Pakistan’s path to economic recovery is marked by both promise and peril. With support from the International Monetary Fund (IMF) and financial investments from Saudi Arabia, the United Arab Emirates (UAE), and China, the nation is poised for potential growth. However, a fragile economic situation and a host of daunting challenges loom, threatening to derail progress.

The IMF programme and financial support from Saudi Arabia, the UAE, and China have paved the way for Pakistan’s economic recovery. However, the country’s economic situation remains precarious, with several challenges that, if not managed effectively, could lead it into deeper economic turmoil. Pakistani policymakers are confronted with significant challenges: the implementation of politically unpopular measures that may trigger inflation to fulfill the current short-term IMF programme, the negotiation of a new IMF programme next year, and the finalization of investment agreements with Arab Gulf nations.

Pakistan’s current $3 billion IMF package is a short-term arrangement that necessitates unpopular yet unavoidable economic policy adjustments. For instance, the IMF requires Pakistan to adjust its exchange rate to reduce the disparity between the interbank and open market exchange rates, which has led to substantial depreciation of the rupee against the dollar and increased inflation. Additionally, Pakistan must address the financial losses incurred by its struggling energy sector by raising power tariffs, making electricity less affordable for many citizens. These changes will exacerbate the impact of Pakistan’s fiscal mismanagement, as the government continues to run large deficits and covers them by printing excessive amounts of the Pakistani rupee, further contributing to inflation.

Due to the combination of necessary IMF-mandated adjustments and policy missteps by Pakistan, another wave of inflation is likely to hit the country. Reports suggest that there are protests and growing discontent among the population due to rising prices, which may pressure the government to reconsider the adjustments. To secure a new IMF bailout, Pakistan must commit to economic reforms, but political considerations are equally crucial. The country was originally slated to hold elections no later than November of this year. However, due to a delay caused by the previous government and the Election Commission’s decision to redraw electoral boundaries based on a recent census, the timing remains uncertain. With an interim government in place that lacks the legal authority to negotiate a new IMF deal, it is unlikely that the IMF will reach an agreement with an interim administration. Pakistan’s current IMF package is set to conclude in early April. Therefore, if the election is not held by February or March 2024, negotiations for a new IMF deal could come to a standstill, potentially pushing Pakistan toward a default-like situation once again.

Pakistan’s financing requirements for the next few years are such that relying solely on the IMF will not be sufficient to overcome the economic crisis. Recognizing this challenge, Pakistani leaders are working to secure investments from Gulf nations to generate funds and stimulate economic activity in the country, asserting that Saudi Arabia and the UAE are prepared to invest tens of billions of dollars. Pakistan has established an entity to oversee major economic projects in the country, known as the Special Investment Facilitation Council (SIFC). Comprising the prime minister and the army chief, the SIFC aims to enhance investor confidence and expedite project implementation. The council has approved 28 investment projects worth billions of dollars to present to Gulf nations. Pakistan is also exploring the sale of equity in the Reko Diq mines, one of the world’s largest reserves of gold and copper, to Saudi Arabia. Other plans include outsourcing airport management to the UAE, accelerating the privatization of the national airline, and expediting a free trade agreement with the UAE, known as the Comprehensive Economic Partnership Act.

Nonetheless, these initiatives may face persistent challenges that investors in Pakistan have long grappled with, including bureaucratic inefficiencies, concerns about shifting economic policies, an unfavorable business environment, and ongoing political instability. Moreover, there are apprehensions regarding potential long-term liabilities, such as outbound dividend outflows, associated with certain investment schemes, which could put pressure on the country’s balance of payments. Hasty trade agreements, like the China-Pakistan Free Trade Agreement, have previously skewed trade balances unfavorably and eroded the manufacturing sector, so there might be objections to the proposed free trade agreement with the UAE as well.

Pakistan’s economic recovery hinges not only on prudent economic decisions but also on maintaining strong political relations with various external powers with competing interests. The UAE and Saudi Arabia, for instance, are likely to invest in Pakistan not just for economic gains but also to wield influence, which necessitates Pakistan’s attentiveness to their concerns and interests. The leverage these countries have over Pakistan has always been significant but appears to be growing even stronger.

It’s also crucial to keep China content. While Pakistan’s ongoing efforts to secure financing from the Saudis and Emiratis, if successful, may potentially overshadow Chinese economic influence, Pakistani leaders will still need to preserve Chinese goodwill to manage the external debt repayment pressures, especially considering a substantial portion of Pakistan’s commercial debt is owed to Chinese institutions. Lastly, Pakistan must maintain a favorable relationship with the United States, at the very least to secure approval for the next IMF deal, as the United States holds the largest share of votes on the IMF board.

How Pakistan intends to navigate the intersecting and sometimes conflicting demands that may emerge in its dealings with these countries remains unclear. Pakistani authorities seem to downplay the potential for regional stakeholders to pull them in different directions. They assume that the investments from the Gulf will complement Beijing’s China-Pakistan Economic Corridor and not compete with it. They also believe they can continue to strike a balance between Chinese expectations and the United States. Nevertheless, the country’s economic recovery effort remains a formidable challenge.

Pakistan’s journey towards economic recovery is a complex and multifaceted undertaking. As the nation strives to overcome the challenges presented by the short-term IMF deal, political uncertainties, and the need for investment, it must also carefully navigate the competing interests of influential global powers. Pakistan’s capacity to strike a harmonious balance between these complex imperatives will determine the success of its economic resurgence. The road ahead is fraught with challenges, but it is essential for Pakistan to continue striving for stability, growth, and the preservation of its economic sovereignty.