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C Raja Mohan writes: Why India may not be averse to UAE rescuing Pakistan’s economy

As Pakistan embarks on yet another IMF programme (the 23rd since 1958) for structural adjustment, there is a new factor that has come to the fore — the Khaleeji (or Gulf) capital. According to media reports, the United Arab Emirates has offered to bring significant new investments that could help pull Pakistan out of its unending cycle of economic crises and bailout packages. India, which has seen a rapid transformation of bilateral relations with the UAE under Prime Minister Narendra Modi, might not be averse to seeing it play a key role in promoting Pakistan’s economic stability and making it part of the trade and investment flows between the Gulf and South Asia.

The UAE offer includes buying Pakistan’s public assets, which Islamabad plans to privatise. It also wants to modernise the Karachi port and finalise a trade liberalisation agreement between the two countries. All these steps are highly controversial in Pakistan, but Islamabad may not have many options.

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The Arab Gulf has long been in an intimate partnership with Pakistan that was built around religious solidarity, dollops of regular economic assistance, concessional oil facilities, as well as cooperation on regional security. Pakistan enjoyed much goodwill in the Gulf as a major Islamic nation. The Gulf rulers, in turn, had exclusive privileges in sovereign Pakistan. They also often helped resolve the differences between Islamabad and Rawalpindi — recall the safe exile that Saudi Arabia gave Prime Minister Nawaz Sharif after Pervez Musharraf ousted him in a coup in 1999 and locked him up.

The balance between Pakistan and the Gulf has altered in the 21st century. The Gulf has become richer beyond imagination, and Pakistan is becoming poorer by the day. A growing population and shrinking economic growth rates have made Pakistan’s economy, at $377 billion, 10 times smaller than India’s. Its per capita GDP ($1,600) today is a thousand dollars less than that of Bangladesh. Pakistan’s continuing relative economic decline has dramatically expanded the Gulf’s leverage over Islamabad and Rawalpindi. When Prime Minister Imran Khan thought he could challenge Saudi Arabia’s leadership of the Islamic world by aligning with Turkey and Malaysia in 2019, Saudi Crown Prince Mohammed bin Salman quickly put Imran in his place. Then Army Chief Qamar Jawed Bajwa had to scramble to undo the damage.

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The consequences of the altered balance between Pakistan and the Gulf are significant and increasingly visible in the Subcontinent. That the Gulf could play a positive role in the economic transformation of South Asia might have sounded outlandish in the 20th century, but it is now a reality.

But first, the economic crisis in Pakistan. Sceptics would dismiss the proposition that the current round of reforms demanded by the IMF can be implemented. They underline Pakistan’s lack of political appetite for a root-and-branch overhaul of its economy. The Pakistani elite’s lack of interest in economic reform is rooted in its confidence in extracting geopolitical rent from the US, China, and the Gulf.

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Some would argue that the rental value of Pakistan is coming down. Pakistan’s importance for Washington has diminished, if not disappeared, after the US withdrawal from Afghanistan. While China remains deeply invested in Pakistan, Islamabad’s utility in keeping a check on Delhi may be diminishing. In any case, Beijing has never been as generous as Washington. The Gulf, which is next door to Pakistan and is flush with cash, is no longer handing freebies to Pakistan but wants something substantive in return.

Observers of Pakistan would bet Pakistan’s long-standing geopolitical luck might yet hold and bring fresh bidders for its much-vaunted strategic location. For now, though, the pressure on Pakistan to change its economic ways is real.

The US, in the past, persuaded international financial institutions to go easy in their demands on Pakistan. This time Washington was letting Pakistan twist in the wind and getting the IMF to apply maximum pressure. The Gulf states and China have insisted that Pakistan must get support from the IMF before they can pitch in. Despite much ambivalence in the political class, Pakistan had no option but to submit to the IMF conditions. But will Pakistan begin and stay on the reform course? In the past, Islamabad walked away from completing the commitments made to the IMF. Islamabad and Rawalpindi were confident that the world sees Pakistan as “too big and too nuclear to fail”. This time, the IMF wanted to ensure it had solid reform commitments from Islamabad.

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In the last few weeks, IMF officials met leaders of different parties, including Imran Khan, to satisfy themselves that there is a wide political consensus behind the painful reforms on the agenda. The IMF has not forgotten that Imran abandoned the reform programme in 2021. The current government, too, was hesitant to implement the IMF regimen. It is only under relentless international pressure that it signed off on the agreement.

The real burden of implementing the reforms, however, falls on Army Chief Asim Munir, who has begun to take charge after a slow start. It is not clear if he has the political skill and a competent financial team that can navigate the economic transition amidst the continuing political challenges from Imran Khan.

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That brings us to the expanding role of the Gulf capital. Thanks to the oil wealth accumulated over the decades, UAE, Qatar, and Saudi Arabia have emerged as powerful financial actors in the region and beyond. Growing economic weight has also translated into political influence and strategic heft across the Greater Middle East, Africa, the Indian Ocean and beyond. South Asia is no exception. On the economic front, we are seeing growing volumes of Emirati and Saudi capital flow into India. When he became PM in 2014, Modi was quick to see the economic and political value of the Gulf. His government’s efforts have put the UAE and Saudi Arabia at the top of India’s most valued strategic partners.

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India’s engagement with the Gulf has also transformed the triangular dynamic between India, Pakistan, and the Gulf. In the past, Pakistan’s relations with the Gulf loomed larger than India’s. Today, the growing weight of India’s engagement with the UAE and Saudi Arabia puts Pakistan in the shade. Overriding Pakistan’s objections, the UAE invited the Indian foreign minister Sushma Swaraj to address a meeting of the OIC in March 2019. The UAE has not criticised India’s decision to change the constitutional status of Kashmir in August 2019. It has encouraged its businessmen to invest in Kashmir.

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The UAE apparently facilitated the back-channel dialogue between Delhi and Rawalpindi that led to the ceasefire agreement in February 2021. But the follow-up steps on the resumption of trade in selected items did not materialise. There was speculation that Imran Khan opposed the resumption of trade contacts with India and was critical of Bajwa’s attempt to ease tensions with Delhi.

Optimists would hope that Munir would be interested in his predecessor’s proposition that Pakistan must shed its traditional obsession with geopolitics and focus on geo-economics. If he is, the UAE could emerge as an important economic bridge connecting the Subcontinent and the Gulf.

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The writer is a senior fellow at the Asia Society Policy Institute, Delhi and a contributing editor on international affairs for The Indian Express

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