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Pakistan's relationship with the US is once again at the crossroads. This is not happening for the first time. The situation was similar as far back as in the late seventies and as recently as the early 2000s. In both cases, there were tensions between the two countries before they eventually became partners at wars in Afghanistan. Once more, Afghanistan has increasingly become the bone of contention between the two countries, putting US-Pak relations in a bit of a freeze. But if the past is any guide, things can change - the key for Pakistan is to play its cards right.

Both Pakistan and the US need each other. America has certain requirements from Pakistan, mostly pertaining to its counter-terrorism objectives in Afghanistan. And Pakistan is in a position to help meet American dependency. However, Pakistan's dependency is much more. About 15 percent of foreign exchange earnings - exports and remittances - came from the US last year. The figure becomes larger when inflows from US allies (e.g. the EU and the UK) are accounted for. Moreover, US has influence on multilateral lending agencies - especially the International Monetary Fund (IMF), and other bodies - as well as on Financial Action Task Force (FATF). This has bearings on Pakistan's foreign policy and economic security.

Given Pakistan needs the US more, the former has limited leverage. However, the US cannot afford to leave Pakistan high and dry and let the region become unstable. Therefore, there is light at the end of tunnel. Both sides are waiting to see who will blink first. Sooner or later, it seems an agreement will be reached allowing workable relations that are beneficial for both parties.

The geopolitical situation is in a flux, where India is a strategic partner of the US in the region, while Pakistan's tilt is towards China, and now Russia could also start leveraging its influence in the region. But Pakistan cannot rely solely on China as its economic and security requirements demand a balanced relationship with both global economic and military powers. The Americans also seem aware of that dilemma. Perhaps something mutually beneficial can come out of that.

There are important developments taking place in the background. Last recent talks with the IMF technical team remained inconclusive. The US Deputy Secretary of State visited Pakistan, but her remarks in India that the US was not looking forward to building a broad-based relationship with Pakistan sent jitters in Islamabad. It seems the relationship is going to become even more transactional. 'Give and take' will define interactions. Pakistan needs to show flexibility for its own economic needs, which heavily rely on the US, and more broadly on the West.

October is important. Pakistan's Finance Minister and Governor SBP are scheduled to visit Washington DC in hopes to reach a staff-level agreement with the IMF. The technical team discussion last week didn't conclude. The bone of contention is the same which was the case in February 2020; back when the programme had to be kept on the back-burner due to the Covid-19 pandemic.

The IMF team is not satisfied with the circular debt reduction plan, and they have concerns regarding continued growth of the FBR revenues and overall fiscal sustainability. The Fund is asking the authorities to take tough measures and to bring structural reforms. Following through on those demands can be good for Pakistan's economic progress in the medium to long term. In the past, successive governments used to obtain waivers from the IMF. Some say that those waivers were due to political leveraging of the US on the IMF. Pakistan is expecting a similar treatment; but it seems to hinge on give-and-take in relation to the Afghanistan case.

However, this does not mean that the IMF is pressurizing Pakistan. The Fund has been consistent in making its demands, which are an economic necessity for Pakistan. The contentious issues are the same, and there are no new or unduly harsh measures being demanded. Letting geopolitics dictate its decisions would expose IMF's credibility to criticism and provide more diplomatic space to China, which has been looking to establish multilateral lending institutions (as it did in the case of Asian Infrastructure Investment Bank).

The talks with the IMF are tough; but they are moving in the right direction. Pakistan is eying for waivers, for it is hard to increase the energy prices (mainly power tariffs) at a time of multi-years high global commodity prices. Same is the case for imposing new taxes or ending concessions. Pakistan needs some time and space. Then there is FATF six-monthly review that is due in October as well. Pakistan is not at risk of being blacklisted, but the timeline to come out of the grey list and statement from the forum is important.

Both the IMF and FATF are important for the much-needed foreign investment and market-based foreign debt. Back in the days, during the eighties and the mid-2000s, the country's economic progress was mainly fueled by a flurry of investment and soft loans. For such inflows to materialize again, a nod from the US is imperative. Pakistan needs these inflows desperately, as the reliance cannot be solely on China or the China Pakistan Economic Corridor (CPEC).

Nonetheless, relations with China are even more important. There was a rough patch due to debt and other payments delay on power projects in the first round of the CPEC. With Joint Cooperation Committee (JCC) meeting taking place last month, there are signs of things moving in the right direction. However, it is not a good time to fast-track CPEC phase 2, as Pakistan does not have the macroeconomic absorption capacity at this stage to put a paddle on the accelerator.

Pakistan's foreign policymakers must keep relationship alive on both sides. Barring India, other US allies in the Asia region - especially Japan, South Korea, and Australia - are nations that have good relations with Pakistan. There is a need to strengthen relationships with these countries, and also with the EU and the UK. Pakistan needs to attain its economic security before it can influence its geostrategic positioning and capitalize on its access to landlocked Central Asian countries.

In short, the circumstances dictate that Pakistan must be on the right side of the US. Perhaps the only good thing to have come about from the visit of the US Deputy Secretary of State was the assurance that President Biden will soon telephone PM Khan. Who knows, maybe all it takes is a phone call to set things right?

Copyright Business Recorder, 2021

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Ali Khizar

Ali Khizar is the Head of Research at Business Recorder

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