Mint Primer: Does Pakistan have the wherewithal to fight India?

Was Pakistan close to a sovereign default?

In 2023, Pakistan was almost bankrupt and close to defaulting on its debt obligations. Pakistan’s economy suffered from political instability, poor governance, a lack of fiscal prudence, and excessive external borrowing. When Russia invaded Ukraine, the geopolitical shock, in terms of higher oil and other commodity prices, sent Pakistan’s economy spiralling into a crisis. 

Economic growth contracted, inflation shot up to 38.5%, interest rate swelled to 22%, and fiscal deficit widened to almost 8%. Its currency weakened sharply even as its forex reserves dropped to just $3.7 billion, not enough to cover even a month’s imports.

Also Read: India resilient to economic fallout from escalating tensions with Pakistan

How did the country survive?

Pakistan rushed to the IMF for help, and in July 2023, $3 billion was sanctioned as part of a bailout package. Another $7 billion was sanctioned in July 2024. The World Bank, too, committed funds. These fundings required Pakistan to put in place sound policies and undertake reforms to strengthen its macro-economic stability, address structural challenges, and create conditions for stronger growth. 

Multilateral institutions said payments would be released in tranches after a periodical review of reform measures taken. Some friendly nations such as Saudi Arabia, China and the UAE also helped by rolling over their loans.

What is the situation today?

In the last 18 months, Pakistan has come a long way. IMF has said that the country has made significant progress in restoring macroeconomic stability and rebuilding confidence. Economic growth has improved, inflation eased to levels lowest in a decade, and interest rates have dropped to 11%. Forex reserves have risen to $15 billion, but it is still not high enough to meet the nation’s repayment and import obligations.

Will recent tensions hurt this recovery?

It certainly will. Ever since Pahalgam terror attack, Pakistan has been spending a lot of resources in mobilizing its armed forces and bleeding its already weak exchequer. With India undertaking precision attack on terror pads both within Pakistan and in Pakistan-ocupied Kashmir, the tensions have risen sharply. Pakistan has promised to respond soon and this risks further escalation. 

Moody’s Rating has warned that a sustained escalation in tension with India could hurt Pakistan’s growth and impact its fiscal consolidation and macroeconomic stability. This will be a consideration for the government as it decides its response.

Also Read: Govt may invoke ESMA to curb hoarding, ensure steady supplies post Operation Sindoor

Can Pakistan afford a serious escalation?

Pakistan’s economy, as it stands today, cannot fund such a misadventure. That apart, India is now urging both IMF and the World Bank to review their aid to Pakistan. The IMF board is meeting on 9 May to approve a $1.3 billion loan under its climate resilience programme and another $1 billion from the $7 billion funding approved earlier. 

It is not clear how the IMF and World Bank will react if Pakistan escalates tensions with India substantially. Any delay in approval will hurt Pakistan by affecting its fragile recovery process.