Pakistan’s financial woes: The IMF and shifting regional dynamics
Pakistan’s new, PTI-led government was facing a financial crisis before it even took office. Its leadership, headed by the charismatic but untested Prime Minister Imran Khan, has to contend with a looming balance-of-payments crisis while still trying to muster enough support to form a government in the center and the key contested province of Punjab.
Pakistan’s fragile but buoyant economy took a turn for the worse last year as the nuclear-armed country plunged into a political crisis sparked by the dismissal, and subsequent conviction in a corruption case, of former Prime Minister Nawaz Sharif. Even before the elections, many analysts predicted that Pakistan would be forced to seek a bailout package from the International Monetary Fund (IMF) or other allies, such as China and Saudi Arabia, to successfully navigate its financial crisis.
As always, Pakistan’s financial woes come wrapped in complex layers of international and regional political dynamics, which have shaped the destiny of the country for a long time. The deliberations on whether or not to approach the IMF for a new support package were sidetracked by an unusual statement from US Secretary of State Mike Pompeo, who warned: “Make no mistake. We will be watching what the IMF does.” He added: “There's no rationale for IMF tax dollars, and associated with that American dollars that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself.”
These comments point to important strands of regional and international dynamics affecting Pakistan. The reference to China alludes to the China-Pakistan Economic Corridor (CPEC), and long-standing skepticism in Washington about Beijing’s grand global project of economic connectivity, the Belt and Road Initiative, of which CPEC is a key regional component.
The US and some other Western countries have voiced concern about the BRI and CPEC, warning that by providing fragile economies such as Pakistan and Sri Lanka with easy credit for infrastructure development, China is leading them into an unsustainable debt trap.
Beyond the reservations about China’s investments in Pakistan’s energy sector and infrastructure, faltering US-Pakistan relations have hit a new low this year after the US moved to drastically curtail military and security assistance to Islamabad. According to the latest figures, Washington has cut spending from a high of $1 billion a year in 2014, to just $150 million.
Against this backdrop, Pompeo's words might appear ominous and a sign of the difficulties that lie ahead, as Pakistan prepared to approach the IMF even before the new government was sworn in. It is, however, important to note that just as most of Pakistan’s current challenges relate to its complex foreign-policy choices, it is the regional sphere that might offer solutions and policy pathways to ease the country out of its financial crisis.
The US and some other Western countries have warned that by providing fragile economies such as Pakistan and Sri Lanka with easy credit for infrastructure development, China is leading them into an unsustainable debt trap.
Dr. Simbal Khan
For one, the recent startling news that the leading US diplomat for South Central Asia, Alice Wells, and a high-level US delegation has had the first face-to-face, direct talks with the Taliban, has again stirred hopes of peace in Afghanistan. The Taliban has long demanded direct talks with the US, without the participation of the Afghan government in the initial stages. By agreeing to this demand, Washington is signaling a major shift in policy on Afghanistan.
Any concerted move toward a negotiated peace and a sustainable peace process in Afghanistan is likely to ease tensions between Washington and Islamabad, and also boost Pakistan’s ability to seek financial support from multilateral lending institutions such as the IMF and World Bank. However, it is unlikely that US-Pakistan relations will revert back to the levels seen in times past, when there were substantial flows of military aid and economic assistance.
Other regional developments also indicate important shifts that are likely to create new opportunities, and challenges, for Pakistan. The withdrawal of the US from the Iran nuclear deal and the re-imposition of economic sanctions on Tehran add another element of change to regional alignments. Any peace deal with the Taliban at this juncture would allow the US and its regional partners, including Saudi Arabia, other Gulf states and Pakistan, to better coordinate their respective policies in the region to promote peace in Afghanistan and Pakistan’s border areas, and tackle the growing threat of Daesh in Afghanistan through meaningful cooperation.
Last year marked the revitalization of the long-standing relationship between Saudi Arabia and Pakistan, and in recent days the Islamic Development Bank (IDB) activated a three-year, $4.5-billion oil-financing facility for the country. This is likely to bring stability to the rupee-dollar exchange rate on the interbank market, which has been under pressure. There are also reports that the new government is likely to receive financial assistance from Saudi Arabia to help ease its balance-of-payments position and survive the current economic crunch.
• Dr. Simbal Khan is a political and security analyst and a South-Central Asia specialist, with experience in regional security and development spanning 20 years. Her work has focused on issues related to trans-border militant movements in South-Central Asia and the geopolitics of border spaces. She is also a Non-Resident Fellow at the Center for International Strategic Studies Islamabad. Twitter: @simbalkh