Perhaps George Fernandes did have a point. For Nawaz Sharif would have realised only too well the costs of a military misadventure to Pakistan's economy. He has tried, and succeeded to some extent, in bringing about urgently needed cuts in public spending. But if Kargil was to lead to a debt crisis, its effects would make it politically unacceptable for his government to remain in power. Anaggressive, and resentful, military leadership might take its place. This would be costly for us, both in terms of lives and money.

Pakistan's incomes growth fell to just 3.1 per cent in the last financial year. Even more importantly foreign capital inflows into their economy had all but dried up. According to figures put out by the Centre for Strategic and International Studies in Washington DC, foreign direct investments into the Pakistan economy slowed down from $436 million in 1997-98 to $296 million last year. Portfolio flows registered an even more dramatic decline from $204 million in 1997-98 to just $4.7 million last year. Perhaps the most worrying signals for Pakistan's policy makers came from non-resident Pakistani remittances. Pakistani pride in last years nuclear blasts was abundant as long as it did not have to be backed by their hard-earned money. But they remitted 34 per cent less money than they did the year before the blasts.

Short-term debt as a fraction of external debt has beenincreasing steadily. Pakistan's government puts its external debt stock at $23 billion. But if, according to the World Bank, short-term private private debt and non-resident foreign currency deposits are included, this figure rises to $37 billion, This puts Pakistan firmly in the list of highly indebted developing countries. Pakistan's debts are around three times its exports. This, considered in light of Pakistan's ability to generate incomes, is too high to be sustainable.

Its debt servicing obligations have grown by an average 8.8 per cent over the last decade, from $1.3 billion to $2.577 billion in 1998-99. The rate of growth of these obligations has thus been an average three to four per cent higher than the rate of growth of Pakistani incomes. This has also meant that more than a third of all export earnings have to be devoted to servicing debt obligations. On present capability, Pakistan can only really afford to devote around 20 per cent of such export income to service these debts.

Pakistan isill-placed to bear such external worries. It depends on agriculture to employ 60 per cent of its workforce. Growth in this sector has dropped to a mere 0.4 per cent last financial year. Since Pakistan has a very narrow agricultural base, inflation can set in very quickly if production is affected. The industrial sector too has been in recession, caused in a large part by a credit crunch. Banks were unwilling to lend because of the large stock of non-performing loans they carried in their portfolios. It is estimated that at least a third of the total loan of Pakistani banks are dud loans. The stock of non-performing loans grew by a huge 600 per cent between 1989 and 1998. The banking sector is extremely vulnerable to the threat of a debt crisis.

Tax revenues have refused to live up to Pakistan's expectations. Less than one per cent of the population pay any tax on their incomes. This has meant that the burden of fiscal adjustment had to be borne mainly by cuts in government spending. Since more than twothirds of Pakistan's federal expenditure is spent on defence and debt-servicing, most of the cuts have been restricted to cuts in social spending. Importantly, this has a critical effect on the spending and provision of vital services in Pakistan's provinces, which has eroded Sharif's support in these provinces.

According to the World Bank, the incidence of poverty in Pakistan has increased throughout the 1990's. They expect this trend to continue. But this makes it all the more important to control inflation. Any instability in prices, especially for food and other mass consumption goods, would make political survival extremely difficult.

Mere circumstances helped Pakistan survive the post-blast financial crisis. America had finally agreed to refund money from the purchase of F-16 Fighter aircraft that America's Congress had earlier blocked. The World Bank advanced Pakistan emergency balance of payments assistance to help prevent a financial crisis. At the same time, the IMF had put together a $1.56billion loan under its ESAF/EFF programme, which helped Pakistan buy some more time with its creditors. Pakistan then managed to use this to reschedule the repayment of $3.3 billion in loans to the Paris Club of Official Creditors. But these debts have to be repaid within the next two years. Almost surely this will cause a large spike in Pakistan's Debt/GDP ratio and in its debt servicing obligations. It is extremely unlikely they would have the same kind of luck with their creditors this time round. With panic setting in such measure that Pakistanis have even started selling their gold to buy dollars, the Pakistani rupee looks set to explore new depths. If this were to lead to a flight of capital, the effect on Pakistan's polity might be disastrous, even for us.

A debt crisis, of the sort Indonesia went through recently, would almost definitely cause the fall of yet another Pakistani government. The army would then have to move in, to quell unrest. The Mujahadeen would enjoy that. Would we?