Indian Defence Review

The Pakistani army initially thought that Imran Khan’s image could be able to overcome the economic crises of the country and hence had supported him in the last election. But the army was not prepared to allow any independent control to the elected government with regards to its foreign and fiscal policies. Most essential requirement of any economic development is political stability something which is either non-existent or under the thumb of the Pakistani army that creates uncertainty which is worse than any economic recession. This has direct impact on domestic industry, stock market and foreign investment.

Pakistan is a habitual panhandler, a country that cannot survive without alms, loans or foreign assistance wherever it may come from or whatever conditions it be attached with. Pakistan needs money to cater to its defence programmes seeking unrealistic parity with India, to fuel jihadi movements, to pay its foreign debt and if something is left in the kitty then to feed its hungry population and not to miss, stuff the pockets of its elites.

The ‘Naya Pakistan’ promised by Prime Minister Imran Khan is more about finding ‘naya’ (new) financers, donors and not on recalibrating changes in the governance and setting its national priorities right.

Pakistan has borrowed $16 billion, the highest ever external borrowing in any fiscal year since Pakistan’s in the financial year 2018-19. This includes $ 5.5 billion by Saudi Arabia, UAE and Qatar.

Pakistani Army’s and Imran Khan’s super nationalist claims bite dust

Initially the duo of Pak Army and Prime Minister Imran Khan had made a loud claim that they would never seek any assistance from International Monitory Fund (IMF) thinking that loan from China and the Gulf Countries would be sufficient to see off another year. Prime Minister Imran Khaan went on to chauffer Saudi Prince and Sheikhs of UAE. But the idea did yield the desired result as these countries could not arrange even half of the funds badly needed by Pakistan. Left with no choice, Pakistan had to go to IMF.

 Pakistan was aware that a bailout package from IMF could be available only when Pakistan is ready for the geopolitical concession to the big donor countries of IMF. The writing on the wall was that in the event of Pakistan seeking loan from IMF, it will have to allow the IMF to the step into the Pakistani administration and dictate them on important financial and currency policies like exchange rate, devaluation of currency, raising taxes and cutting expenditure etc.

International Monetary Fund (IMF) takes control

Thus the worst nightmare came true when Pakistan was forced to apply for a bailout packages from IMF, 22nd time since Pakistan’s creation. The IMF finally approved $ 6 billion bailout package to Pakistan to help achieve ‘Return Sustainable Growth’ to economy. This deal is to be carried out in 39 months in which IMF will review Pakistan‘s progress on quarterly basis. A Financial Committee, manned by IMF’s handpicked men, has been formed to oversee the implementation of the IMF package. It is widely believed that the appointments of former IMF Mission Chief Reza Baqir as the Governor of the State Bank of Pakistan and former Finance Minister Abdul Hafeez Sheikh, as the Prime Minister’s financial adviser was as per the dictate of the IMF.

The first casualty of this bailout package was the Pakistani rupee which plummeted straight away as the Government had to agree to the IMF diktat “flexible market determined exchange rate”. The Pakistani currency had already lost its value to half since December 2017. Pakistan’s total external debt and liability is $ 105.8 billion at this time. Now the depreciation of the Pakistani rupee against the US dollar further added $8 billion increase in the external debt.

The IMF will also carry out the debt sustainability analysis to determine whether Pakistan can sustain the loan. The IMF has set a target of increasing Pakistan’s foreign exchange reserve from the current $6.8 billion to $11.18 billion in next year. Pakistan has also been directed by the IMF to pay around $37 billion external debt within the period of IMF bailout deal and this looks next to impossible in spite of Pakistan spending roughly 30% of its total GDP in the servicing of external debts.

There is also a nexus between world’s donor agencies. Pakistan appears to have been trapped into this nexus. A bailout package from IMF is a kind of pre condition for the flow of funds from other major financial institutions like the World Bank, Asian Development Bank and Islamic Development Bank. Pakistan’s current account deficit is $18 billion and this does not give any confidence to other nations to do business with this country. They show interest in trade with the country that has IMF support.

Pakistan’s sovereignty mortgaged

Pakistan is virtually now under the complete control of the IMF which has called for further increase in taxation in their financial budget from presently $25 billion to around $34 billion. Pakistan had no choice but to immediately increase in the price of petrol and electricity in Pakistan which led to the nationwide protest by the traders. It is feared that the prices may even hike further in the coming months. The inflation is at 9.4% which IMF itself believes will go upto 13% in remaining part of the financial year. Pakistan’s tax revenue is only 13% of its GDP. With no other source of generating revenue, the country is heading towards bankruptcy as the buyers do not have the purchasing power to bear the burden of increased taxation as demanded by IMF.

Big Boss from IMF comes calling

The visit of Pakistani Prime Minister Imran Khan to United States had a very important meeting on its itinerary – meeting with the Managing Director of the IMF – Mr. David Lipton. In the statement issued by the IMF after the meeting with Prime Minister Imran Khan states that

“we discussed recent economy developments and the implementation for the authority’s economic reforms program supported by the IMF. There program aims to establish the economy, extend their institutions and thereby put Pakistan on a path of sustainable and balanced growth. I (Mr Lipton) highlighted the need to mobilize domestic tax revenue or in to the future to provide reliably for needed social and development spending while placing debt on a firm downward trend”.

This communiqué is an important document to understand the kind of control the IMF has acquired over the Pakistan at this point. It is rolling out the economic policy priorities and setting out dos and don’ts to Pakistan.

It further says that

“the IMF together with other international partners is working closely with the government of Pakistan to support the implementation of the authority’s economy reforms program.”

This basically means that there are other authorities too who would be calling shots in Pakistan in this period of IMF bailout package and its implementation. It is believed that the IMF wants Pakistan to pursue certain geopolitical interests and the present bailout program of $ 6.8 billion is more to protect the interests of United States in particular and to ensure Pakistan compliance to that. The United States’ interest in Pakistan at this moment approximately revolves around the Afghan peace process to the extent of using Pak army in pushing Taliban back. The IMF will pursue the agenda of US and force Pakistan to be more transparent in the transactions related to its dealing with China with regards to China Pakistan Economic Corridor (CPEC). Pakistan trade deficit is $16 billion in the year 2018 and it is more because of the huge Chinese import to the country. The United States is very particular that the IMF loan, that includes American dollar, does not go to help the Chinese business engaged in CPEC.

Can Pakistan’s battered economy improve?

 Pakistan has multiple economic woes that include low foreign exchange reserve, little exports, high inflation, growing fiscal deficit and current account deficit. About 30% of Pakistan Govt expenditure is towards debt services which is becoming even more difficult by its decreasing revenue. The total public debt constitutes 70% of the GDP. According to World Bank’s ‘ease of doing business’ report Pakistan ranks 136th out of 190 economies surveyed. Pakistan is already on financial action task force (FATF) grey list and this will have serious consequences for them. Pakistan will have to rationalise its custom laws, improve the security within the country and boost its international image.

Pakistan also needs to focus on its domestic industry and gain its competitiveness in the international market. There are huge tax gaps in Pakistan with regard to large businesses in which Army Generals are believed to have direct interest. Its agriculture sector is not taxed. Large business houses in Pakistan have thousands of acres of land holdings to reflect losses in their agricultural activities and show less overall income.

The way forward

The Pakistani army initially thought that Imran Khan’s image could be able to overcome the economic crises of the country and hence had supported him in the last election. But the army was not prepared to allow any independent control to the elected government with regards to its foreign and fiscal policies. Most essential requirement of any economic development is political stability something which is either non-existent or under the thumb of the Pakistani army that creates uncertainty which is worse than any economic recession. This has direct impact on domestic industry, stock market and foreign investment.

Further the label of Pakistan as the bedrock of Islamic terrorism does not improve the confidence of the world capital market. The Pakistani Army has consistently refused the normalisation of relation with India. That would have allowed free trade between the two countries and open new markets for their domestic entrepreneurs. Its main goal is to continue spending on defence and nuclear program and support jihadi politics in the name of protecting Islam and Pakistan. A country without adequate infrastructure, power, tax structure and skilled labour force cannot build the economy if the priorities are wrong.

The foreign loans are only an additional burden on the poor and toiling masses of Pakistan as successive Government have siphoned off billions of dollars to foreign accounts which cannot be retrieved now, the political arrests of ex prime ministers and presidents of Pakistan at the behest of Accountability Commission notwithstanding.

In a way, it is good that IMF bailout, if implemented properly will root out some of the economic problems of Pakistan. It might even create an environment of fiscal discipline and help run the economy sensibly. But all that is coming at a cost and that is surrendering its sovereignty.