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5 January 2023, Gateway House

Pakistan in crisis, again

India’s economy is looking bright, but there is a shadow in its neighbourhood. Pakistan’s fast deteriorating political and economic condition can create fresh uncertainties for India on the national security and economic security front.

Senior Fellow, Energy, Investment and Connectivity

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After shocks arising from the COVID-19 pandemic and the Russia-Ukraine conflict, India must now prepare itself for more geopolitical and geoeconomic risks in its vicinity. The South Asian region has been in turmoil since 2020, with many of India’s neighbours facing economic and political troubles. More specifically, Pakistan is enfeebled, and can create national and economic security challenges for India.

Pakistan is facing a perfect storm arising out of self-created problems worsened by external shocks. The military carried out a soft-coup against Former Prime Minister Imran Khan in April 2022, and he is now actively protesting the new government and military. Khan was also targeted by an assassin during his ‘Long March’ to Islamabad as he attempted to regain power – which could be a subtle message from the establishment to back off.

Khan’s ouster may have been forced by Pakistan’s worsening economic conditions – falling forex reserves and high inflation and breach of the country’s agreement with the IMF – but conditions have become worse under the new dispensation of Prime Minister Shahbaz Sharif, the former chief minister of Punjab. Foreign exchange reserves were just $5.8 billion on 23rd  December[1], enough to cover about a month of imports. This number also includes a $3 billion ‘deposit’ by Saudi Arabia[2], which implies that actual forex reserves are less than half the official number.

The forex situation is so dire that the State Bank of Pakistan has stopped issuing letters of credit for imports[3], and Pakistan has stopped paying the dues of foreign airlines[4] which amount to $225 million now. The past few weeks have seen two automakers – Toyota and Suzuki – suspend production due to the import restrictions.

Inward remittances, a major source of foreign exchange, have dropped[5]. This happens if the exchange rate is artificially high. Although the Pakistan Rupee (PKR) has weakened by 21% against the U.S. dollar in 2022, the open markets rate suggests the PKR will need to fall an additional 15%-20% against the greenback. Further devaluation of the PKR will push up inflation, which has been over 20% for six months now. Pakistan is currently in negotiations with the IMF for a rescue package, which is stuck as the government is unwilling to meet the lender’s tough conditions[6]. Pakistan has gone to the IMF 23 times in the past for an ‘arrangement’ – financial assistance of some kind.

Pakistan’s domestic crisis has been in the making for some time. High oil and gas prices arising from the crisis in Ukraine, as well as high interest loans including those from China, are contributors.

The crisis in Europe has raised the cost of natural gas, pricing Pakistan out of the energy market. Global gas suppliers such as Gunvor and ENI diverted cargos meant for Pakistan to Europe, to gain from the high prices in that market[7]. News reports suggest that due to the energy shortage, natural gas is being rationed for households[8] while the textile sector, – a key exporter for Pakistan – is facing shutdowns.

In addition to the political and economic challenges, Pakistan is facing increased security problems on its western frontier. December 2022 has seen a number of cross-border attacks emanating from Afghanistan and from various insurgencies within the country like Baluchistan. Pakistan, which was projected as the big winner after America’s abrupt withdrawal from Afghanistan, is now discovering the perils of allying with the Taliban regime.

What does this mean for India?

First, Pakistan is unlikely to ‘collapse. A bailout by the IMF or friendly countries will eventually happen.  For China, Pakistan remains an important ally and a low-cost way to keep India off -balance. Pakistan continues to prove its utility to the U.S. and U.K. by acting as a conduit to supply weapons to Ukraine[9]. Some form of help from these countries, once they extract more concessions, is likely. In the case of China, the concession could be greater control over Gwadar Port, which could host a military presence in the future. Pakistan’s dire straits may make it a more willing tool, directed against India.

Second, since Islamabad and Rawalpindi can’t deliver much to their own citizens, they have already resorted to anti-India rhetoric, as seen by the comments of Pakistan foreign minister Bilawal Bhutto on Prime Minister Modi, to distract attention from domestic problems[10]. Pakistan’s army, which has cornered the lion’s share of the state’s resources since independence, may adjust to the difficult economic situation by resorting to smuggling drugs and weapons[11].

India faced the Covid crisis during 2020 and 2021, and the Ukraine crisis during 2022 – 2023 may be the year of the Pakistan crisis.

Amit Bhandari is Senior Fellow for Energy, Investment and Connectivity, Gateway House

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here

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References

[1] https://www.sbp.org.pk/ecodata/forex.pdf

[2] https://www.reuters.com/world/middle-east/saudi-arabia-extends-term-deposit-pakistans-cbank-spa-2022-12-02/

[3] https://pkrevenue.com/industry-slams-finance-ministry-for-blocking-letter-of-credit/

[4] https://www.iata.org/en/pressroom/2022-releases/2022-12-07-03/

[5] https://www.sbp.org.pk/ecodata/Homeremit.pdf

[6] https://propakistani.pk/2022/12/28/painful-reality-pm-shehbaz-says-no-other-option-but-to-go-for-imf-program/

[7] https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/lng/032822-gunvor-backs-out-of-lng-deliveries-to-pakistan-from-april-june-officials

[8] https://www.dawn.com/news/1720286/govt-has-no-option-but-to-ration-gas-in-winter

[9] https://www.eureporter.co/world/ukraine/2022/10/06/british-deliver-aid-to-ukraine-via-pakistan/

[10] https://www.ptinews.com/news/national/four-heavily-armed-terrorists-travelling-to-kashmir-in-truck-killed-in-chance-encounter-in-jammu/484183.html

[11] https://www.livemint.com/news/india/pak-boat-seizure-drugs-arms-meant-to-land-on-coast-between-salaya-and-okha-in-gujarat-says-dgp-11672142822942.html

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