Experts: Pakistan's escalating political and economic crisis and IMF terms might fuel instability in the region
Indian analysts believe there could be serious repercussions for the region as Pakistan's rupee, which fell nearly 50% in a year to 262 to the US dollar on Monday, pushes the neighboring country towards becoming an international "basket case," along with declining foreign exchange reserves, widespread power outages, stampedes at state-run food distribution centers, and other factors.
Tuesday will mark the start of key talks between the Shehbaz Sharif administration and the Washington-based IMF (International Monetary Fund) for a bailout package, which might include "severe and perhaps politically hazardous" pre-conditions of austerity, they warned.
Along with increased radicalism in the area as a result of Pakistan's instability, India would also be at danger from unforeseen acts, such as attempts to deflect domestic public attention by focusing on an enemy outside.
The existing political crisis, in which the Imran Khan-led Pakistan Tehreek-I-Insaf party has forced new elections by dissolving two provincial legislatures, is being exacerbated by the current economic crisis. According to Ambassador TCA Raghavan, a former Indian ambassador to Pakistan, "the restrictions that the IMF is likely to demand for releasing money would of course inflict a tremendous lot of short-term suffering and may have a political fall-out."
The 23rd IMF bailout of Pakistan since independence, worth $7 billion, was delayed last November because the international lender of last resort believed Pakistan had not made enough progress on fiscal and economic reforms to right-size the economy. The country's foreign exchange reserves, which have fallen to $4.34 billion (from $16.6 billion a year ago), are now just enough to cover three weeks of imports. While the amount of long-term debt has increased to $274 billion, with around $8 billion of that debt coming due this quarter,
The nation's dependence on imported wheat and oil has caused inflation to soar to 24%, and a wave of terrorist assaults has scared away international investors, including Chinese companies that had shown interest in establishing factories in a highly publicized industrial corridor.
According to economists, the IMF is expected to demand a higher tax to GDP ratio as well as more reasonable prices for certain services, like as electricity, in order to raise more money for the government's operating costs and loan repayments.
The former director general of Research and Information System for Developing Countries, a Delhi-based think tank, and head, Centre for WTO, Professor Biswajit Dhar, noted, "The bail-out is a must for Pakistan as a combination of high energy and food prices, rising unemployment, negative export earnings, flight of investment, and shortages have made it the international basket case that Henry Kissinger (former US secretary of state) had thought Bangladesh would become."
Utilizing its geopolitical position and extorting money from international allies has been Pakistan's strategy in the past when dealing with crises of a similar kind. This time, it's not operating as well as it did before. For its ruling elite, that is the true issue, according to Ambassador Raghavan.
Pakistan had anticipated that, as in the past, the triple A would once again assist it—the Army, America, and Allah. But things have changed... Pakistan's financial issues are mostly due to the army, which consumes the majority of the country's budget. Aid weariness is a problem in America. Pakistan's finance minister has now turned to Allah in despair, joked Ambassador Rajiv Dogra, a former permanent representative of India to the UN Food and Agriculture Organization and the country's last general consul in Karachi.
The Sharif administration and the Pakistan Army, according to Indian analysts Raghavan and Dhar, will postpone elections to give the civilian government more time to implement the reforms the IMF is seeking and make them acceptable to the middle class, which will likely bear the brunt of the austerity measures taken.
"Under identical conditions, a reasonable nation would consider carefully the best route to escape it" (economic crisis). Here, commerce with India may be a possibility. Pakistan still has a severe energy shortage and might gain a lot by strengthening its energy ties with India.
Pakistan will benefit from India's sizable market. India will provide much more affordable imports. But based on historical behavior, Pakistan would choose to bite its nose off to spite its face rather than engage in business with India," stated Ambassador Dogra.
On the other hand, India can also reject such overtures. Given that the political base of the present administration may not support such a step, Professor Dhar said there was little likelihood that India would open its markets to Pakistan.
Experts noted that the combined fragility of Pakistan's economy and politics might therefore burst throughout the neighborhood in several ways.
The present environment is excellent for terrorist organizations to flourish, according to Ambassador Dogra, and Pakistan has a history of sending its troublemakers to other countries in the area, particularly India. According to a research released earlier this month by the Pakistan Institute of Conflict and Security Studies, there was a 28% increase in terrorist incidents in Pakistan in calendar year 2022 compared to the previous year. Armed groups launched 376 terrorist acts, resulting in 533 fatalities and 832 injuries. The bloodiest month was December 2022, when there were 49 assaults and 56 people died, including 32 members of the security forces.
While Pakistan is likely to remain "self-absorbed" while it manages its crises, alternative options cannot be completely ruled out, according to some observers.
"You can never be certain of what is occurring (in the minds of Pakistan's governing class). Kargil occurred even at a really positive period in our relationship. Nobody will ever say that it is impossible for anything like that to occur. You must continue to be vigilant, added Ambassador Raghavan.