Home / Economy / Mint Explainer: Will the world allow a nuclear Pak to fail?

Even sipping a cup of tea is a luxury in Pakistan now. "I appeal to the nation to cut down on the consumption of tea by one to two cups because we import tea on loan," Pakistan federal minister of planning Ahsan Iqbal told the nation on 14 June. Call it the tipping point for Pakistan.

Indeed, Islamabad is confronted with a gargantuan socio-economic crisis. The country is dealing with soaring food import bills, surging energy costs, a run on the rupee, depleting forex reserves, and a jump in debt-servicing costs. These challenges have some striking similarities to the mess in Sri Lanka. Even the expected $1.2 billion loan disbursement from the International Monetary Fund (IMF) this month, a slice of a $6 billion loan programme the Fund has approved, may do little to save Pakistan.

But can the world allow a nuclear Pakistan to fail? Will Pakistan's nukes save the country from collapse?

What is Pakistan's problem?

The global commodity price surge has stoked runaway inflation to 25% as the country's import costs soared. In addition, mounting dollar payments for the country's food and energy import bill—spiking 60% last fiscal—have eroded forex reserves and the value of the Pakistan rupee (PKR). Moreover, debt-servicing costs and rating downgrades have further added to the weakness of the PKR, which has tumbled about 25% against the dollar in 2022 (it recovered some ground in August on hopes of the IMF bailout).

Recently, Pakistan's finance minister Miftah Ismail explained the daunting challenge before the Shehbaz Sharif-led coalition government. The country needs $41 billion in forex reserves over the next year or so—of this, $21 billion is needed for debt repayments, $12 billion for current-account deficit financing and another $8 billion to replenish foreign-exchange reserves.

At this point, Pakistan has forex reserves of only about $9 billion, about a month-and-a-half's worth of imports. To stem the crisis, Pakistan has imposed a temporary ban on the import of all non-essential goods.

Ismail points fingers at former prime minister Imran Khan's regime for letting the crisis snowball into unmanageable proportions. During the four years of the Khan regime, the country's budget deficit had soared from $1.6 trillion to $3.5 trillion, Ismail said, adding that "this kind of current account deficit" is unsustainable. He has also vowed to prevent imports from increasing for another three months, even at the cost of constricting growth.

What are Pakistan's options?

Forced to approach the IMF for a lifeline again, Pakistan has now begun meeting all the pre-conditions set by the lender for the next round of the bailout programme. Recently, it has increased fuel prices massively, further worsening the standard of living in the country. Some experts claim millions may have slipped into poverty because of the increase in the cost of living. Closures of cab services, restaurants and small businesses, unable to afford the prohibitive price rise, have been reported in local media. Some experts are now worried about social and economic unrest, pointing out the similarities to Sri Lanka.

But, the silver lining for Pakistan is that the IMF has now stated that Pakistan has met all its pre-conditions for the $1.2 billion financial assistance. How often has the IMF come to Pakistan's rescue? In 2019, Pakistan got financial assistance from the IMF for the 22nd time.

As we said, a $1.2 billion lifeline is quite inadequate to bail out Pakistan, but it's likely to open more funding options for Islamabad - from allies and more multinational donors. Allies such as Iran, Turkey, Saudi Arabia and, of course, its all-weather friend China may have to extend loans and grants to Islamabad to prevent it from defaulting on its external debt obligations.

Both the US and China will be loath to let a nuclear-armed Pakistan collapse, given its geopolitical significance.
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Both the US and China will be loath to let a nuclear-armed Pakistan collapse, given its geopolitical significance.

It remains to be seen whether Pakistan can continue to meet IMF's suggested economic reforms, given the political instability in the country, with strong opposition expected from Imran Khan's Pakistan Tehreek-e-Insaf (PTI), which continues to retain its popularity among Pakistanis.

Meanwhile, Ismail has asked fellow Pakistanis to brace for "bad days" but maintained the country is on the "right track".

Will the world allow a nuclear Pakistan to fail like Sri Lanka?

Pakistan's woes have similarities to the Sri Lanka crisis—from dwindling forex reserves to an energy crisis to inflation. And there is chatter in the Pakistani media about job losses and rising poverty.

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But can the world afford to let a nuclear Pakistan fail? More so, when Taliban-ruled Afghanistan is its neighbour. It seems very implausible. Both the superpowers, the US and China, will be loath to let a nuclear-armed Pakistan collapse, given its geopolitical significance. Indeed, if it were to happen, it will probably be seen as Biden's biggest foreign policy disaster by most Americans, much worse than the Afghanistan fiasco. And China has vital interests in Pakistan through ambitious projects such as the China-Pakistan Economic Corridor.

Instead, the global community is likely to push Pakistan to adopt reforms and manage its resources more efficiently than it has done so far. The IMF is demanding deep-seated reforms in Pakistan—from higher taxes to cutting subsidies. The goal is to push Pakistan to raise resources internally, cut dependence on dollar debt, and move away from the politics of handouts and populism. So far, Pakistan seems to be complying with the IMF as it's desperate for aid, and understandably so. In fact, some media reports suggested Pakistan might have led the US to Al Qaeda's Ayman al-Zawahiri's hideout to get US support for assistance from the IMF.

Still, Pakistan's track record is not inspiring. Pakistan has often reneged on its commitments in the middle of aid programmes. But perhaps policymakers in Islamabad will realize time is not on their side anymore.

How did Pakistan get here?

Over the decades, Pakistan has destroyed its economy with its mammoth military expenditure as it tried to match India's military muscle. It pursued an ambitious nuclear programme, with former prime minister Zulfiqar Ali Bhutto once famously asserting, "We'll eat grass but make the bomb." That's nearly how it has turned out. Unfortunately for Pakistan, Bhutto proved prescient. A US ally through the Cold War, Islamabad depended on generous aid from Washington and international donors like the IMF to keep its economy afloat.

In a changed post-Cold War era, the US has found a new ally in India, and Pakistan has turned to China, Saudi Arabia, the UAE and others to sustain its debt-fuelled economy. Through all this, Pakistan has remained an agri- and aid-dependent economy. Political instability meant Pakistan never really invested in the building blocks of an economic boom such as robust infrastructure, independent institutions, a vibrant domestic industry and a healthy democracy. In fact, Pakistan's crippling power shortages have been big stumbling blocks for the domestic manufacturing industry.

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