Watching Pakistan drift towards sovereign debt default over the past six months has been like watching one of those movies where the characters’ car has stalled in the middle of a rail crossing. At first, despite the distant rumbling, you’re sure they’ll be able to restart the motor, or at least bail out before the freight train bears down on them.
But the minutes tick on, and absolutely nothing happens; the train’s klaxon is now utterly deafening and you’re preparing yourself for the sickening crunch. And then, by some miracle, the giant machine halts, just millimetres short. The International Monetary Fund’s (IMF) agreement with Pakistan on June 29 for a new $3 billion line of credit, just hours before the expiration of the previous 2019 agreement was like that moment.
The analogy may seem dramatic, but it actually undersells the gravity of what Pakistan was facing. The effects of sovereign default on a modern society can be even more catastrophic than a major war, as the peoples of Lebanon and Sri Lanka can testify, because it hits the entire country all at once. The lights literally go out, along with mobile communications, banking, medical services, fuel and pharmaceutical distribution. There is inevitably violence on the streets and multiple rounds of political upheaval. Recovering from these losses can take up to a decade, but in some cases, the opportunity costs and the effects of the loss in faith may never be made whole.
Readers may have a vague sense of having seen all this before, or assume that Pakistan must be another Argentina, that is, a frequent defaulter. What is extraordinary is that although Pakistan has regularly approached the IMF for help since 1968, it has managed to maintain an unbroken streak of avoiding default. It has done so not by meeting its obligations on time, but by securing the rescheduling of debt, and even new loans from the IMF and the various other governments who lend it money.
This forbearance has been despite the fact that Pakistan has never fully executed the agreements that these funds were tied to. In fact, Pakistan’s continued dependence on the IMF is inextricably linked to both the repeated failures to implement reform packages, and the IMF’s repeated failures to hold Pakistan accountable for this. But what explains these decades of fiscal laxity on the IMF’s part, especially given that the IMF has never been generally known for its generous and forgiving nature?
The IMF, like the World Bank, has shareholders who oversee its governance and override its decisions, if the stakes are high enough. The US government is the IMF’s largest shareholder, and Pakistan for most of its history has put a great deal of effort into being indispensable to US administrations’ national security priorities. Pakistan’s Yahya Khan was Richard Nixon’s bridge to China in the Cold War; Gen Zia ul Haq was Ronald Reagan’s front line against the Soviet Union. And after 9/11, Gen Musharraf made Pakistan an essential logistical and intelligence cornerstone of the "War on Terror". The new agreement might appear to be just another turn of the hamster wheel, but the details make clear that what has happened is fundamentally different from the usual pattern.
As noted in previous columns, the Ukraine war’s effects on energy and foodstuff prices have laid bare the underlying strengths and weaknesses of economies all over the region. Pakistan was far from the worst off, but its problems were compounded first by the climate-driven flooding of 2022 which displaced millions and simply washed away billions in both public infrastructure and personal assets and second, the escalating struggle between Imran Khan’s PTI movement and the civil-military co-dominium that rules Pakistan.
These events, although momentous, were on their own not earth-shaking enough to change the Pakistani government’s reflexes. On the other hand, the Biden administration’s willingness to walk away from Afghanistan, and Pakistan’s determination to stay on good terms with both Beijing and Washington meant that an American president didn’t want or need anything special from Pakistan, and was not obliged to offer an equally special quid pro quo for the first time since the Eisenhower administration came into office in 1953.
The IMF held up Pakistan’s release of funds from the 2019 facility for its failure to implement agreed upon reforms. The White House did not make the usual "request" to the IMF Managing Director Kristalina Georgieva via the US Treasury Secretary. Instead, Prime Minister Shehbaz Sharif had to fly to Paris himself, and hold long and intense negotiations with Ms Georgieva on June 22.
Without the usual US support, Islamabad has had to agree to take the kinds of steps that Pakistan’s special interests have always fiercely resisted – for example, cancelling a planned tax amnesty that would largely have benefited the wealthy, and addressing Pakistan’s unsustainable, foreign-exchange draining reliance on energy imports. And if Pakistan does not deliver, it is likely that the funds will be frozen, again.
This shift opens up the chance for Pakistan to break free of its reliance on geopolitical leverage instead of good governance and sustainable growth, although there is no guarantee that they will choose to stay on that path. This is a part of the world where world shaking events can and do come out of nowhere. Washington may once again be forced to engage, and Islamabad may once again choose special treatment over good government.
Certainly, Pakistan will never be just another country; with 220 million people, a significant nuclear stockpile, and an exceedingly fragile democracy, there is likely to always be some measure of sensitivity to what a default in Pakistan may cost the world. It is likely that Pakistan will continue to receive more consideration than, say, Argentina.
But on the flip side, it is clear that Pakistan’s long-suffering emerging middle class wants nothing more than a fair and balanced economy. Given how badly bruising recent political warfare has been to the army and major political parties alike (the PTI included), Pakistan’s elites will be better off if they finally pick up the proverbial can, instead of finding new ways to kick it down the road.
