Pakistan’s economy has been in dire straits for quite some time now. With over $130 billion USD in external loans, according to CEIC’s economic database, the $338 billion USD economy (according to the World Bank dataset for current GDP as of 2023) is taking even commercial loans at higher interest rates merely to service existing debt – debt to repay debt. How can such a country engage in war rhetoric and terror patronage when it faces over $22 billion USD in debt repayments (Fitch Rating’s analysis) this fiscal year, while possessing barely $15.25 billion USD in foreign exchange reserves (State Bank of Pakistan dataset)? How can it push terror across the border into India when it is facing survival problems? In the recent Pahalgam incident in Jammu and Kashmir on 22 April, masterminded from Pakistan, a group of terrorists including Pakistani infiltrators killed 26 innocent civilians, enraging India and the international community, demanding justice.
Pakistan, forced to appeal to its residents to drink less tea because it has to import the commodity, while simultaneously supporting terror, presents a case study in contradiction. According to the Observatory of Economic Complexity (OEC), an online data visualisation website, Pakistan was the largest importer of tea in 2023. Importing tea means borrowing more money, which Pakistan could ill afford. Consequently, the country’s Planning Minister, Ahsan Iqbal, appealed to his countrymen in July 2022 to drink less tea and save the country’s foreign exchange. More tea imports mean more external borrowing to finance them. The country imported significantly less tea in 2023 than in 2022, and the current year is no exception. According to the Pakistan Bureau of Statistics, during the period from July to March 2024-25, tea valued at $468.248 million USD was imported into the country.
A country that has seen the number of poor people increase and their incomes decrease should never contemplate adopting such policies, yet Pakistan’s army and its civilian leadership choose instead to follow a detrimental path.
According to the World Bank, as of 2023, 37.2% of Pakistanis were living in poverty, and the country saw more than 3 million people added to the ranks of the poor compared to the last assessment in 2018. The reasons for the crisis, as quoted by the World Bank, include: a difficult prevailing macroeconomic environment, a deteriorating labour market, rapidly rising prices, and recent natural disasters, which are also the major reasons cited for reduced household incomes in the country.
An opinion piece in a major Pakistani publication, The Express Tribune, published last month and quoting various sources stated that over 25% of Pakistanis were living below the poverty line as of 2024. While one may question the sanctity of this number, the next line is more scathing. It states that the number of poor people in the country increased by 7% when compared with 2023 data.
According to the World Food Programme, 82% of the Pakistani population cannot afford a healthy diet, with 20.7% of the population undernourished.
The World Bank assessment encapsulates this: “With declining incomes, people have less access to nutritional food, which undermines human development outcomes. Moreover, floods have disrupted access to sanitation, improved drinking water, schools, health centres, and markets, likely leading to greater hardship, worsening health outcomes, and higher stunting rates among the affected population.”
According to the CIA’s “The World Factbook”, the current literacy rate in the country is 58%. It describes Pakistan as a “lower middle-income South Asian economy; with extremely high debt; and endemic corruption.” The country’s economy contracted, with the real GDP growth rate registering at -0.04% for 2023. Its real GDP per capita was $5,400 USD in 2021, increased to $5,500 USD in 2022, but fell back to $5,400 USD in 2023.
This is a country grappling with endemic corruption, where its leaders and all-powerful army prefer engaging in war rhetoric and supporting terror over lifting people out of poverty, increasing literacy, or boosting social welfare spending.
It is a country forced to adopt severe austerity measures as part of International Monetary Fund (IMF) bailout conditions. The IMF is often called a tough lender. Whenever it provides bailout loans, it imposes several conditions aimed at reforming the recipient’s economy through policies stipulated in the loan agreement. These conditions are often unwelcome to many experts and critics, but Pakistan perceives it has no other option. To date, the country has received 24 bailout loans from the IMF.
What are the reasons for this dependency? Key reasons include: unpredictable economic policies; financial mismanagement; significant fund diversion towards the military and terror sponsorship (yielding no economic return); the absence of large-scale industrial ventures, resulting in low domestic/export income alongside massive imports; mammoth external loans and associated repayment burdens; critically low foreign exchange reserves; the persistent risk of economic default; and recurring balance of payments crises. This tangled web of issues leaves Pakistan’s policymakers viewing IMF bailouts as the sole recourse.
The country accepted the latest IMF bailout in 2024, a 37-month, $7 billion USD loan disbursed in tranches, contingent upon evaluation of reform measures adopted by Pakistan as proposed in the loan document. While praising Pakistan for implementing the economic reforms suggested by the IMF during the previous $3 billion USD bailout package agreed in July 2023, the conditionalities for the subsequent loan include:
- Broaden the tax net and trim the deficit, raising revenue by at least 1.5 per cent of GDP in FY 2024-25 (and 3 per cent over the programme’s duration) through fair, comprehensive taxation of retail, export and agricultural income, securing a primary surplus while ring-fencing funds for social protection, health and education.
- Seal a National Fiscal Pact with the provinces by devolving responsibility for schools, health, social safety nets and local infrastructure. The plan requires the provincial governments to boost their own collections, including a fully harmonised agricultural income tax.
- Keep monetary policy tight and the exchange rate flexible while working to drive down inflation and rebuild foreign-exchange reserves.
- Reinforce financial stability and access to credit. Recapitalise weak banks, modernise crisis-management tools and widen financing channels for households and businesses.
- Restore energy-sector viability by adjusting tariffs promptly, halting non-essential generation projects, cutting costs and replacing blanket cross-subsidies.
- Level the playing field for private enterprise and exports, reform and privatise commercially attractive state-owned enterprises, abolish guaranteed returns, tax holidays and price supports (including in Special Economic Zones and agriculture) and liberalise trade policy.
- Embed robust governance and anti-corruption safeguards.
Pakistan makes desperate efforts to ensure the IMF continues releasing subsequent tranches by convincing the multilateral lender that it is implementing all conditions stipulated in the loan agreement. Therefore, it is puzzling to see the country’s establishment engage in hostile rhetoric and fund and promote terror in other countries by harbouring numerous terror groups, particularly when Pakistan was placed on the Financial Action Task Force’s (FATF) grey list thrice between 2008 and 2022 for terror financing and risks being placed there again following the Pahalgam incident.
Placement on the FATF grey list entails reduced access to international aid and investment, and increased monitoring by the FATF to ensure compliance with corrective measures. Placement on the list signifies a tangible loss of capital inflows, beyond the significant international reputational damage. Additionally, the Pakistan link behind the Pahalgam terror incident suggests Pakistan’s economic policies are failing to curb terror financing as promised. This implies a lack of robust governance in the country to implement anti-corruption safeguards. This potentially violates a major IMF conditionality for the bailout loan. Pakistan is supposed to follow a tight monetary policy focused on increasing revenue. However, funding and promoting terror offers no return on investment, but just bad name and outcome.