By Vipul Tamhane
Pakistan has faced a tumultuous relationship with the International Monetary Fund (IMF), often dubbed an "IMF addict" due to its withdrawal effects. This contrasts with South Asian nations like India, Sri Lanka, and Bangladesh, whose economic trajectories do not share the same level of dependency.
Economic comparison and political context
Pakistan's economic crisis is not just due to financial mismanagement but also its political landscape, creating a fragile equilibrium among the political class, military, and populace. The IMF's intervention is a temporary band-aid rather than a long-term solution. Pakistan's financial distress surpasses countries like Angola, Yemen, and Egypt. The country faces economic stagnation, with a meager growth rate of 2 per cent falling short of the expected 1.8 per cent, compounded by a high population growth rate of 3.4 per cent annually.
IMF's role and economic risk indicators
India has criticized the IMF bailout plan for Pakistan, urging strict monitoring of emergency funds to prevent redeployment towards defense expenses or loan repayments. The US has not explicitly stated a stance on Pakistan's recent IMF bailout, but the IMF staff and Pakistani authorities have reached a staff-level agreement on policies supported by a Stand-By Arrangement (SBA), subject to approval by mid-July. The $7 billion package aims to stabilize Pakistan's economy, preserve macroeconomic stability, and create space for social and development spending. However, Pakistan's high population growth and stagnant per capita GDP underscore fiscal stress, with a projected fiscal deficit of 8 per cent of GDP over the next five years.
Inflation, debt, currency valuation and social impact
Pakistan's inflation rate is currently at 19.6 per cent, with projections suggesting a potential rise to 26 per cent. The cost of milk is a significant economic strain for ordinary citizens, with the cost of milk now twice as high compared to Indian counterparts. This inflationary trend has implications for India and the US, as it could lead to trade and regional impacts, especially in essential commodities like food. Inflation may also cause migration, affecting local labor markets and remittance flows. The US, with vested interests in South Asia, could exacerbate existing challenges and influence policy decisions.
Pakistan's debt situation is dire, with the IMF's assistance seen as a lifeline. The country needs $19 billion annually for the next five years to service its debt, which accounts for a significant portion of its revenues. The conditionalities attached to IMF loans impose stringent austerity, exacerbating social unrest due to inflation and rising energy prices.
Foreign exchange and investment
Pakistan's foreign exchange reserves are below the IMF's recommendation, putting pressure on the national budget and affecting sectors like education and health. This has implications for India and the US, as India, with a border with Pakistan, may face trade and regional impacts due to a fragile economy. The interest burden of $6 billion annually for the next five years strains the national budget, overshadowing crucial sectors like education and health. India may need to make strategic decisions regarding engagement with Pakistan, considering its economic situation and regional stability. The US, with South Asia interests, may need to address Pakistan's economic crisis to maintain regional stability. Both nations will closely monitor the situation and assess its
impact on their interests.
Historical and political dynamics
Pakistan's political landscape is marked by instability, with no prime minister completing a full term. The military and elected government often lead to sudden leadership changes, further destabilizing the country. The removal of Prime Minister Nawaz Sharif in 2017 and the rise and fall of Imran Khan in 2017 exemplify this volatility. Khan's tenure was marked by tensions with the military, particularly regarding foreign policy decisions and internal appointments. The current government, led by General Asim Munir and Shehbaz Sharif, operates under a tenuous arrangement, reflecting the broader political dysfunction. A blood feud is currently brewing between Khan and Army Chief Asim Munir.
The way ahead
Pakistan's economic crisis has significant implications for India and the US, as it shares a border with Pakistan, potentially affecting trade relations and regional stability. The country's struggling economy could lead to disruptions in cross-border trade and investment and security concerns could spill over into India. India closely monitors Pakistan due to historical tensions and ongoing conflicts. The growing collaboration between India and the US in technology could further strain Pakistan's economy. The situation warrants close monitoring, as stability in the region is interconnected. The IMF's role in Pakistan is crucial, but it can only provide temporary relief. Long-term stability requires addressing political and economic challenges. The IMF's future support depends on Pakistan's commitment to policy reforms, including fiscal discipline and improved tax collection. If Pakistan continues without substantial reforms, the IMF may withdraw its support, leaving Pakistan to face the consequences of its economic and political instability alone.
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(The writer is a counter-terrorism expert and a visiting faculty with Pune University (SPPU) at the Department of Defense and Strategic Studies (DDSS). He is also the founder & editor-in-chief at Diplomacy Direct, a public interest think-tank.)
