Pakistan's proposed bailout by IMF offers India, US strategic opportunity to reign in ISI and army

An important personality from Pakistan who I met recently on the sidelines of an event was quite convinced that a minimum $10 billion bailout package from the International Monetary Fund (IMF) was something the country would have to seek to remain above water. Even with Pakistan’s looming economic crisis well before the recent elections, the issue has been spoken of quite casually in most post-election analyses.

Representational image of Pakistan Army. AFP

Representational image of Pakistan Army. AFP

That Prime Minister Imran Khan has his hands full with the economic crisis also appeared to be treated rather casually by Pakistan’s high society, ostensibly due to the issue of national self-esteem being involved. Across the border, they can see India signing a $5 billion deal to acquire just one weapon system (the S-400 from Russia).

It must be galling for Pakistani citizens to compare their situation to India's: Especially since, only a couple of generations ago, Indian citizens rued the Pakistani quality of life and consumerism even as India underwent the tribulations of a socialist economy.

On 9 October, 2018, Imran finally decided to open negotiations with the IMF for a bailout package; the 13th time Pakistan is seeking such a loan. There are strategic opportunities for the international community and perhaps India too. However, first let's take a quick look at the situation:

All indicators suggest a downturn in economic growth and increase in inflation. The forecast for growth is between 4.8 percent and 5.1 percent, with inflation in double digits. It took seven meetings of the nation’s highest economic affairs body to finally increase fuel prices by an astronomical sum, the largest single rise in years.

With the rupee touching Rs 130 to $1 with onset of the balance of payments crisis, it’s a fall of 20 percent in seven months. As per a report, the last fiscal year ended with a current account deficit of $18 billion, 5.7 percent of the GDP. The budget deficit crossed 2 trillion rupees. There is a need for $8 billion for debt servicing over the next 12 months and foreign exchange reserves have sunk to $8.9 billion, down from $14 billion a year ago.

One reports indicates that Saudi Arabia, which extended a $4 billion line of credit to Pakistan, suddenly declined the same and wishes instead to invest in energy infrastructure in Gwadar. Pakistan borrowed close to $6 billion in additional loans from China over the past year, but its leading economists are of the view that no other nations or institution can bring about a bailout except the IMF.

The United States is the major shareholder of the IMF, and Secretary of State Mike Pompeo quite candidly expressed his views on the crisis three months ago; which he has since marginally diluted. "Make no mistake, we will be watching what the IMF does", said Pompeo. What he emphasised was that US would seek greater transparency on the terms and conditions of the China-Pakistan Economic Corridor (CPEC), considered by many as the chief trigger behind the economic crisis. The US would also like to ensure that the bailout package is not being used to service the Chinese debt and the Chinese debt diplomacy being employed to coerce less developed nations is effectively countered.

Given the seriousness of the economic situation, a potential meltdown in Pakistan could have a catastrophic effect on its population (around 210 million), with the impact being felt all over South Asia. With the radical Islamist waywardness persisting despite operations by Pakistan’s security forces, there can be no predicting the direction this may take. What will worry the international community is the inevitable issue of the security of Pakistan’s strategic nuclear assets. Although Pakistan is yet far from that stage, doubts about the effective control by the government remain.

Pakistan finance minister Asad Umar indicated it may take four to six weeks to negotiate the bailout commencing from a meeting at Bali. The IMF chief economist certified that “Pakistan was a member of good standing, which was fully entitled to request financial support”. Yet, given the US dominance in the final decisions and the state of relations between the US and Pakistan, there will be every effort to extract the last ounce of ‘strategic effect’ out of Pakistan for such a bailout package.

In fact, given Pakistan’s intransigence on Afghanistan and its virtual refusal to rein in jihadi elements considered strategic assets for its campaign in Kashmir and Afghanistan, the US should sense its chance, and equally that of others, to force Pakistan to shut down its jihad factories, act against internationally declared terrorists and against others whom it has protected.

This is an opportunity to read the riot act to the Pakistan Army, the country's delinquent intelligence service ISI and give a boost to civilian control of government in Pakistan. Thus far, Pakistan appeared confident of weathering the storm of the economic crisis with much talk of its Chinese links. However, the realisation is now sinking in that it was the Chinese connection which has actually got it into its current mess.

Reports indicate that Imran, while preparing for his upcoming visit to China, is going to insist that the focus of the CPEC shifts from infrastructure to agriculture, job creation and foreign investment. The US may consider this an opportunity to force a change in China’s concept of the Belt and Road Initiative, from the strategic orientation with coercive debt trap diplomacy that it employs against almost all countries. With China also worried on the trade war front with the US, it will probably see the ground shifting but a change in President Xi Jinping’s flagship project may not come about so easily.

For India, it is an opportunity towards indirectly influencing outcomes. It must remain in consultation with the US as one of the important stakeholders in Afghanistan and equally as one of the longest sufferers of Pakistani strategy of waywardness and denial. There is a mutuality of strategic interests with the US which must now be put to test beyond the 2+2: to extract our interests from the negotiations for the IMF bailout.


Updated Date: Oct 10, 2018 21:02 PM

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