will not be complicit in funding military oversight in the country.
Increasing development assistance only if coupled with capacity building. Cutting military aid to Pakistan allows for the funds to be reallocated towards improving aid efficacy through technical assistance in capacity building. Pakistan receives huge influxes of aid from the US, but its use returns few results because it has not been coupled with the necessary tools to administer the funds. While technical assistance and institution building requires a long-term commitment, it will increase the absorptive capacity of Pakistani institutions and ensure judicious use foreign assistance. Continuing development assistance will support Pakistan in recovering from the economic crises it faces in meeting its financial obligations and reduce the opportunity for insurgents to capitalize on public outrage.
Continuing drone strikes with the understanding that the US may reconsider the program when Pakistan no longer provides a safe haven for terrorist activity. The contentious practice of using Unmanned Aerial Vehicles (UAVs) to target and kill suspected al Qaeda operatives in Pakistan is unlikely to end in the short-term. Though the strikes are allowed by the Zardari regime, they are widely criticized by the international community and unpopular amongst Pakistanis. If Pakistan cooperates with US efforts, regains control over its restive tribal areas and military forces, and proves itself capable of securing the entirety of its territory, then the US might consider ending lethal strikes within its borders. This offer appeals to Pakistan in that it would lead to an end to US “presence” in the nation, and create a sense of Pakistani ownership of the process of regaining control over its own security situation.
Over the last decade, the US has provided Pakistan with a significant opportunity to cooperate on security and development initiatives; now Pakistan must do its part. Cooling relations over the last several weeks have impeded progress on cooperative efforts and further revealed the fragility of the Pakistani state. The US is growing impatient with Pakistan’s inability to honor its commitments to reopen supply routes to Afghanistan, gain control over its restive territories, and consolidate power in its weakening government. With the exit of most US forces present in Afghanistan set for 2014, Pakistan may never have a better opportunity to secure its future than it does now.