April 5, 2023

IntelBrief: Pakistan’s Political Crisis Compounds Economic Distress

AP Photo/K.M. Chaudary

Bottom Line up Front

  • No easy off-ramps are available to resolve the power struggle between Pakistan’s ruling coalition and opposition leader and former Prime Minister, Imran Khan.
  • In March, security forces and Khan supporters violently clashed over government attempts to force him to appear in court.
  • The power struggle constrains Pakistani leaders from tackling the country’s worsening economic difficulties, prompting many Pakistanis to move abroad.
  • Pakistan’s political crisis is complicating efforts to finalize a needed loan from the International Monetary Fund (IMF) and has caused Islamabad’s allies to hesitate on additional financial infusions.

As of early April, the political conflict between Pakistan’s governing coalition and opposition leader and former Prime Minister Imran Khan and his popular Pakistan Tehreek-e-Insaf party (PTI) is escalating tensions to the point where Pakistan’s institutions are unable to provide a feasible road map out of the crisis. The power struggle has produced violence between his supporters – mainly the middle classes and younger generation - and Pakistani security authorities. The crisis began in April 2022 when Khan was ousted as Prime Minister by a no-confidence vote in Parliament. Since then, the 70-year-old former cricket star turned politician, who founded the PTI in 1996, says the government has brought nearly 100 legal cases against him, including accusations he illegally sold gifts he was given while in office during 2018-2022. His supporters and many experts accuse the government of Prime Minister Shahbaz Sharif, who heads a coalition composed of leaders and their families that have been in power for most of the past three decades, of largely inventing charges against Khan to thwart his efforts to return to power. Aside from depriving the Pakistani population of its confidence in government, the power struggle has constrained Pakistan’s leaders from addressing seemingly intractable difficulties, including the ongoing security threat from militant Islamist factions, the steady deterioration of Pakistan’s economy and national finances, and tensions with Afghanistan and India.

On March 14, Khan’s standoff with the ruling coalition turned violent when his supporters clashed with police moving to arrest him at his home in Lahore for failing to appear in court in Islamabad. Officers retreated in the face of the violence, but clashes erupted again days later when Khan traveled to Islamabad to appear before judges. A subsequent court order preventing his arrest has left him free to resume rallying his supporters to demand national elections in mid-2023. Prime Minister Shahbaz Sharif has insisted that the elections would not be held before the parliament completes its five-year term in October – a date that gives Sharif and his allies additional time to try to cripple Khan politically. According to Fawad Chaudhry, Khan’s aide, 2,100 PTI party workers have been detained recently.

Furthermore, Pakistan's Election Commission has disqualified Khan from running again for making "false statements" regarding the sale of gifts sent to him while in office. The disqualification is subject to judicial review, but Pakistan’s courts are reportedly divided on the legalities of government actions against Khan. High court judges are reportedly vulnerable to pressure from both Khan’s supporters and his opponents. A key unknown is whether the Pakistani military and its powerful intelligence service, the Inter-Services Intelligence Directorate (ISI), which can still exert significant influence over politics, will throw its full weight behind Khan’s opponents. Professions of political neutrality by the new Chief of Army Staff, Asim Munir, the top military leader, are not widely believed by the public or elites. As Prime Minister, Khan fired Munir in 2017 from his previous post as head of the powerful ISI, and no reason was given for his removal. Some Pakistan experts assess that further violence by Khan supporters could provoke the government to place the country under a state of emergency, which could delay elections for a year and undoubtedly spark mass unrest.

The political crisis has constrained the government’s ability to focus on efforts to stabilize the economy, which is experiencing high inflation, low foreign reserves, and rising unemployment. Pre-existing economic issues and government mismanagement have been compounded by the war in Ukraine, increasing the inflation rate for food and fuel to exceed 40 percent even as the value of Pakistan’s currency is in free fall. Devastating floods in 2022 ruined vast areas of agricultural land and forced many farmers into unemployment. The natural disaster caused more than $30 billion in damage, and Pakistani economists estimate that gross domestic product (GDP) will only grow 1.5 percent in 2023. Unemployment could reach 10 percent, or as many as 8 million people out of work, by the end of the current fiscal year in June 2023. Central Bank interest rates are the highest in Asia at 20 percent, a level that is highly restrictive for growth. Total public debt is nearly $270 billion, equivalent to about 78 percent of GDP, and the country’s foreign reserves are as low as $3 billion, which would cover less than a month of imports. In 2022, Pakistanis, particularly those with means or connections abroad, left the country at a rate triple that of previous years, according to official documents from Pakistan’s Bureau of Emigration made available to The Express Tribune.

Substantial infusions of foreign assistance appear to be the only way the country can stabilize its finances. The government and population have been counting on a $1.1 billion bailout from the International Monetary Fund (IMF)—the last tranche of a $6.5 billion package approved in 2019—but the political and economic crises have already caused a four-month delay in finalizing the loan. Before agreeing to release the tranche, IMF negotiators are demanding that the government improve tax collection and lower energy subsidies. However, Prime Minister Sharif has refused to impose such measures, partly fearing that those steps would only increase lower- and middle-class support for Khan. The IMF also wants regional and international donors to help stabilize the country’s balance of payments. Yet, one of its best-funded and closest regional allies, Saudi Arabia, has resisted making new, unconditional grants to Pakistan. Saudi Finance Minister Mohammed al-Jadaan stated at this year’s World Economic Forum that “direct grants and deposits without strings” are a thing of the past. At a bilateral summit meeting in January, United Arab Emirates (UAE) leader Mohammad bin Zayid Al Nahyan pledged a new $1 billion loan for Pakistan, but that amount alone will not meet IMF conditions. Qatar’s August 2022 pledge to invest $3 billion in Pakistan’s economy will aid various sectors over the longer term but does not provide immediate financial relief. China is a strategic ally of Pakistan against India, as well as Islamabad’s largest investor and bilateral creditor - Pakistan already owes Beijing more than $30 billion. China is hesitant to extend Pakistan additional credit, but, in late March, Beijing reportedly agreed to roll over a $2 billion loan that matured on March 23, according to a top Pakistani finance ministry official. The U.S. exit from Afghanistan in 2021 and deprioritization of counterterrorism has reduced Pakistan’s profile in U.S. national security strategy, even though Pakistan is a nuclear-armed state, and Washington is unlikely to increase foreign aid to Pakistan beyond already programmed levels.

India is a historic adversary of Pakistan, and two other neighbors, Afghanistan and Iran, are in no position to be financially helpful to Islamabad. Tehran and Kabul are under significant multilateral sanctions, and the Taliban regime in Afghanistan has alienated Pakistani leaders since coming to power by giving a safe haven to the Tehrik-i-Taliban Pakistan (TTP), a radical Islamist movement. The TTP appears to be taking advantage of the country’s political and economic unrest to escalate its attacks on Pakistani forces in or near the “ungoverned spaces” of the northwest. In late January, a TTP faction killed more than 100 worshipping at a police compound mosque in Peshawar, the capital of Pakistan’s Khyber Pakhtunkhwa province. Numerous smaller attacks have occurred since leaving open prospects for greater instability and insecurity that can be exacerbated by election violence.