Pakistan’s economic crises have become cyclical. In the absence of structural reforms, it has very little choice but to seek a bailout package from its lenders. Currently, it desperately needs $37 billion to finance its debt next year. It is on the verge of an agreement with the IMF for an enhanced bailout package. Other lenders will also come to their assistance. The Chinese are rolling over Pakistan’s debt. The Saudis extended a $3-billion loan in December 2021 but are waiting for signals from the IMF. The French have suspended their loan of $107 million.
In the short term, Pakistan may avoid the embarrassment of a debt default. There will be economic pain because of the IMF conditionalities but will be borne by the poor. The immediate crisis management may lead to a reprieve but without addressing any of the structural problems in the economy that is not able to balance its expenditure with revenues. In any economy, this is not a simple economic question. It has to do with the political choices of the ruling elites and their political will to make difficult decisions.
One of the reasons, why the difficult decisions were not taken was due to the geopolitical advantages that Pakistan had during the Cold War and subsequently throughout the US presence in Afghanistan in its war on terror. This also resulted in the growth of a rentier economy. Pakistan was bailed out whenever it was in an economic crisis because it was important to the western bloc. The Pakistani ruling elites could sell the country’s services and keep the economy afloat.
Critical economic reforms were not carried out for a self-sustaining economy. On the other hand, the advantage of the geopolitical environment has been diminishing as Pakistan aligned closer to China. The CPEC has also contributed to increasing Pakistan’s debt burden. It’s too early to talk about a debt trap, but Pakistan owes close to $15 billion to China. The FATF has also squeezed the Pakistani elites to make some behavioural changes.
In the immediate context, the promised IMF loan will roll over Pakistan’s debt. It remains to be seen whether revenues can be generated by taxation and defence cuts. But there is a political choice that the country has to make in normalising trade relations with India. Pakistan’s decision to suspend trade with India after Article 370 was evoked is adversely impacting their economy. Its textile industry, which was benefiting from cotton imports from India, is today buying cotton from the US and Brazil. As Pakistan deals with an economic crisis, improving relations with India might be one of its least priorities. However, it has to look at the larger picture and built economic strengths and see how it can benefit from improving trade relations with India and through regional cooperation.
This will necessarily lead to the question: is Pakistan willing to stop supporting terrorist groups against India? Is sentencing LeT leaders like Hafeez Saeed and Sajid Mir tactical, carried out under pressures of the FATF since 2018? The Pakistani ruling elites have to realise whether the support for proxy groups against India and Afghanistan has placed it at any geopolitical and economic advantage. India should not expect any acknowledgement of that from Pakistan as it will amount to an admission of complicity and guilt. But it should look out for any signs of behavioural change without letting its guard down. India should extend a helping hand to the people of Pakistan in their hour of crisis. Pakistan will not accept it. But India should make the gesture. There is always a possibility of an opening.
The writer is Professor and Officiating Director of the Academy of International Studies, Jamia Millia Islamia, Delhi
Ajay Darshan Behera