PAKISTAN: POLITICAL ECONOMY AND POST-2000 DEVELOPMENTS-----6

growth rates. Ongoing civil conflict in Afghanistan led to takeover by the Taliban, presumably a

further version of the ‘Islamist terrorists’ originally generated under American sponsorship. The

freedom struggle in Kashmir also incurred Indian outrage, thus commencing an intense process

of vilification of Pakistan. Such efforts at ‘demonization’ began to shape perceptions of Pakistan

overseas; and they have found their latest expression in those seeking scapegoats for the

continuing failure to quell resistance in Afghanistan, following the invasion and occupation of

that country by the western axis.

In the first couple of years of his rule, Musharraf was unable to turn around the economy, which

continued to suffer from the structural weaknesses that had emerged in the 1990s. Especially

crippling was a foreign debt burden exceeding US$30 billion, which had risen precipitously since

the 1980s through the willingness to lend of multilateral agencies like the World Bank, Asian

Development Bank and International Monetary Fund, aided by the resource hunger of native

intermediaries into whose coffers these funds appeared to have mostly disappeared. The

foreign currency deposits held by Pakistanis in overseas banks were said to be roughly

equivalent to the country’s foreign debt. Loan repayments became difficult to meet,

necessitating rescheduling of debts. The problem was compounded by repayment pressure of

debt that had been raised at commercial rates, to meet interest payments on soft loans. This

action had apparently been taken by the interim ‘caretaker’ regimes established after the

dismissal of elected governments in the 1990s, when some multilateral agency hirelings, like

Moeen Qureshi and Shahid Javed Burki, took over temporary control of the administration and

public finance. By mid-2001 the foreign exchange reserves had sunk to a mere $200 million,

and inability to maintain repayment schedules was even moving the country towards sovereign

default.

These fiscal adversities had significant roll on effects in the economy. In the face of fiscal

deficits of 6% or more, which reflected an excess of even current expenditures over revenues,

public finances began to suffer a continuing resource gap. With military expenditures continuing

at high levels, the development budget had to be severely curtailed. This left little room for any

decisive improvements, or even increments, in infrastructure, communications, energy

resources, social sector amenities and health and education, and human resource

development. The financial stringency, as well as perceptions of heightened country risk, kept

interest rates above 20% with financial institutions, and at even higher levels in the highly

pervasive informal money market. These prohibitive rates affected investment levels as well as