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Pakistan Is Drowning in Debt


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Pakistan is in a political and economic death spiral that could push it over the same cliff as Sri Lanka, as internal conflict, regional instability, and global uncertainty all threaten the survival of the state.

Pakistan has struggled to recover from the pandemic and is now grappling with another spike in COVID-19 cases. But the country faces life-threatening challenges similar to what Sri Lanka faced before the island government collapsed amid 50 percent inflation; food, fuel, and medicine shortages; power cuts; and, in May, its first failure to make an interest payment on a foreign loan. For Pakistan, life support is a drip feed of loans from foreign friends and emergency injections from multilateral lenders.

Some of Pakistan’s economic woes are internal and even self-inflicted, with subsidies thrown around like confetti, for instance, as successive governments have failed to boost exports that would benefit the working class to balance high-end imports for the military and political elite.

Other causes are external. Russia’s invasion of Ukraine has strained global food supplies, leading to an uptick in prices while also choking off the supply of energy such as natural gas and oil. Recent back-to-back interest rate hikes by the U.S. Federal Reserve have added further pressure on Pakistan: The rupee hit an all-time low against the dollar last week after the Fed hiked the key rate by another 75 basis points, a move meant to tame domestic inflation. But for Pakistan and other developing economies, higher rates push down the value of the currency and push up the cost of debt servicing—and public anger.

And there’s plenty of anger to go around. Inflation is running above 38 percent annually, sovereign debt now exceeds $250 billion, and Pakistan’s central bank said “external debt and other payments” have cut foreign exchange reserves to less than $9 billion, enough for just six weeks of imports. Some Pakistanis are withdrawing dollars from local banks despite assurances from Finance Minister Miftah Ismail that the government won’t freeze or seize foreign currency. One of the big credit rating agencies, S&P Global, has downgraded Pakistan’s long-term outlook to “negative.”

So perhaps it’s not surprising that the Army chief often referred to as Pakistan’s most powerful man has taken the extraordinary step of phoning Washington to ask for help getting the International Monetary Fund (IMF) to break protocols for an urgent release of funds.

Gen. Qamar Javed Bajwa reportedly asked U.S. Deputy Secretary of State Wendy Sherman to urge the IMF to release $1.2 billion immediately, rather than after the board meets in late August to approve a decision already made by lower ranks, according to Nikkei Asia. Pakistani Foreign Office spokesperson Asim Iftikhar confirmed the call but not its content.

The money is part of the IMF’s $6 billion Extended Fund Facility, a 2019 bailout agreement. The release of the $1.2 billion had been on hold due to IMF concerns about former Prime Minister Imran Khan’s economic stewardship. During four years in office, Khan alienated the United States and multilateral lending institutions and used Islamism as his populist platform. Khan was ousted in April by a no-confidence vote in the parliament, which he quickly blamed on a U.S. conspiracy.

Khan’s successor, Shehbaz Sharif, talked to Washington about the IMF bailout, negotiated an extra billion dollars to take the package up to $7 billion, and launched reforms to satisfy the IMF’s conditions to shore up the budget, including removing fuel subsidies, which saw consumer prices shoot up by 17 percent. Khan has attempted to harness the subsequent public anger to rehabilitate his reputation for elections due by October 2023.

Amid the political turmoil, Bajwa has again confirmed where the real power lies in Pakistan’s “hybrid” democracy, in which the elected parliament is heavily influenced by the military. His call to Sherman made him look like “the only adult in the room,” said a Western diplomat in Islamabad who spoke on condition of anonymity as she wasn’t cleared to speak to the media. Bajwa has recently visited Saudi Arabia and China, good financial friends to Islamabad, and is scheduled to visit the United Kingdom in coming weeks.

Bajwa’s phone call “reflects the Pakistan Army’s concerns about the state of the economy,” Husain Haqqani, a former Pakistani ambassador to Washington who is now at the Hudson Institute, told Nikkei Asia. “It also reflects that the Pakistan Army chief is the authority with whom the global players feel the final word rests.”

Bajwa’s intervention should illuminate the extent of Pakistan’s problems. While the economy crumbles, security is threatened by separatist and terrorist conflicts in different parts of the country. Since the Taliban takeover of neighboring Afghanistan last year, the Pakistani Taliban, or Tehrik-i-Taliban Pakistan (TTP), have been revitalized and have launched devastating terrorist attacks against Pakistan. The Pakistani military is in talks with the TTP, brokered by the Afghan Taliban, after Pakistan’s military bombed TTP positions inside Afghanistan this year. Pakistan is also dealing with a separatist movement in Baluchistan, a vast region bordering Iran and Afghanistan where armed groups are fighting for an independent homeland.

But the economic crisis may be even more immediate. Local media report that Pakistan’s outstanding sovereign debt obligations over the next five years will be just shy of $50 billion, coming at a time of widespread poverty, hunger, and public ire. The alternative would be to again default on foreign loans, an oft-repeated pattern that has made Pakistan one of the world’s most bailed-out countries since its formation in 1947. Local lawmakers have insisted that a default was never going to happen and the new IMF bailout funds will give other multilateral institutions and foreign investors confidence in Pakistan. Others take a more cynical view.

“Pakistan believes it is too nuke to fail,” said a regional diplomat, also speaking on condition of anonymity, referring to the country’s nuclear capability, which it often uses for bilateral and multilateral leverage. The problem is that a lack of consequences stunts political reform, experts and diplomats said.

“There will always be someone there to make sure there is no default, whether it is China, Saudi Arabia, one of the banks, the United States. And that just further entrenches the denial of the political class that they have to take responsibility,” the Western diplomat said.

“Everything is always someone else’s fault. The urban elite don’t have to bear the brunt of rising prices for food. They don’t travel in their own country to see how most of the people live. They can go abroad as they like.”

The diplomat suggested that public anger at political mismanagement could translate into a radicalized religious response—for instance, if Khan harnesses public anger for a political return. “That would just take the country further backwards. And no one wants or needs that,” the diplomat said.

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