Pakistan Aims for IMF Deal at Last – Foreign Policy

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South Asia Brief: Pakistan Aims for IMF Deal at Last
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Welcome to Foreign Policy’s South Asia Brief.
Welcome to Foreign Policy’s South Asia Brief.
The highlights this week: Pakistan closes in on a deal with the International Monetary Fund to unlock further assistance, India bristles at criticism of its human rights record after Prime Minister Narendra Modi’s state visit, and three countries are set for a milestone connectivity deal in the region.
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Pakistan Nears IMF Deal
Pakistan may finally be closing in on a deal with the International Monetary Fund (IMF) after months of unsuccessful negotiations. In recent days, Islamabad has taken steps to meet IMF conditions required to unlock $1.1 billion in assistance from an existing aid package scheduled to expire at the end of this week. The IMF has praised these final-hour moves.
The austerity measures include amending the country’s new budget to raise taxes by $750 million—aiming to cut the country’s severe fiscal deficit—and ending all import restrictions to ease an equally serious current account deficit. On Monday, Pakistan’s Central Bank raised interest rates to 22 percent, up by more than 12 percentage points since April 2022. The moves are intended to reduce demand and ease strain on Pakistan’s foreign reserves, which currently cover barely a month’s worth of imports.
New IMF funds would bring Pakistan short-term relief from its economic crisis, enable additional financing from top foreign creditors, strengthen prospects for foreign direct investment, and avert a debt default. Still, while the deal would allow Pakistan to step back from the cliff, it won’t solve the country’s economic problems in the long term. Without serious policy changes, they will remain entrenched.
Until recently, Pakistan’s prospects for an agreement with the IMF deal were dim. Keen to boost its flagging popularity, the government had increased energy subsidies, which ran afoul of the IMF’s austerity conditions. Islamabad also struggled to craft a coherent recovery plan. In recent weeks, senior IMF leaders have gone public with their concerns about Pakistan—both its economic policy choices and its unstable politics. The IMF’s rejection of the country’s budget earlier this month seemed to be the nail in the coffin.
At the same time, inflation in Pakistan hit a record 38 percent in recent weeks. Crushing poverty is driving some people to flee the country, including the more than 100 Pakistani migrants who died in a shipwreck off Greece this month. According to Pakistani officials, stricter border control along land and air routes has prompted more people to try dangerous sea routes to Europe.
Economic stress isn’t only hitting Pakistan’s poor. Wealthy and educated Pakistanis are leaving, too, exacerbating chronic brain drain. The country’s Bureau of Emigration reports that more than 750,000 people left Pakistan in 2022, a threefold increase from 2021. They included doctors, engineers, IT experts, and accountants. The end of COVID-19 travel restrictions can in part explain the shift—but it is likely also due to a growing desire among skilled and well-educated workers to find better opportunities abroad.
The economic stress driving this exodus would be eased but not eliminated by an IMF deal. That’s because the underlying structural factors that triggered Pakistan’s current crisis would still be in place. These include heavy reliance on costly fuel imports and on a top export—textiles—that struggles to compete globally, an inefficient agricultural sector grappling with water and energy shortages, and a political and economic elite prone to corruption and unwilling to invest more in public welfare.
An IMF deal would give Pakistan some economic breathing room, and it could boost the current government and its supporters ahead of elections. But it would be a Pyrrhic victory: Barring badly needed large-scale reforms that are too politically risky, the next economic crisis could be just around the corner.
What We’re Following
Obama’s comments upset India. Indian Prime Minister Narendra Modi’s state visit to Washington last week produced a slew of new agreements. But some Indian officials have focused instead on tangential criticism of New Delhi’s human rights record from former U.S. President Barack Obama during an interview with CNN. Indian Finance Minister Nirmala Sitharaman said that Obama can’t be trusted, given his administration’s own record.
During the interview, Obama advised U.S. President Joe Biden to tell Modi that if religious minorities aren’t treated better in India, the country could start “pulling apart.” He made a similar comment during a speech in New Delhi in 2015, when he was president. The criticism didn’t go over well then, either; it remains one of the most direct comments about threats to religious minorities in India made by a senior U.S. official.
Although the reaction to a former leader’s comments may seem excessive, it reflects how human rights remain a delicate issue in U.S.-India relations. At the same time, Indian politicians weighed in with a domestic audience in mind. With national elections scheduled for next year, they aren’t likely to shy away from outrage the next time a prominent U.S. official expresses similar concerns.
A milestone connectivity deal. Bangladesh, India, and Nepal are soon expected to sign a three-way deal allowing Bangladesh to import hydroelectricity from Nepal through India’s grid in a major connectivity project. Earlier this month, officials in Dhaka and Kathmandu got the final approval from New Delhi for the use of an Indian transmission line to convey the electricity.
The accord makes sense from an energy security standpoint: Bangladesh has suffered massive power outages in recent months, and Nepal has a surplus of hydroelectricity. India has the robust infrastructure to catalyze the transfers. But there are also geopolitical benefits. For Bangladesh, hydroelectricity from Nepal can balance its Russia-financed nuclear energy resources. Nepal’s involvement in an India-backed connectivity project pushes back against China’s Belt and Road Initiative.
The only downside is that the deal won’t boost integration across the whole region; India has in part ramped up connectivity projects with its eastern neighbors to isolate its rival Pakistan.
Pakistan’s military fires senior officers. On Monday, the Pakistani military announced it had fired three senior officers for their handling of attacks against military facilities during the May 9 protests that followed the brief arrest of former Pakistani Prime Minister Imran Khan. Few details were provided about the officers, including their names. An Army spokesperson said they were sacked for not doing enough to stop the violence.
There are a few explanations beyond the obvious. The military may see the fired officers as supporting Khan; its leadership is keen to rid the top ranks of pro-Khan sentiment, based on private conversations. The military may also seek to send a message that no one is above the law, including the armed forces, with the goal of boosting its image. As Betsy Joles wrote in FP, Khan and some of his supporters face the threat of military trials in the wake of the violent protests.
Under the Radar
Bhupesh Baghel, the chief minister of the Indian state of Chhattisgarh, this week described significant progress in curbing the threat of the Naxalites, a Maoist rebel group that has long fought against security forces in the state. Baghel spoke of hundreds of villages retaken from the Naxalites, schools reopened in these areas, and the construction of new roads and bridges.
Baghel’s comments come several months after officials in New Delhi told India’s Parliament that Naxalite violence has declined significantly in recent years.
Not long ago, Naxalite violence convulsed Chhattisgarh and parts of the neighboring state of Jharkhand. Heavy-handed state paramilitary tactics and intensive coal-mining projects further galvanized their campaign, which centered on impoverished regions and tribal communities. In 2009, then-Indian Prime Minister Manmohan Singh described the Naxalite movement as India’s greatest internal security threat.
However, in recent years, security offensives and development projects appear to have eased the crisis. There is a clear political opportunity for the Chhattisgarh government, which is currently led by the Indian National Congress party. The state holds elections later this year, and Congress will want to showcase this counter-insurgency success to boost its prospects.
FP’s Most Read This Week
Regional Voices
Political analyst Sarwar Bari argues in the Express Tribune that Turkey’s recent elections offer useful lessons for Pakistan. “Despite intense polarization and highly contested elections, the opposition didn’t use the narrow margin of [Turkish President Recep Tayyip] Erdogan’s victory as an excuse to reject the results or demand a recount,” he writes.
In the Dhaka Tribune, economist Jyoti Rahman asserts that since the mid-2000s, prices have generally risen more quickly than the income of poor laborers in Dhaka, Bangladesh’s capital. Consequently, “the working poor of Dhaka [have] not really seen much of a change in their living standard in two decades,” she writes.
A Kathmandu Post editorial laments Nepal’s “stable instability,” with politicians in the opposition constantly maneuvering to seek power—not content to wait for the next election. “It is a tragedy for Nepali democracy that its political parties consider it almost a sin to sit in the opposition’s bench,” it argues.
Michael Kugelman is the writer of Foreign Policy’s weekly South Asia Brief. He is the director of the South Asia Institute at the Wilson Center in Washington. Twitter: @michaelkugelman
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