Pakistan is dying, and this is a worldwide issue.

It's the stuff of nightmares: a nuclear-armed state on the brink of collapse, and yet it's increasingly becoming Pakistan's waking reality.

Dec 3, 2023 - 19:12

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Pakistan is dying, and this is a worldwide issue.

It's the stuff of nightmares: a nuclear-armed state on the brink of collapse, and yet it's increasingly becoming Pakistan's waking reality. The country's import-dependent economy has depleted its foreign exchange reserves, leading to food and energy shortages, and the resulting economic hardship is fuelling political polarisation, radicalization, and extremism. Such changes would be unsettling in any country other than nuclear-armed Pakistan. Domestic political uncertainty is leading to major border disputes with India and Afghanistan, which could expand their territorial claims, and the resulting escalation could destabilize South Asia and drag the rest of the world down with it. Islamabad is linked to the IMF.

The World Bank, China, and others are also involved. Meanwhile, the military is keeping a close eye on events, and many fear another coup. Pakistani society needs a cooler head and clever politics to extricate itself from the crisis because if the economy is a weapon, politicians need to know when to pull the trigger.

If you want to control the destiny of a country, you have to make money. The British Empire developed a single currency for colonial India in 1835, hoping to reap the benefits of age while maintaining control over the payment of taxes and, crucially, debt. Little has changed since Pakistan gained independence in 1947, but the fortunes of its 230 million people depend on foreign dollars to buy essentials such as food, energy, and fertilizer.

For many years, however, more foreign money has been flowing out of Pakistan than in, leaving Islamabad with recurring budget deficits and current account deficits. When Russia invaded Ukraine in 2022, global commodity prices plummeted, putting pressure on Pakistan's foreign currency reserves. In response, massive flooding along the Indus inundated a third of the country, destroying both subsistence agriculture and export crops. The resulting double whammy exacerbated Pakistan's import dependency while simultaneously depriving the country of export funds and saddling the state with an additional USD 15 billion repair bill, equivalent to nearly 4% of GDP by January 2023. The currency reserves were only sufficient to cover imports for a few weeks.

Islamabad responded with power outages, increased electricity costs, insufficient imports, and the delay of food and raw material deliveries. This strategy choked off the outflow of payments. It led to production cuts and an industrial downturn. The textile sector, which employs 7 million people and accounts for a tenth of Pakistan's GDP, laid off 7 million workers. At the same time, the cost of gasoline in factories rose, driving up manufacturing costs and making domestic products uncompetitive in global markets. The economic distress has exacerbated political tensions both within Pakistan and with its creditors. Under the leadership of Imran Khan, the current IMF program for Islamabad began in 2019.

Khan was no stranger to cricket, but he couldn't reconcile his populist beliefs with the IMF's austerity requirements.

Khan eventually lost his job due to a vote of no confidence, but not before he attacked his political rivals and stoked the political fire in Pakistan. The resulting crisis could force Pakistan to move to a market-determined exchange rate and remove energy subsidies, which would fuel inflation, reduce demand, and trigger a recession. However, such a policy could only radicalize a community where the costs of living outweigh the benefits and there are few democratic options. Militancy is on the rise.

The number of extremist attacks rose by 27 in 2022, culminating in one of the bloodiest attacks in the country's history at the Peshawar mosque. In January of this year, jihadism in Pakistan was inextricably linked to territorial issues. The Pakistani and Afghan Taliban reject the de facto validity of the Durant Line, a British colonial-era border that bisects Pashtun areas, even though the border serves as a shield for terrorist incursions into Pakistani territory. If the country falls apart internally, the Taliban will try to capitalize on the nationalist fervor of the 40 million ethnic Pashtuns in Pakistan, especially in Hybrapaktankwa, to gain diplomatic recognition or greater Pashtun autonomy.

Such events might have an impact on Balochistan, which has been dealing with separatist insurgents since 1948. Local separatist parties describe the province as neglected and underdeveloped, and given the vast hydrocarbon and gold reserves in the region, a weak central government could strengthen separatist movements. If both the Pashtun and Baloch areas were to rebel against Pakistan, there would not be much left of Pakistan, but the biggest threat to the security of South Asia would be the status of Pakistan's nuclear weapons. As of 2021, Islamabad is estimated to have 165 nuclear warheads, four plutonium production reactors, an expanded uranium enrichment infrastructure, and new delivery systems under construction. Non-state organizations, rogue agencies, factions, or individuals would have ample opportunities to steal nuclear weapons in a collapse scenario. Worse still, if Pakistani weapons or nuclear technology were to fall into the hands of unscrupulous individuals, there would be no shortage of potential buyers given the likely increase in separatist and jihadist violence. The fall of Pakistan would therefore lead to the proliferation of nuclear weapons around the world.

An India-Pakistan conflict, with Kashmir as the most likely trigger, would be equally alarming, albeit a mutually assured destruction. The terrorist nuclear states are theoretically engaged in direct combat in Kashmir; this idea was tested in practice in 1999. Both states fought a war over the Cargill district, and both sides continued to monitor the regional balance of power. Pakistan must be careful not to lose its military capabilities to a domestic political crisis. Although India may be inclined to pursue its interests across the Line of Control, nuclear communication between the two countries is limited. There is no such thing as a red telephone. This increases the likelihood of miscommunication and errors, which increases the risk of nuclear conflict, especially if New Delhi cannot determine which Pakistani political entities are capable of negotiating or if Islamabad cannot reliably account for all its nuclear assets.

In this case, a future confrontation could have global repercussions. To stop the spiral of extremism and instability, it is necessary to overcome the economic crisis, reduce military spending, diversify the economy, and reduce dependency on imports, but the real problem is foreign debt. During the Cold War and the Afghan conflict, Pakistan's geopolitical importance allowed it access to virtually unlimited loans and bailouts from the IMF and other Western institutions. However, the amounts involved were beyond Pakistan's ability to repay and, more importantly, were denominated in foreign currency. This fact has far-reaching implications for Pakistan's economic life, although the government may be able to circumvent the problem in the short and long term. It is increasing its foreign debt stock by 130 billion dollars. The unsustainable debt service on Pakistan's dollar debt will amount to 26 billion dollars in 2023, depleting the foreign exchange needed for essential imports. Harsh austerity measures can also be self-defeating if they further destabilize Pakistani politics.

The only viable way forward, therefore, is for creditors to accept a debt haircut, restructure the remaining debt, defer immediate interest payments, and secure new capital flows. Otherwise, Pakistan's clear choice of foreign debt will drag the country into the abyss and destroy any prospect of recovery. However, such restructuring talks are fraught with deception, especially given the geopolitical implications of Pakistan's external debt structure. The proportion of debt owed to private creditors, including commercial banks and bonds, has risen from 19 to 30 percent since 2014. These entities have no interest in foreign affairs and even less interest in Pakistan, and they will certainly frustrate any efforts to cancel the debt if they are not paid in full. Meanwhile, Western-dominated multilateral creditors such as the IMF, the World Bank, and the Asian Development Bank hold about a third of Pakistan's external debt but argue that debt relief would hurt their creditworthiness and thus their ability to fulfil their missions, leaving China to pick up the tab.

Beijing is Islamabad's most important bilateral creditor, holding one-fifth of Pakistan's foreign debt. It is also Pakistan's best hope for debt relief, as debt relief could be negotiated in private. There is also a qualitative difference. As the Chinese death is related to tangible infrastructure projects such as the China-Pakistan Economic Corridor linking Xinjiang to Guadaluport via Pakistan and reducing trade dependence on the Straits of Malacca, a stable Pakistan is vital to Chinese interests as $65 billion is invested in such projects. With attacks on Chinese nationals on the rise and the possibility of jihadism spreading in Xinjiang, it is unlikely that Islamabad will be forced to repay its loans. China's position on the grand geopolitical chessboard would suffer, but China has not become a great power by making unilateral concessions; therefore, some equivalent, albeit symbolic, compromises on the part of Western creditors may be required to grease the wheels of death forgiveness. Pakistan's predicament could eventually become everyone's problem. If it spirals out of control, Pakistan faces economic and political catastrophe, and although its nuclear weapons make it too big to fail, its foreign debt burden makes it too big to succeed.

For now, the creditors still have the whip in their hands, but soon they may see debt relief as a concession to realism if it turns out that deaths that cannot be repaid will not be repaid.

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