Amid an ongoing economic crisis, Pakistan’s external debt and liabilities have almost reached $130 billion — 95.39 per cent of its gross domestic product (GDP).
As per the latest data, inflation is at its highest in 48 years, currently sitting at 27.6 per cent. While in January 2023, food inflation reached 42.9 per cent compared to 12.8 per cent last year, bringing the country into a severe economic crisis.
With high inflation, Pakistan’s central bank has raised the policy interest rate and the price of petroleum in Pakistan was notified by the country’s finance minister Ishaq Dar on Tuesday. However, that is not the culmination of its economic crisis as the economic woes are now impacting its armed forces.
While Pakistan continues to develop a dependency on aid and loans, including twenty programmes funded by the International Monetary Fund (IMF), the ongoing negotiations for the bail-out package may hit a roadblock.
Severe military supply disruption
Now, the economic woes have hit its army too. Based on reports, senior commanders on the ground have notified the Quarter Master General (QMG) Office at the General Headquarters of the severe cuts in food supply to soldiers.
Pakistan’s total defence budget in 2022–23 stands at $7.5 billion. Despite the early indications, the defence allocation was raised by 12 percent over the original military expenditure in 2021–22 and a 3 percent increase over the revised expenditure. In fact, the new defence budget makes up 16 percent of the total government outlay for the year.
As per data, the total reserves are only $3.2 billion. With a lower economic growth rate of a mere 2 per cent, the government is grappling to fulfil its military obligations—which is now spilling over to the logistics and essentials supply issues.
In fact, according to unclassified reports, the DG-Military Operations (DGMO) sent alarms that the army was facing severe supply-related issues. According to the reports, the DGMO also indicated operational challenges in border areas.
According to the central bank of Pakistan, the major concern is on debt servicing which makes up half of its federal budget. The IMF has pointed out that its growing debt can no longer be overlooked even during the fresh negotiation for the next round of funding—the comprehensive bail-out package.
The Pakistani government has been negotiating with the leading international agencies which include the IMF to unlock a $1 billion bailout package to address the critical supply-side shortages.
Amid the worsening economic crisis, Pakistan is preparing to implement austerity measures under the IMF’s roadmap.
Reports have emerged that the salary of government employees will be cut, the number of foreign missions will be reduced and staff will be trimmed to reduce costs. However, the government has not specified the timeline and the scale of its measures. Reports suggest that the government has proposed a salary cut for the Pakistani armed forces as well.
Broadly, the IMF has listed four items in the loan program agenda which include the hike of the central bank’s interest rate, written assurances for the external financing gap, cost surcharge on electricity and the tightening of the exchange rate. Mostly, the bailout package calls for open-market policies with less regulatory interference, especially in the area of monetary policies.
While on expectation, Pakistan’s central bank has increased the interest rate by 300 basis points (bps) to 20 percent, the rest remains unfulfilled amid the ongoing crisis. The policy rate of 20 per cent is an increase of more than 2 per cent. Besides, Pakistan has to return almost $ 22 billion over the next 12 months.
Further, the United Nations Development Program calculations also point out Pakistan’s spending of $17.4 billion in the form of freebies–land and other concessions– to the political class and military establishment. And according to the experts, the severity is going to hit the military establishment hard which includes the salary cut and the freeze on fresh military acquisition.