Despite IMF's $3bn bailout, a deepening crisis emerges in Pakistan
IMF approves a $3 billion bailout for Pakistan, but the country's economic problems persist. Political divisions and military control complicate the situation.
The International Monetary Fund (IMF) recently approved a 9-month stand-by-arrangement (SBA) of $3 billion for Pakistan with disbursement to be spread over the next nine months. This is the 23rd package of IMF assistance for the country, saving Pakistan from sovereign default. But its problems are far from over. The economic reforms require political consensus and Pakistan’s polity is deeply divided. Pakistan Tehreek-e-Insaf (PTI) has been demanding the dissolution of the National Assembly and fresh elections.
Following Imran Khan’s arrest on May 9, crowds attacked the General Headquarters (GHQ) of the Pakistan Army and ransacked the Lahore Corps Commander’s residence. Since then, hundreds of PTI supporters have been arrested and subsequently released by a Pakistani court on May 20. The Pakistan army had announced that they would be tried under the Army Act. This indicates a silent coup with the army extending its control over the civilian population without a formal military take-over.
The SBA of $3 billion includes an additional commitment of a half billion dollars by the IMF. It may be recalled that nearly $2.5 billion was not disbursed under the previous package. The IMF had withheld the release of the last two tranches as Pakistan had deviated from the commitments it made. While the fresh package has given a breather to the Shahbaz Sharif government, it has also ensured that IMF will continue to exercise leverage over future governments even as elections are likely to be announced shortly.
Pakistan’s debt payment of ₹7,303 billion exceeds the Federal government’s share of revenue of ₹6,887 billion. This indeed is the definition of a debt trap – a situation where the loan repayment exceeds the tax revenue. Pakistan has already crossed this threshold.
Despite the country’s dire economic situation, the Army has claimed its pound of flesh. According to media reports, the defence allocation of ₹1.8 trillion is 12.5% of the total budget in 2023-24 of Rs. 14.5 trillion. This is simply an attempt to underplay the true costs of the military to the state exchequer. The above figures do not include military pensions and defence production. Taking these into account, the actual defence allocation comes to Rs. 2.1 trillion. Defence is the federal government’s responsibility. The federal share of revenue is ₹6.8 trillion, while the rest is the share of provinces. Defence expenditure of ₹2.1 trillion works out to more than 33% of federal revenue.
Social sectors and development expenditures remain neglected. Benazir Income Support Program (BISP), the government’s flagship program, has received a paltry amount of ₹450 billion. Development expenditure is just ₹950 billion – about 40% of the defence allocation mentioned above.
The IMF program is crucial to Pakistan. In the past, Pakistan could draw upon generous support from its friends such as Gulf states and China and defy the IMF and western lenders. Now they are also insisting upon Pakistan’s compliance with IMF’s conditions. This is to ensure that Pakistan observes some discipline.
Last month, it was announced that Pakistan will buy Russian crude oil against payment in Chinese Yuan. There is something missing in this narrative. Pakistan was supplied oil and gas by Gulf countries in the past. This was usually on easy terms. Now, Pakistan has to shell out more for them. The bilateral assistance of $2 billion committed by Saudi Arabia is also not free of cost. It is based on 4 percent profit sharing.
The political equations are as complicated as the economic reforms. The army would like to ensure that Imran Khan ceases to be a factor in Pakistan’s politics. But it would also like to make sure that Pakistan Muslim League (N) does not become too strong. The Shahbaz Sharif government has initiated steps for the return of Nawaz Sharif, contrary to the point where it had brought Imran to power to see off Nawaz Sharif. It does not want Imran Khan’s departure as a political force to recreate its old problem. A new party called Istehkam-e-Pakistan Party (IPP) has been formed under Jahangir Tareen, a one-time supporter of Imran Khan. If Imran Khan is truly gone, will the PPP-PML(N) alliance hold?
The Pakistan army is adept at political engineering and will manage party re-alignments. Pending elections, a caretaker government may be convenient to take difficult steps needed to put the economy back on its feet. Established political parties will be loath to take such steps before the elections.
The army, however, has two bigger challenges. The first is internal. The attacks on army GHQ and military establishments across the country are being blamed on Imran Khan. The Inter-Services Public Relations statement mentioned it has affected the army’s prestige and may also show a measure of disaffection with the army. This, in the core areas of Punjab and Khyber-Pakhtunkhwa where most of the Army’s recruitment takes place, is a dangerous sign. The second is the state of the economy. The new year’s budget is predicated on a GDP growth rate of 3.5 percent. The growth during the previous year was 0.3 percent. Is it a realistic assumption that the growth rate can zoom tenfold in one year, especially when the economy will be in a contractionary phase given IMF prescriptions for fiscal prudence? A lower growth rate will affect revenue, increase the fiscal deficit and demand a bigger bail-out package in the future.
D. P. Srivastava is former Indian ambassador to the Islamic Republic of Iran, a distinguished fellow at Vivekananda International Foundation and author of Forgotten Kashmir: The Other Side of the Line of Control.
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