Until now, the United States has seldom used its economic leverage to shape Pakistan’s behaviour.
Following a Twitter spat with Pakistan’s Prime Minister Imran Khan, US President Donald Trump reiterated last week his decision to slash aid to Pakistan by $1.66 billion. Trump’s claim that the Pakistanis “don’t do a damn thing for us” predictably sent the latter into apoplexy. Not least because it was a reminder of Pakistan’s grim economic situation as well as its dependence on the United States, especially to secure a bail-out from the International Monetary Fund. But the episode should also remind us that until now, the United States has seldom used its economic leverage to shape Pakistan’s behaviour.
Perhaps the most egregious, yet little known, instance of American unwillingness on this front was during the 1971 Bangladesh crisis. Had the United States used the economic levers at its disposal, the subcontinent might well have avoided a colossal humanitarian disaster and the ensuing war.
The Pakistan Army launched its brutal crackdown on the Bengalis on the night of 25 March 1971. Just over 10 days later, a group of Pakistani officials came to Dhaka to examine East Pakistan’s economic situation. They quickly realised that the devastation wrought to the eastern wing would have serious consequences for Pakistan’s economy. Above all, export of jute from the province, which contributed to just under half of Pakistan’s overall export earnings, had come to a standstill. This crisis drastically aggravated a liquidity crunch that Pakistan was already facing—the most serious one in its history.
Owing to the military regime’s mismanagement, Pakistan’s foreign exchange reserves had plummeted to $164 million in March 1971 from $343 million in March 1970. This figure included capital assets such as gold and foreign securities that are usually not liquidated to meet current requirements. At this point, Pakistan’s short-term liabilities stood at $263 million. Against the backdrop of the continuing crisis, projections by the ministry of finance suggested that Pakistan’s reserves would be down to $20 million in September 1971. In consequence, General Yahya Khan’s regime announced on 24 April a moratorium on repayment of debt for six months.
Pakistan had taken a grave step. External assistance was crucial to the Pakistani economy for bridging both its savings-investment gap and its export-import gap. A bulk of this aid was provided by the Aid to Pakistan consortium—a grouping managed by the World Bank but effectively controlled by the United States. Following a quick assessment by its regional experts, the Bank concluded that “if Pakistan’s economic collapse is to be prevented, action will have to be taken quickly and the amounts of external assistance required will be large”. Yet, these experts also pointed out that the key to recovery lay in Yahya’s willingness to cease military action and reach a political accommodation with the Bengalis. The military regime was not open to attempting any such thing. Instead, Yahya sent his economic adviser, M.M. Ahmed, to request the Nixon administration for assistance. After meeting Ahmed, Nixon instructed his aides to ensure “that the Bank understood that we feel strongly that it and other aid donors should do what they could to be helpful”.
The Bank’s president, Robert McNamara, told Ahmed that “political constraints were the dominant obstacle” to securing an aid package. He emphasised that “only the Government of Pakistan could remove these constraints” by swiftly showing that “it was seeking a political, rather than a military solution to the problems of East Pakistan”. On 1 June, a joint IMF-World Bank team reached Pakistan to take stock of the situation. The Pakistanis presented a Panglossian forecast of economic activity, including in East Pakistan, and resisted calls for realism in drawing up their submission. At a meeting on 21 June, the Pakistan consortium agreed to continue disbursing aid against existing commitments but refused to consider providing new aid to Pakistan.
When Yahya complained about the outcome, Nixon promptly assured him that there was a misunderstanding. The consortium’s meeting was informal and there was no unanimity about the suspension of future aid. What’s more, the White House publicly announced that notwithstanding opposition in the US Congress, fresh economic and technical aid to Pakistan would only be withheld till Pakistan submitted a revised plan. Meanwhile, the existing pipeline of $82 million would continue to flow and the administration would request Congress to approve $188 million in aid to Pakistan in 1972. National Security Advisor Henry Kissinger was aware that Pakistan’s proposals “may well not satisfy either the World Bank/IMF or the other aid donors.” Indeed, when Pakistan reached the end of its moratorium in October, “the US may well be alone in proposing support”.
Nixon and Kissinger’s refusal to “squeeze” Yahya stemmed from the latter’s key role as a conduit in the secret opening to China and Kissinger’s forthcoming trip to Beijing via Islamabad. In the wake of that trip, Nixon and Kissinger would justify their continued “tilt” towards Pakistan by insisting that the United States’ credibility with China would be destroyed if it was seen as going against a long-standing ally.
In fact, Pakistan’s economic crisis gave Nixon and Kissinger an opportunity to shape the Yahya regime’s behaviour without overtly being seen as undermining their ally. Had they made it clear in June 1971 that come October they would be unable to bail out Pakistan, the military regime may well have been stopped in its tracks. Kissinger himself had noted that “US economic support—multiplied by US leadership in the World Bank consortium of aid donors—remains crucial to West Pakistan. Neither Moscow nor Peking can duplicate this assistance”. Nixon and Kissinger’s unwillingness to use this leverage effectively reinforced Yahya’s intransigence in dealing with the Bengalis, multiplied the enormous human costs of the crisis, and eventually lowered united Pakistan through the trap-door of history.
Pakistan can now, of course, count on China and Saudi Arabia to help shore up its parlous finances. Yet the United States wields important economic levers with which to influence Pakistan’s behaviour at this juncture. Whether Trump’s bluster translates into sustained policy remains to be seen.
Srinath Raghavan is a Senior Fellow at Centre for Policy Research and author of the book 1971: A Global History of the Creation of Bangladesh. Views expressed are personal.
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