Since Pakistan’s former Prime Minister Imran Khan was ousted from office in a no-confidence vote last April, the country has been embroiled in both a political and economic crisis. Volatility in Pakistani politics reached a zenith this month after the arrest of Khan on corruption charges, sparking violence in major cities across the country.
The uproar has caused concern among Pakistan’s allies in the Gulf, particularly the United Arab Emirates (UAE) and Saudi Arabia, which have both previously pledged financial support for Pakistan as it battles extreme economic turbulence.
Partly fueling the political chaos in Pakistan is the country’s severe economic situation. Inflation has recently hit a record high of 35.4%. The Pakistani rupee has lost half its value against the US dollar in the last year alone. Perhaps most seriously for the government, Pakistan is facing an external debt crisis.
In December 2022, Islamabad’s external liabilities stood at over $126 billion. Amid an environment of higher interest rates and a stronger greenback, these dollar-denominated debts have become more expensive to service. Particularly as the country’s foreign exchange reserves dwindle — the State Bank of Pakistan announced in December that its foreign exchange reserves had fallen to a four-year low of just $6.7 billion — there are increasing concerns that Islamabad will default on its debts.
The International Monetary Fund (IMF) has been in discussions with Pakistan over a bailout package to avoid a default. In 2019, Pakistan signed a $6 billion deal with the IMF, with a further $1 billion agreed a year later. However, the IMF has refused to release the first payment of $1.1 billion until the organization receives guarantees that Pakistan’s international allies — particularly the United Arab Emirates (UAE), Saudi Arabia and China — are prepared to back Islamabad financially as well.
Mohammed Sohail, CEO of Topline Securities, a brokerage house in Karachi, told Al-Monitor that such demands are a normal part of the process but raised doubts as to whether the UAE and other allies will be prepared to offer further funds given the escalating political crisis.
“The IMF as per practice asks borrowers to share their funding plans to show how many dollar inflows they think will come in,” Sohail said. “This gives clarity to the IMF that the borrower remains fully and adequately funded. China, the UAE and Saudi Arabia have already provided commitments to the IMF. However, around $2 billion worth of commitments are still pending.”
Sakib Sherani, CEO of Macro Economic Insights, a think tank based in Islamabad, noted the crucial importance of Pakistan securing external funding from its allies in the region. “Pakistan’s current IMF program has been stalled for months — in part due to slow implementation of prior commitments by the government, but mainly due to an impasse in securing funding commitments from bilateral sources such as the UAE and China,” he told Al-Monitor.
“Concerns about Pakistan inching toward a sovereign default could be one factor in holding up fresh commitments, while the deepening political instability in the country is likely to be another,” Sherani added.
Would the UAE and Saudi Arabia be prepared to see its South Asian ally default on its debts? Doing so would not be without risk, given that they both have strong commercial interests in Pakistan, which offers a market of over 200 million people.
The UAE’s trade with Pakistan is expected to surpass $10.6 billion in 2023, with bilateral trade between Saudi Arabia and Pakistan standing at about $4.6 billion in 2022. Economic turbulence could also throw into question the viability of a Pakistan-Gulf Cooperation Council trade deal that is currently being negotiated. Both Middle Eastern countries are also home to millions of Pakistani expats; increased economic and political volatility could encourage further waves of migration.
“It is difficult to see the remaining funding commitments coming immediately considering Pakistan’s political and economic situation,” Sohail said. “However, the government has managed the situation somewhat by restricting imports, resulting in a current account surplus.”
This surplus should boost the central bank’s foreign reserves, putting it in a stronger position to meet Pakistan’s dollar-denominated debt repayment, and perhaps giving Abu Dhabi and Riyadh breathing space to see how the situation plays out before offering more funding.
Kaiser H. Naseem, international development banker and former World Bank official based in Dubai, noted that this situation is far from unprecedented. “Historically Pakistan has relied on the support of both the UAE and Saudi Arabia. This assistance has mainly been in the form of deferred payments for oil to fuel the economy, and sometimes preferential rates,” he told Al-Monitor.
Islamabad will certainly need to hope that its allies in Abu Dhabi, Riyadh and Beijing pledge their support once more. The risk of Pakistan being unable to meet its commitments is certainly increasing — the global credit ratings agency Moody’s warned last week that the country is heading toward the precipice. However, even if this funding from Pakistan’s Gulf allies comes through, it will only paper over the cracks of an economy that appears to be in almost constant decline.
“If you are dependent on others and continuously depend on others, not building your capacity for the long run so that you can wean yourself off aid, you’re never going to grow,” Naseem said.