As Pakistan hurtles towards deeper economic crises, Imran Khan’s biggest problem isn’t Trump or IMF but his own compatriots.
Last week, when the US government announced it would “re-programme” $300 million in military assistance to Pakistan, it was only the latest in a series of actions that have ratcheted up pressure on Islamabad.
A year ago, when US President Donald Trump announced his Afghanistan strategy, Pakistan came in for mention only in the context of his pledge to put more pressure on the country. Trump’s tweet on the first day of this year set the tone: the US has been foolish in giving Pakistan more than $33 billion over the past 15 years, “receiving only lies and deceit” in return. In an indication of his priorities, Trump blamed Pakistan for giving safe haven to the very terrorists that the US troops were fighting in Afghanistan. “No more!” he thundered.
His administration has stuck to this line since then. Even as the Pakistani economy hurtled towards a deeper crisis, Washington has remained unsympathetic. For the first time in years, the Trump administration suspended a military education and training programme and excluded over 60 Pakistani military officers from various US defence academies. The financial cost of suspending this programme was trivial, but the signal was massive and aimed directly at the Pakistani military establishment.
This was followed by a deep cut to the ‘reimbursements’ to Pakistan under the Coalition Support Funds, the direct overt component of which used to be to the order of hundreds of millions of dollars every year. A couple of weeks ago, Trump signed a legislation that reduced this to $150 million, albeit liberalising the stringent conditions that used to be attached.
Washington is now squarely blaming Pakistan for the “lack of decisive actions in support of the (US) South Asia Strategy”. Including the latest cuts, the Pentagon has withheld $800 million in direct military assistance this year. In a familiar routine, Jalaluddin Haqqani, a long-time proxy, has been reported dead a day before the US Secretary of State’s scheduled visit to Islamabad. It remains to be seen whether the Trump administration will fall for a trick the Pakistanis have successfully played with its two predecessors.
When the Wall Street Journal asked me to write an op-ed a few weeks after Osama bin Laden was killed in 2011, I had argued that Washington must “cut Pakistan loose”, as bailing it out will only impede the country’s transformation into a normal state. As long as the Pakistani military establishment could secure external assistance for itself and deflect the hardship and punishment onto the Pakistani people, more aid only meant the fattening of the military-Jihadi complex. It is only when the Pakistani establishment and the ruling elite are forced to confront stark choices can there be hope that the country will reform itself.
It looks like such a moment is in the offing. Pakistan urgently needs at least $10 billion in hard currency to tide over a looming balance-of-payments crisis. It needs two or three times that over a longer term if it does not want to slip back into periodical crises. Given its poor credit rating, there are few willing to lend it any money, and the few commercial lenders who are loaning it money are doing so at high interest rates and for very short terms. Pakistan is likely to find it difficult to service even these short-term loans as they become due within the year.
Although there are many in Pakistan who expect China to bail them out, the only real option is to approach the International Monetary Fund (IMF) for emergency assistance. The IMF is likely to insist on the standard macroeconomic diet: reduce wasteful expenditure, collect more taxes, control inflation and allow the local currency to fall. That’s why many Pakistanis find China attractive because it supposedly doesn’t insist on such painful conditions. But China has never played the role of the IMF before and is unlikely to want to be Pakistan’s sole unconditional creditor.
It is more likely that Beijing will advise Islamabad to approach the IMF, and promise to use its offices to get Pakistan a softer deal there. The US has already made it clear that Pakistan won’t have an easy time at the IMF, not least because they don’t know the extent and the terms of Pakistan’s CPEC deals with China. The IMF board might see a tussle between the United States and China over this, and it’s unclear if Beijing sees an aid package for Pakistan as important enough to confront the US on.
Imran Khan’s economic policy appointments inspire some confidence that he gets the seriousness of the situation and realises that his government will have to implement some very painful measures. Given his populist rhetoric — and presuming that he really believes what he has been saying — he might not hesitate to do things that will hurt the elite. For instance, forcing them to pay their taxes, electricity bills and so on.
What he might not be able to do so easily — and what IMF conditions might require him to do — is cut the defence expenditure. Today, the situation is such that once the Pakistani government services its debts and pays its military establishment, it has nothing left. Put another way, defence expenditure (around Rs 1 trillion) is one-third of the federal government’s expected revenue (around Rs 3 trillion). Any meaningful attempt to cut the fiscal deficit ought to start by cutting the defence expenditure.
Therein lies Imran Khan’s economic and existential challenge: Can he get the khakis to tighten their belts without incurring their, to put it mildly, displeasure? The military establishment is likely to go with whatever macroeconomic route Imran Khan decides, to the extent that he doesn’t hurt their interests. With the Trump administration in no mood to give them more money, the khakis might be unwilling to make any sacrifices of the financial kind for their country.
Tough as the challenge is, I think the Imran Khan government will be able to secure a reprieve of some sort from the IMF and stave off an immediate balance-of-payments crisis. After that, the people he must negotiate with and persuade are his own compatriots, which is where his real troubles lie.
Nitin Pai is director of the Takshashila Institution, an independent centre for research and education in public policy.