For over a year, a rapid depletion of its foreign exchange reserves, skyrocketing prices and political instability have defined Pakistan’s politico-economic situation, pushing it to the brink of default and an economic meltdown. Pakistan’s tug-of-war with the IMF finally ended, with the latter announcing a nine-month stand-by agreement worth USD 1.2 billion for immediate disbursement. Pakistan’s foreign reserves are currently at its lowest level, barely enough to cover a month’s imports. One US dollar is now worth 286 Pakistani rupees.
Senior IMF officials had publicly aired their concerns about Pakistan’s economic policy choices and unstable political situation. The IMF rejected the budget presented earlier this month. Pakistan has had to bend to IMF’s prescriptions to access the last tranche of USD 1.1 billion but was unable to meet its conditions fully. It was compelled to release a revised budget and hike taxes, energy prices and interest rates to fall in line with the IMF’s prescriptions. The budget revision followed PM Shehbaz Sharif’s meeting with IMF Managing Director Kristalina Georgieva and negotiations between the IMF and Pakistani officials. Austerity measures implemented in line with the revised budget include raising taxes by USD 750 million to reduce the spiralling fiscal deficit. Pakistan’s Central Bank has also raised its benchmark interest rates by 100 basis points to a whopping 22 per cent.
In the last six decades, Pakistan has approached the IMF 22 times—a remarkable record. While it has been forced to seek funds from the IMF, it has a long history of not following the economic measures it accepts as part of the IMF’s aid. This has resulted in scepticism within multilateral financial institutions. Frequent borrowings have added up over the last few decades, resulting in humongous government debt. The ever-increasing defence budget greases corruption in the military. Overall, the Pakistani State’s financial management has reduced confidence in its ability to handle its economy prudently.
Pakistan’s traditional benefactors—China, Saudi Arabia and UAE—have not rushed in to help this time. Fresh IMF funding will help Pakistan avert a full-blown economic meltdown, but this will be temporary. Long-term economic problems will require fundamental policy changes because underlying structural faults remain in place.
Desperate Pakistanis are fleeing the country. A tragedy in the Mediterranean recently took place when a boat—ferrying illegal migrants from Egypt to Greece—capsized and took the lives of over 200 Pakistanis. Even the wealthy are running away—and they include qualified and skilled people—abandoning Pakistan for better prospects abroad. Pakistan’s political and economic elite, steeped in corruption, are largely insensitive to public welfare.
The Pakistani establishment is unable to implement urgent reforms because of political risks. The most urgent and politically risky reform is cutting down the defence budget, a prescription laid down by the IMF. While 50 per cent of Pakistan’s budget goes into debt servicing, 26 per cent goes to defence. Defence-related expenditure is estimated to be around USD 11.5 billion. The current budget has raised defence expenditures by around 16 per cent.
Pakistan’s army is a State within a State and controls crucial political and economic decisions. The civilian government simply cannot bypass the military for fear of being overthrown. It is unlikely that the army will agree to any major cuts in its budget. The defence forces have several expensive vanity projects which lubricate corruption in the higher echelons of the army. The military has gotten used to having its way and sponging off public money. It exploits the bogey of security threats from India to ensure that it gobbles up a huge slice of the national economic pie.
Pakistan’s army brooks no challenge. Former PM Imran Khan’s plight is an apt example. Propped up by the army and publicly known as a “selected PM”, he was overthrown by political intrigue organised by the army—because of his growing popularity, interference in army appointments and essentially, for growing too big for his boots. Imran now faces the imminent danger of being incarcerated for various charges brought against him, all engineered by the army. He may even be debarred from politics for life and exiled. In the worst-case scenario, he could be eliminated by judicial execution, a fate that befell former PM Zulfiqar Ali Bhutto, grandfather of the current foreign minister Bilawal Bhutto Zardari. Nawaz Sharif was also hounded out by the army when he showed signs of going against its policies, particularly vis-à-vis the ties with India. The army wants to ensure Imran’s elimination from politics before the forthcoming election in October.
Imran’s supporters recently severely dented the image of the army when they attacked army establishments after he was arrested. The military is going through an unprecedented purge of its senior generals and others for their inability to prevent the attacks and vandalisation of establishments by Imran’s supporters. The military is using the draconian Army Act to prosecute a large number of demonstrators. Pakistan’s military is also divided, and these purges are indicative of fissures within the army.
Earlier, while the US was still militarily present in Afghanistan, it needed Pakistan for its operations there, and so, was generally supportive of Pakistan when it came to the latter’s access to IMF funding. Pakistan’s leverage has been weakened by the American withdrawal from Afghanistan and growing India-US ties. And although Pakistan has tried to appease the US by selling ammunition to Ukraine, present geopolitical factors are no longer tolerant of Pakistan’s traditional policy of indulging in cross-border terrorism while also playing victim to terrorist attacks.
Saner voices in Pakistan are calling for putting the domestic situation in order and normalising ties with India. This is easier said than done. Stable and normal ties with India are not in the interest of the army, which will lose its primacy in the country’s polity. Its role as China’s proxy to contain India will also be undermined. Many Pakistani businesspersons want trade ties to be renewed. India is in no hurry to normalise ties with Pakistan unless there is an irrevocable end to cross-border terrorism.
Pinak Ranjan Chakravarty
Former Secretary in MEA and a former Ambassador.
Served as the last Indian Consul-General at Karachi. Visiting Fellow at ORF, Delhi