NationalVOLUME 19 ISSUE # 43

Pakistan’s economic dilemma and geopolitical challenges

Pakistan is deeply entangled in a multifaceted crisis, driven by crucial economic and foreign policy challenges. If these issues are not addressed, the crisis will likely worsen. The most pressing economic concern is the country’s cash-strapped economy, compounded by over $20 billion in debt repayment obligations this year. In this context, Pakistan is anxiously awaiting the approval of a $7 billion Extended Fund Facility (EFF) from the International Monetary Fund (IMF).

The IMF Executive Board was expected to approve the EFF during its meeting on August 28, but it did not include Pakistan’s request in the agenda. This development was a significant setback for the coalition government, led by the Pakistan Muslim League-Nawaz (PML-N), Pakistan People’s Party (PPP), and Muttahida Qaumi Movement (MQM). There are unconfirmed reports that the IMF might not include the $7 billion EFF for Pakistan in its September meeting either. If these reports are accurate, it would be a severe blow to Pakistan’s struggling economy.

The $7 billion EFF was initially considered likely, as an agreement had been reached between Pakistan and the IMF at the staff level in July. The approval of this loan is critical for Pakistan; without it, the country will struggle to meet its national budget estimates announced in June. The IMF’s delay in including Pakistan’s EFF in its Executive Board agenda is reportedly linked to additional, unspoken demands from the IMF, including a requirement to reduce the size of the government by 30 percent. In response, the Pakistani government has already abolished 28 departments within five federal ministries and cut 150,000 government jobs as part of efforts to reduce administrative expenditures. This includes the closure of the Utility Stores Corporation, which provided grocery items, in line with IMF demands for a 30 percent reduction in government size.

While the IMF’s demands have drawn criticism, reducing the size of the government is a reasonable request. In many developed countries, government size is significantly smaller. Despite the 18th Amendment, which transferred various administrative responsibilities from the federal to provincial governments, Pakistan’s central government continues to maintain ministries like education and health, contrary to both the spirit of the 1973 Constitution and the 18th Amendment. Even at the provincial level, there is a need to downsize departments and staff, as the current structure imposes heavy financial and administrative burdens.

Successive Pakistani governments, despite pledges to international financial institutions and commitments to the Millennium Development Goals (MDGs) and Sustainable Development Goals (SDGs), have failed to reduce the size of the government. This failure has contributed significantly to the country’s financial strain, particularly in terms of non-development expenses like salaries and pensions, which continue to cripple the economy.

The current government has been considering various options, such as extending the retirement age and abolishing pensions, but no decisive actions have been taken yet. A reduction in the number and size of government departments could address many of Pakistan’s financial and administrative problems. Studies and practical experience show that lean, technology-driven government departments tend to be more efficient and effective. Unfortunately, the bloated structure of Pakistan’s federal and provincial governments has become a burden rather than a benefit. These departments have often been maintained not for public service, but as vehicles for political patronage, providing jobs to supporters rather than focusing on service delivery.

Although reducing the size of the government is an IMF demand, it is in Pakistan’s best interest to implement these reforms swiftly, without worrying about short-term political consequences. Given that the current coalition government, led by Prime Minister Shehbaz Sharif, is already deeply unpopular and widely viewed as illegitimate due to the alleged rigging of the February 8 national elections, implementing such measures should not pose an additional challenge. On the contrary, taking bold steps like downsizing the government could be seen as a landmark achievement for this administration, even if it does not improve their popularity or legitimacy.

The economic situation is dire, as highlighted by the Pakistan Business Council’s warning that many multinational companies are planning to relocate from Pakistan. The Dubai Chamber of Commerce reported that 3,968 Pakistani companies registered in Dubai between January and June 2024, reflecting the growing economic uncertainty. This is largely due to the ongoing political crisis, economic instability, and sluggish growth in the country.

At this stage, Pakistan’s economic rescue depends heavily on the support of three key allies—Saudi Arabia, China, and the UAE. These nations need to confirm the rollover of $12 billion in loans, which is crucial for the IMF’s approval of the $7 billion EFF, needed to bridge Pakistan’s external financing gap. However, the approval of the IMF package seems increasingly uncertain. It is also influenced by the geopolitical dynamics between Pakistan and the United States.

Prime Minister Shehbaz Sharif’s recent remarks, stating that “whatever China is doing for Pakistan, the United States cannot,” have raised eyebrows. Made during a meeting with journalists who had recently visited China, the statement underscored Pakistan’s growing reliance on China, despite acknowledging that relations with the U.S. need “repair.” This positioning suggests that the government prioritizes its ties with Beijing over Washington, a stance that may not sit well with U.S. policymakers and could affect IMF decision-making, which often factors in U.S. influence. This diplomatic balancing act between China and the U.S. adds another layer of complexity to Pakistan’s already fragile economic situation.

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