It is a common theme that developing countries deal with socio-economic problems and other challenges which include: poverty, lack of infrastructure, lack of human capital, lack of employment, trade deficits, environmental issues, inflation and energy crises etc. Such scenarios are created when there is scarcity of resources, small budget for policies that enact change, or just general disorganization. Whatever the issue, these problems are often addressed and intervened by international development agencies.
Hence, developing countries rely upon foreign aid from developed countries, International Financial Institutions (IFIs) and aid agencies. Unfortunately, in Pakistan’s case, it has been borrowing heavily from IFIs since it’s independence. This has resulted in extreme dependency over the decades that Pakistan finds itself facing a huge debt trap, which has resulted in a cycle of increased borrowing from organizations like the International Monetary Fund (IMF).
This brings forth the underlying question, of whether Pakistan can sustain itself without aid. With the current Debt to GDP ratio at 67.2% in 2016-18 and external debt at 20.6% of GDP, (Central Bank of Pakistan, 2018) the situation is not healthy for a developing nation to have such bad debt ratios and figures. Therefore, when speaking of the impact of foreign aid on the economics of Pakistan, this is a very large and encompassing problem.
This issue is a large umbrella term for multitude of micro-problems that have resulted from excessive borrowing. Ever since the war on terrorism took place, Pakistan has been an important geo-strategic location for other countries that house these aid donor agencies to have a presence in. Therefore, the politics surrounding foreign aid are both controversial, and take form through several different perspectives – most of which will be analyzed in this study as a backdrop to give more depth and understanding towards the impact on economics and politics intertwined.
1.2 The Positive Outcome
When speaking of some of the pros of foreign aid, one cannot ignore the influence of aid agencies and International Financial Institutions in helping our socio- economic development. The mega dams of Pakistan, coupled with many infrastructure and energy projects were built through assistance from the World Bank, Asian Development and other bilateral donors. Similarly in the social sectors, Pakistan received a lot of help from its international partners. Pakistan received loans worth US $ 51.4 Billion from Multilateral and grants worth $ 11.89 Billion during 2003-2017. (Economic Affairs Division Pakistan, 2017)
1.3 Significance of the Study
In this study, an attempt will be made to draw conclusions about Pakistan’s dependence on foreign aid and its sustainability to maintain this in the short and long term. This analysis will synthesize different perspectives that take into account the pros and cons that surround foreign aid in Pakistan. Similarly, a critical analysis of current economic conditions in the country given Pakistan’s high debt to GDP rate, low foreign reserves etc. will occur throughout this study
The Economy is an integral element of state governance thus receiving foreign aid from our development partners in the future is something that should be reflected in policy and institutional development. Also, conclusions will be drawn on the politics that surround the history between Pakistan and foreign aid, mainly with reference to the relationship between the United States of America and Pakistan during the War on Terror in the past decade and a half.
This paper and study is aiming to be useful and of importance to Policy Makers, Planners, Economists as well as students and academics who are working on Pakistan’s economic and financial issues. Other than that, It should also act as a tool for any reader who would want to learn of Pakistan’s history with foreign aid itself – the role of International development agencies such as World Bank, Asian Development Bank, USAID, UK’s Department for International Development (DFID) and China. It will give an in-depth analysis of the country’s current dependence on foreign aid as well as the implications it brings forth on economic planning and growth in the times to come.
This study will be a realistic critique of Pakistan’s aid dependency by carrying an impact analysis of some key donors along with some some important foreign aided projects, which have had positive contributions for the economy. Similarly, practical recommendations would be put forward so that there is better aid utilization and it is not wasted on projects which are not in the public interest or may not even require extreme usage of funds.
It is also necessary to understand that one can not simply cut off foreign aid after spending decades on borrowing and increasing debt. Therefore, a plan must be designed through which action would be taken and solutions are created. So, the significance of this study deals largely with realizing the nature and relationship between Pakistan and foreign aid. Once that is described, contrasting perspectives that have been gathered in this research through interviews with decorated personnel in the Pakistan government, along with detailed opinions of those who are in positions as policy makers and strategic analysts concerning the matter of whether the cons outweigh the pros, will be shown. Adding to the debate will be whether Pakistan can truly survive without foreign aid, and rise up as an independent economy that can repay its debts and rebuild itself.
1.4 Objective of the Study
The objective of the study is to:
a. Showcase that weak economies are dependent on resources being plugged through a handful of sources and Foreign Aid is the most important of all these instruments.
b. Evaluating the role of international aid agencies along with their projects in Pakistan’s economic development.
c. Highlight that it is better to be self-reliant and not being aid dependent in the sustainable long-term future.
d. Analyze whether or not, in the short term, Pakistan can sustain without foreign aid despite its socio- economic problems.
1.5 Problem Statement.
Although in many instances, international agencies have their own agenda in making countries aid-dependent – in Pakistan’s case, although it may be right to an extent, it should also be acknowledged that for the economic and social sector development in Pakistan, foreign aid has indeed helped a lot. In the past, and to this day, Pakistani governments have put very little priority in human or social development. Their share in the GDP is minimal, which has allowed for this gap to be filled and plugged in by foreign aid agents.
Imagine if there were no World Bank, Asian Development Bank loans for huge infrastructure and energy projects, no Chinese funding for CPEC, no DFID or USAID or the UN funding for Health, Education, Climate Change, Human Rights/ Gender issues, Community Development projects etc., where would Pakistan be? Does our government have the capacity and resources to carry out all its projects without foreign aid? The question is in need of some serious calculated predictions and answers. Take out all the foreign aid and assistance out of Pakistan and then observe, how the projects and programs would sustain themselves.
Similarly, aid effectiveness and proper utilization of funds is also an important issue. How should a state gather maximum benefits from monetary assistance rather than wasting it and then repaying heavy loans with interest that adds to the problem of debt servicing. All the while, when speaking of ulterior motives on the front for aid donors, many criticize them as being “overlords” of sorts who come to spread their influence. However, the importance of understanding the concept of us utilizing these agencies for their wealth and funding is one that should take priority in the minds of governance officials in Pakistan.
Pakistan needs to allocate foreign aid more accordingly, after looking at the long list of problems and issues that swarm the country. Policies must be formulated, programs and projects designed, and eventually then implemented. Hence, this report seeks to illustrate that exactly by looking at all the aforementioned points and discussing them in detail. Not only that, but also carrying out research that would yield more data that has been analyzed and made available to further add to this debacle of whether or not Pakistan can sustain itself without foreign aid.
Chapter 2. Review of Literature.
Most developing countries are recipients of foreign aid in one form or another for different aspects of socioeconomic development. Muhammad Arshad Khan and Ayaz Ahmed(2007) published their paper titled ‘Foreign Aid- Blessing or Curse: Evidence from Pakistan’ in which they showcased some key points regarding foreign aid inflows having a positive impact in the process of growth by lessening the saving- investment gap, increasing productivity with the transfer modern technology.
However, if we see this from a neoclassical perspective, this growth made from foreign capital inflows into the country is temporary. Sadiq Abbas, Malik Ali and Hadi Hassan Mukhi wrote about the two gap model in their report titled ‘Foreign Aid and Pakistan Economy’ suggesting that the economic development policy focuses on two constraints: the need to save and create investment opportunities, and requiring foreign exchange to finance imports.
2.2 White Man’s Burden
William Easterly in his book ‘White Man’s Burden’ highlights why the west’s efforts to provide aid have done so much ill and so little good (William Easterly, ‘White Man’s Burden’ The Penguin Press: New York, 2006). Abdul Malik in his paper, ‘Quality and Coordination of Official Development Aid in Pakistan'(Malik, 2009) highlights the term ‘aid fragmentation’ and points out that this fragmentation explores the extent to which aid received by a country is broken down among different donors and is spent on various projects across different sectors, thus leading to the proliferation of many small sized donor assisted activities on the ground.
2.3 Knowledge Gaps
A plethora of information exists on topics such as: foreign aid, aid effectiveness, impact of foreign aid on any country’s economic development, types of aid, types of donors etc. But, there are still areas where a significant gap of knowledge exists and increased research is desperately needed. Whereas development assistance and foreign aid itself have been discussed in detail since the past years, not much is available about how countries can survive and develop once out of the aid dependency loops
2.4 History of Foreign Aid and the Emergence of Donor Agencies
Foreign aid is indeed a phenomenon through which billions of dollars are channeled to developing countries each year and the development sector provides employment to thousands of people in different organizations and aid agencies. The US congress passing the Act for the Relief of the citizens of Venezuela is often seen as the first picture of what foreign aid would be. In this paper, however, the focus will remain on the post World War II period. The Bretton Woods Institutions started in in 1944 and were named after the New Hampshire town in the United States where agreements used to be made. The Bretton Woods in known to introduce the exchanging or bartering of given currencies against other currencies. Eventually, this led to the founding of the International Monetary Fund (IMF), International Trade Organization (ITO), as well as which was formerly known as the International Bank of Reconstruction i.e. The World Bank; as it is known today.
The founding of these monetary watchdog organizations was seen as a landmark in the progress toward the world straying away from military warfare and instead making the economy as most important tool of power. Some theorists and economists regard this as the most prominent achievement done on an international scale since the end of the second World War. Basically, the method through which developing or underdeveloped nations could get monetary or other assistance, was revolutionized from this point onwards.
2.5 History of Foreign Aid in Pakistan
Dating back to the 1950s, foreign aid has been of use in Pakistan for a long time. Back then, all the aid had come under the genre of project aid or assistance. This assistance also required the government’s involvement (utilization) for it to actually be put into effect. Another form of aid is Commodity Assistance, which does not require utilization and is generally preferred by Pakistan governments for the same reason (no utilization) i.e. minimal effort to be made by the government to put that aid into its effect. According to K.A.Saeed in his book, ‘Economy of Pakistan’, it was noted that the commodity assistance ratio to total aid fell from 34 percent in 1965 to 23 percent in 1980. Furthermore, Pakistan also received food aid which was initially edible oil and wheat from the USA. Pakistan made sure to put a greater focus and emphasis on technical cooperation, as it would send Pakistanis overseas for training. In the past 40 years (1960-2002), Pakistan received US dollars 73.14 billion in the form of foreign aid. Similarly, during the period 2003-2017, Pakistan has received loans worth dollars 51.4 billion and grants worth dollars 11.8 billion. These figures prove that the monumental amount of aid that Pakistan had received over the decades was crucial in the socio-economic development of the country.
Table 1 shows the history of foreign aid to Pakistan (2003-2017)
Assistance Category US $ Millions
Loans ( 2003-17)
Bilaterals/ Paris Club Countries 14198
Bilaterals /Non Paris Club Countries 6619
Multilaterals and Others 30268
Grant Assistance (2003-17)
Bilaterals/ Paris Club Countries 8578
Bilaterals /Non Paris Club Countries 451.5
Multilaterals and Others 1028.3
Relief Assistance 917
Afghan Refugees (2003-2017) 29
Earthquake Relief 888
Source: Economic Affairs Division, Government of Pakistan
2.6 Grant Assistance
Table 1 shows an overall numerical categorization of the aid history of Pakistan. One can see that the bilateral loans from Paris club countries are $ 14.19 billion whereas from Non Paris Club countries are $ 6.61 billion. The multilateral loans from International organizations are $ 30.62 billion, which is $10 billion more than the bilateral loans. Furthermore, the total grant from both the bilateral and multilateral agreements is $ 11.897 billion. This total sum is a staggering figure which reveals the immense dependency Pakistan has and continues to have on international loans.
2.7 The Roles of Aid Donor Agencies
The World Bank (WB), was established in 1944 to support a quick and efficient European recovery from the aftermath of World War II (Amadeo, 2018). As stated earlier, it is an integral part of the three Bretton Woods Institutions. Within a few years after its success in central and East European countries, WB turned its attention to developing or underdeveloped countries. Poorer countries needed more open-ended terms so that there was room for them to grow and effectively repay debts according to their growth.
2.8 USA and the World Bank
For the previously mentioned purpose, US President Dwight D. Eisenhower proposed that the International Development Association should be part of the World Bank in order for the developed countries to aid those afflicted by extreme poverty and lack of development, therefore the United States took a leading role in this initiative.
2.9 The World Bank’s Role in Pakistan
Through the structural adjustment-lending program introduced in 1980, The WB played an instrumental role in Pakistan rebuilding its economy through the wars faced and it gave a foundation from which the country could move forward. The Country Partnership Strategy (CPS) agreed by the Pakistani government dictates the World Bank’s program in Pakistan. The World Bank Pakistan has about 29 investment lending projects under implementation with a total net commitment of $5.4 billion. During the fiscal year 2016, the World Bank commitments amounted to almost $2.3 billion. FY17 commitments to date are approximately $0.8 billion. World Bank Group’s CPS for Pakistan for FY2015-19 was formulated after an extensive, country-wide consultations with many stakeholders involved. It is structured in a way that could potentially help the country address the most transformational areas in development.
World Bank’s Commitments by Fiscal Year (in millions of dollars)
Table 2 World Bank’s Commitments by Fiscal Year
Year Commitment amount
2013 809 M
Source: World Bank website ________________________________________
2.10 Asian Development Bank
The Asian Development Bank(ADB) was founded in 1966 and its primary purpose is to aid member countries in the Asia-Pacific region in achieving a developed or developing status. The ADB has the functions of: making loan and equity investments for economic and social prosperity of developing member countries; providing assistance along with policies or projects in those countries; the promotion of investment of public and private capital spheres; helping countries formulate plans and policies for development to take place. The Bank tries cover the entire spectrum of economic development, with an emphasis placed upon agriculture, capital market development, transport, energy and social infrastructure.
2.11 Routes Taken by the ADB in Pakistan
From 2015 onward, ADB has taken great steps to enact institutional reforms in Pakistan along with infrastructure development. Main targets that are funded by the ADB are in the sectors of: energy, transport, agriculture, natural resources, rural development, water supply, urban infrastructure and services, public sector management, and finance. The country operations business plan, 2017–2019 for Pakistan, which includes a provisional assistance package of $5.96 billion. Cumulative disbursements to Pakistan and grants amount to about $20.79 billion. As of end June 2017, the ADB-funded for the reforming of the public sector – in Pakistan, there are about 37 investment projects with a total cost of $6.7 billion. Out of the 37 investment projects, 32 valued at $5.83 billion are still happening.
2.12 Department for International Development (DFID)
The Department for International Development (DFID) was created in 1997 with a goal of targeting extreme poverty. Before this, Britain had only focused its aid on other economic development programs. DFID was formed as a separate government department led by a cabinet minister. In the autumn of 1997, DFID published its first paper with the focus on eliminating world poverty.
2.13 DFID and Pakistan
Projects undertaken by DFID in Pakistan have revoleved around the following themes:
1) Ending Extreme Poverty and giving humanitarian assistance:
This assistance centers on providing primary education, skills training, access to small loans for 1.56 million people, cash for 5.2 million of the poorest families; and humanitarian assistance for over 4.1 million people affected by floods in the past who have lost their homes or families.
a. Economic development: DFID took leadership to help achieve an IMF program from 2013 to 2016, this program increased the GDP from 3.7% to 4.7%, the fiscal deficit was reduced as well, along with the foreign exchange reserves increasing.
b. Building Institutions: DFID has operated on a federal as well as provincial level to improve public institutions in Pakistan and make efforts against corruption as well.
2.14 DFID’s Budget for Pakistan
1) The budget for the year 2017-18 was 373 million pounds and that for 2018-19 fiscal year is 345 million pounds .
DFID’s breakdown of bilateral plans 2017-18
Table 3 Sectoral breakdown of bilateral plans 2017-18
2.15 United States Agency for International Development
In November 1961, President of the United States at the time, John F. Kennedy inaugurated the U.S. Agency for International Development (USAID). This was the first American aid organization that would operate internationally to provide aid to countries all over the world and set up its missions to enact economic change and social improvement. This change would be through programs targeting not only the economy but in the sectors of education, food, sanitation, agriculture etc.
2.16 USAID and Pakistan
After Pakistan was created in 1947, the US was one of the first few countries to formally recognize it, and with that recognition came economic support. Therefore, with US backing , Pakistan was able to make projects happen at a faster rate, such as the: Institute for Business Administration, Jinnah Postgraduate Medical Center, the Indus Basin Project, Faisalabad Agricultural Institute, and a variety of others.
2.17 More Projects
Mangla and Tarbela dams account for about 70 percent of the whole countries output for energy – the US was one of the countries that helped fund these goliath projects during the 1960s – 70s period. The Guddu Power Station in Sindh, and the Lahore University for Management Sciences (LUMS), in Lahore, were funded by the US as well after the 1980s. Over the past ten years, the United States, with USAID, has given Pakistan nearly $7.7 billion worth of financial assistance or funding.
However, It is a known fact that the reasons for which America operated within USAID in Pakistan were strategic in nature due to aid being suddenly cut off several times in the past and re emerging after the war on terror began. Still, Pakistan is perhaps one of the biggest recipients of American aid today. Hence, one can safely conclude that the US has its own geo-strategic goals due to Pakistan’s position on the map, compared to just having a humanitarian cause for intervening in Pakistan’s development process. Similarly, now after President Trump’s new South Asia policy there are signs that in future, USAID’s assistance to Pakistan may be once again reduced.
2.18 Successful and Important Donor funded projects
Tarbela Dam (including Tarbela Extension V1 and V) – Tarbela Dam was originally constructed in 1974. It is the world’s largest rock-filled structure, standing just under 500 feet high and encompassing the Indus River for 9,000 feet. Its existing hydropower facilities supplies about 16% of the electricity generated in Pakistan.
Tarbela Dam is 485 feet high above the riverbed and forms Tarbela Reservoir with a surface area of about 250 km2. The dam was built for water supply but its power-generating capacity was added in three “extensions” that were completed in 1992. The construction of Tarbela Dam and now its extensions has been of huge significance for Pakistan’s economic development and sustainability in the energy sector. Without donor support, Pakistan would not have been able to construct this very important mega dam with its own resources.
2.18 Economic Assistance from China.
Pakistan has been a prominent ally to China since the early 1950’s and proved its friendship during the period Beijing’s period of international isolation in the 1960s and early 70s. Both countries have maintained a resilient and powerful working relationship as the years have gone by. Pakistan was also one of the first states to formally recognize the People’s Republic of China as a sovereign nation.
2.19 How it Started
From 2010 onwards, China has given US $580 Million (RMB 3.775 Billion) grants to Pakistan, USD 333 million has been utilized on numerous projects within the social sector and on emergency relief goods. RMB 1.4 billion has been allotted to Gwadar projects (Information obtained from the Ministry of Finance through deputy secretary, Samar Ihsan, 2018) which will be a major trade hub and sea port in the future. This is arguably the primary reason for which China has secured an economic interest in Pakistan due to it’s geo-strategic location and how much money China would save travelling through Pakistan for its trade operations, rather than around it.
Similarly, China has provided Pakistan with more than 1048 training facilities including short term seminars and technical training, acting as an outlet which could be availed by local staff and officials in the services sectors. In addition, many masters training programs or workshops have been conducted in various disciplines/fields for capacity building of public sector officials. China has also involved 2814 government officers from Pakistan who have been sent to China for detailed trainings.
2.20 Route Forward
When there are so many pros and cons alike, there are different perspectives on the route forward; and even if there have been many useful pros that have enacted great change economically in this country, one must take into consideration to most fundamental problem with foreign aid i.e. the debt trap. Pakistan must come up with a clear and concise plan to gradually release itself from the unending and multiplying debt it owes to these donors. Therefore, the suggested route forward revolves around the formulation of new economic policies that strengthen the economy from within; and discourages future borrowing.
Chapter 3 Methodology
3.1 Method of Research
The primary method used in this paper is going to be conducted through in-depth interviews.
3.2 Area of Research
Interviews will be conducted with high-ranking officials and key informants that work in the development and government–based sectors. Insights will be provided to support opposing arguments against foreign aid on whether Pakistan could ever sustain itself without it.
3.3 Research Design
A set of open-ended questions will be asked, and all the information provided in response will be recorded, and key points noted.
Chapter 4 Conclusion
In this day and age, foreign aid has resulted in a handful of advances being made for Pakistani economy. However, this aid has created an immense debt that could potentially take decades to pay back – since the borrowing started more than half a century ago. In this paper we critically analyzed the role of aid agencies in Pakistan along with their projects that have yielded results of both sorts –beneficial and financially crippling. Money has been plugged into the country through these channels and has never been paid back, hence we discussed the importance of breaking out of a debt trap. The Methodology section that includes in-depth interviews will highlight key points from all perspectives on the impact that foreign aid has truly had on the economics and politics of Pakistan, and how this impact might affect future policy and international relations.