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Pakistan on the Brink: What the Collapse of the Nuclear-Armed Regional Power Could Mean for the World

A series of disasters — including catastrophic flooding, political paralysis, exploding inflation, and a resurgent terror threat — risk sending the global player into full-blown crisis..

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Vendors sell fruit under battery-powered lights during a blackout due to a power grid failure in Lahore, Pakistan, on Jan. 23, 2023.

The last year has brought Pakistan to the brink. A series of rolling disasters — including catastrophic flooding, political paralysis, exploding inflation, and a resurgent terror threat — now risk sending a key, if troubled, global player into full-blown crisis. If the worst comes to pass, as some experts warn, the catastrophe unfolding in Pakistan will have consequences far beyond its borders.

“This is a country of 220 million people, with nuclear weapons and serious internal conflicts and divisions,” said Uzair Younus, the director of the Pakistan Initiative at the Atlantic Council’s South Asia Center. “The world didn’t like the outflows of refugees and weapons that came from countries like Syria and Libya. In comparison, Pakistan is magnitudes larger and more consequential.”

“If the economy remains in a moribund state, and there are shortages of goods and energy leading to a political crisis on the streets of major cities, that would also allow the Pakistani Taliban and other terrorist groups to begin hitting at the government more directly,” said Younus, who is also vice president of the Asia Group, a strategic advisory firm. “We could see a significant weakening of the state and its capacity to impose order.”

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It is hard to overstate the difficulty of Pakistan’s current situation. An unfortunate string of recent events combined with chronic mismanagement has created a potentially mortal threat to Pakistan’s political system.

“There are three crises intersecting at the moment in Pakistan: an economic crisis, a political crisis, and a security crisis that has grown since the fall of Kabul,” said Younus, who described the situation as the “worst threat to Pakistan’s national cohesion since 1971” — the year Bangladesh fought for and won its independence from Pakistan.

Pakistan’s foreign reserves have reportedly dwindled to a mere $3.7 billion, barely enough for a few weeks of energy imports to keep its cities and businesses running, while its public debt has grown to a staggering $270 billion. Pakistan was particularly hard-hit by the war in Ukraine, which, along with other developing countries , forced it into a bidding war over scarce liquid natural gas that it has been unable to afford.

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The crushing weight of Pakistan’s debt has forced Prime Minister Shehbaz Sharif to beg the International Monetary Fund to restart a financial bailout that was put on hold early last year. Negotiations are ongoing as the IMF is reportedly demanding painful concessions  — a difficult sell ahead of consequential elections planned for later this year.

Meanwhile, there are already signs that economic pressure will impact Pakistanis’ most basic needs. In late January, Pakistan suffered an unprecedented nationwide blackout as power went down across the entire country for over 24 hours. Though the cause of the outage is unclear, it could be a preclude for what lies ahead.

“The electricity generation capacity of Pakistan is significantly dependent on the continued import of fuel,” said Yousuf Nazar, a Pakistani economic analyst and former banking executive. “You can imagine what would happen if we started to see power breakdowns and outages, or even shortages of fuel for transportation, at a time when the country is also dealing with 40 percent inflation.”

The compounding crises , particularly serious for a debt-ridden economy with no solid political leadership and a kleptocratic elite, have been a long time coming. While much of Asia has gradually become rich and stable over the past few decades, Pakistan has remained poor, chaotic, and volatile.

“During globalization and the liberalization of trade that happened across Asia during the 1990s, Pakistan was busy playing power games between the military and civilian elites,” Nazar said. “This present crisis was brewing long before the Ukraine war, which was the straw that finally broke the camel’s back.”

“This present crisis was brewing long before the Ukraine war, which was the straw that finally broke the camel’s back.”

Pakistan’s economy has long been characterized by an abysmally corrupt set of policies designed to provide subsidies to civilian elites and military officials while neglecting the vast majority of the population who work in industries like agriculture and textiles. But the infusion of foreign money that bankrolled the lavish lifestyles of Pakistani elites seems to be drying up.

Saudi Arabia, a longtime donor to Pakistan, announced last month that future aid packages to foreign countries would be dependent on internal market reforms —  a clear warning to recipients like Egypt and Pakistan whose economies are characterized by bloated public sectors and military control. The United Arab Emirates recently committed to providing some financial assistance to Pakistan, but the amount is barely enough to cover imports of vital goods for a few more weeks. Meanwhile, China, which holds 30 percent of Pakistan’s debt, has so far shown no willingness to renegotiate terms, while the United States has largely tuned out from the region after its bitter exit from Afghanistan.

Pakistan’s relationship with India, its economically ascendant neighbor now led by a hawkish Hindu nationalist government, also shows no signs of improvement.

“Many people talk about what sets India and Pakistan apart in terms of their economic trajectories, especially since, until the 1980s, Pakistan’s trajectory was more positive. There are so many factors one could mention in terms of years of bad policies, but one must also talk about the issue of elite capture,” said Michael Kugelman, deputy director of the Asia Program at the Wilson Center.

“India has made efforts to implement policies that move closer to things like universal education and access to health care,” he continued, “whereas in Pakistan, those with the power simply have disregarded the economic needs of the people.”

Local residents wait to buy wheat flour at government-controlled prices in Islamabad on Jan. 10, 2023.

The economic crisis is coupled with political instability that could weaken the hold of the state and make Pakistan progressively more difficult to govern with each passing year.

Following his removal from power last year during a conflict with his onetime supporters in the military that he claimed was a U.S.-led conspiracy, Imran Khan has been staging mass rallies aimed at reinstalling himself as prime minister. Amid a wave of targeted killings and arrests of his allies and supporters, Khan was himself wounded in an assassination attempt last November when a gunman shot him during an election rally. A polarizing figure in Pakistani politics, Khan boasts a large and committed base. Had he been killed, it is easy to imagine Pakistan devolving into widespread civil conflict.

As things stand now, all the major political parties, despite their fierce differences, are invested in keeping the country intact, and the military remains a powerful final arbiter over politics. But toxic political infighting and frequent changes in leadership have made responsible stewardship of the economy even more difficult — setting Pakistan down the path toward deeper problems.

“If you’re unable to meet the economic needs of the people and just respond with force, it will only catalyze greater anger.”

“Fragmentation of the state is not possible, but we could see a deep-seated economic crisis that pushes many people below the poverty line, puts simple commodities out of reach, increases food insecurity, and also foments anger among the public,” said Arif Rafiq, a nonresident fellow at the Middle East Institute and specialist on Pakistan. “That can have real political consequences, not just for political parties, but also for the army. If you’re unable to meet the economic needs of the people and just respond with force, it will only catalyze greater anger.”

In recent months, Pakistan has seen a resurgence of terrorism from radical Islamist groups, as well as ethnic militants in the resource-rich province of Balochistan. The Pakistani Taliban, which killed thousands of Pakistanis during the war on terror, announced its return with a horrifying suicide attack last month that killed over 100 congregants attending Friday prayers at a mosque. The attack is a warning sign that instability in neighboring Afghanistan, which suffered tens of thousands of deaths over the past two decades of U.S. occupation, may once again impact Pakistan.

The economic and political crises have also extended to the slow-going recovery of millions across the country after the historic flooding last year that put roughly one-third of Pakistan’s landmass under water and displaced millions of its poorest citizens.

Though the disaster can be blamed in part on climate change driven by wealthy countries, international aid has been slow and meager, leaving Pakistan mostly on its own to pick up the pieces.

Former Prime Minister Asif Ali Zardari, notorious for his outlandish personal corruption , once reportedly told U.S. diplomat Richard Holbrooke that Pakistan was “too big to fail” — likening the country to U.S. banks that received massive bailouts to prevent collapse in 2008. Although Pakistan is a nuclear power , as well as the fifth most populated country in the world, whether its leaders can pull themselves together and find a way out of the onslaught of crises — perhaps the worst in the country’s history — remains to be seen.

“There is tremendous uncertainty, as people don’t know whether Pakistan will simply just default on its foreign loans sometime this year,” Rafiq said. “There is heightened risk across the board, and every major indicator has taken a turn downward. It is hard to see a pathway to stability because the government’s legitimacy comes from its ability to handle the economy — and things are not going to get better in the foreseeable future.”

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Could 2024 mark Pakistan’s economic turnaround moment?

Najy benhassine, martin raiser.

After a commendable period of uninterrupted decline in poverty rates, Pakistan’s economy is now facing one of its worst crises  . Poor policy choices combined with a series of shocks—COVID-19, the 2022 catastrophic floods, and adverse global conditions—have caused  growth to slow , poverty to increase, and brought the country to the brink of debt default. Moreover, human development outcomes remain at levels we see in much poorer countries, while per capita income growth has been declining in the face of low productivity and high fertility. 

These challenges call for deep, sustained reforms. We recently launched  Policy Notes , which lay out our views on what these reforms should entail. What we propose is not new. What is different this time though is that the alternative of muddling through with short-term fixes and external financing is riskier and much harder to pull off. 

Many countries’ turnarounds have emerged out of similar crises. For Pakistan, this could also be an opportunity to address deep rooted issues that have plagued the country’s development for too long.  

First, Pakistan must address its  human capital crisis . Seven percent of children in the country die before their 5th birthday, multiple times higher than in comparable countries. Forty percent of children under 5 suffer from stunted growth—and it’s more than 50 percent in poorer districts. 

Halving stunting rates  in a decade is feasible, but it will require a shift from the traditional focus only on nutrition and health to providing wider access to clean water and sanitation, birth spacing services, and improved living and hygiene environments. 

It will take strong cross-sectoral and local coordination, a national mobilization and behavioral change campaign, and investments of close to 1 percent of GDP every year. 

A weak education system  is compounding the effects of stunting: 78 percent of 10-year-old children are unable to read age-appropriate text, while over 20 million children are out of school. 

Second, to finance improvements in service delivery and human capital development, Pakistan must generate more fiscal space. Tax collection has remained at a low 10 percent of GDP for decades. Abolishing expensive tax exemptions and reducing compliance costs could quickly generate about 3 percent of GDP in added revenues.   

More funds could also be raised  at the provincial and local levels from undertaxed sectors, like real estate, agriculture, and retail—potentially adding another 3 percent of GDP.  Expenditure savings  could be achieved by more efficient management of public resources. Most loss-making public enterprises should be privatized. Poorly targeted subsidies in agriculture and energy should be cut, while protecting the poorest. Overlaps between federal and provincial spending should also be decreased. These measures could provide savings of another 3 percent of GDP per year. 

Over time, bold fiscal reforms could potentially generate more than 12 percent of GDP in new fiscal space.  This is three times the additional resources needed to address human development gaps, leaving enough resources to raise public investments in infrastructure and reduce public debt. But to put Pakistan’s public finances on a more sustainable footing will ultimately not be possible without stronger economic growth. 

Third, therefore, Pakistan must strive for a more  dynamic and open economy . Current policies distort markets for the benefit of a few, while preventing productivity growth. Frequent overvaluation of the currency coupled with high tariffs lead firms to focus on domestic markets, disincentivizing exports. 

A challenging business environment deters investment, as does strong state presence in contested markets. Tax distortions also discourage productive investment and support non-tradable sectors such as real estate. Accelerating the sale of productive assets or selectively attracting foreign investment deals may bring in much-needed forex reserves in the short term, but a lasting impact will require urgently addressing the core issues behind low investment and declining productivity growth—leveling the playing field, spurring competition, cutting red tape, and increasing policy predictability. 

Fourth, the  agriculture sector must be transformed  to safeguard food security in the face of climate change and rising water scarcity. Current subsidies, government procurement, and price restrictions lock farmers into low-value, undiversified farming systems and water-intensive crops. 

These subsidies should be reallocated into public goods such as research on seeds, veterinary services, irrigation, drainage services, promoting regenerative agriculture, and building integrated agriculture value chains  . Such measures could generate productivity gains, boost on- and off-farm incomes, and make Pakistan more resilient against climate shocks. 

Fifth,  energy sector inefficiencies  need to be addressed faster and more consistently as they have long been a drain on public resources. Recent tariff increases have helped limit losses while protecting poor consumers, but large distribution and transmission losses, combined with high generation costs, must be reduced to put the sector on a sustainable footing. 

Fortunately, Pakistan has access to some of the cheapest hydropower and solar resources. Leveraging these will require investment  , which will only come if long-standing issues in the distribution and transmission systems are addressed, notably through more private participation. 

Also, tariffs adjustments needed to recover costs have to be shielded from politics in order to provide credible incentives for investors over the long term. 

All these policy shifts cannot be achieved at the federal level alone. Local governments will have to be empowered with capacity to raise and efficiently allocate funding to invest in much-needed local services. Decentralization needs to be revived.  

Moreover, while a more dynamic economy will provide opportunities for most Pakistanis, to leave no one behind social safety nets will need to expand while improving targeting and coherence across federal and provincial instruments. 

By putting such fundamental reforms into place in the coming years, Pakistan can achieve upper-middle income status by its centennial in 2047. We have no doubt it has the human capacities and a proven implementation ability to reach this goal. 

The country has ample potential to not let this economic crisis go to waste, and instead, make it a historical turning point. The year 2024 could mark ‘Pakistan’s moment’.

This blog is a repost from  Dawn , first published on January 3, 2024.

Country Director for Pakistan, South Asia Region

Vice President for the South Asia Region, World Bank Group

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Pakistan’s economic crisis

• Sonia Mishra

FACULTY Q&A

Pakistan is facing a multidimensional crisis. Its economy is teetering on collapse due to a possible political crisis, the rupee plummeting and inflation at decades-high levels, devastating floods, and a significant shortage of energy.

Offering his insight on the situation is John Ciorciari, professor and associate dean for research and policy engagement at the University of Michigan’s Gerald R. Ford School of Public Policy. He is also director of the Ford School’s International Policy Center and Weiser Diplomacy Center.

How bad is the economic crisis in Pakistan, especially after the floods?

Pakistan faces a severe economic crisis and clearly requires external support. Foreign exchange reserves are at dangerously low levels—enough to pay for only a few weeks’ worth of imports. Inflation is at its highest levels in decades, growth is sagging and the central bank has raised interest rates sharply to address a weak currency. Food and fuel prices are causing real pain to ordinary people, and the country’s economic challenges are only exacerbated by the devastation wrought by the floods.

The economy was struggling even before the floods. What are some of the other causes?

Pakistan’s economic crisis has numerous causes. Weak governance and political instability have been significant factors, weakening investor confidence in the country and contributing to corruption and pork-barrel politics that undermine the country’s fiscal position. Pakistan is also highly import-dependent, particularly with regard to energy, which renders it acutely vulnerable to hikes in global oil and gas prices. The pandemic did not help, and Pakistan’s tense relations with India continue to deprive it of a potentially transformative trading and investment partner.

The international community has pledged $9 billion to help them. Some of the biggest donors are Saudi Arabia and China. Do you think these governments will expect support in any way from Pakistan in return?

Donors such as China and Saudi Arabia may not include many explicit conditions to their aid, but implicit strings are always attached. China will look to Pakistan for favorable development opportunities, such as the energy corridor running from the Arabian Sea to China’s western provinces and the strategically vital port of Gwadar. China will also seek Pakistan’s support on geopolitical issues ranging from the Taiwan Strait to Afghanistan and Ukraine.

Saudi Arabia sees Pakistan not only as a key oil purchaser and source of migrant labor but also as a key Sunni-majority ally vis-à-vis Iran. Riyadh will expect Islamabad to support Saudi initiatives in the Persian Gulf and Saudi leadership stemming from its role as guardian of the holy sites of Mecca and Medina.

Is $9 billion enough to help them rebuild and make it out of the crisis?

Pakistan will need an infusion of more than $9 billion to climb out of the crisis. However, much should come from private sources. The value of IMF funds is to provide a stopgap, rebuilding confidence in a way that encourages private flows to resume.

Will Pakistan be able to protect itself from inevitable future climate disasters?

Pakistan is highly vulnerable to climate-linked disasters and cannot alone build a fortress against climate change. Stronger domestic preparedness and resilience are clearly needed, but ultimately Pakistan’s fortunes will hinge primarily on global progress to address the drivers of climate change.

Will all the money pledged to Pakistan be used towards flood recovery, or do you expect some might help their federal reserves that were at dangerous levels before the flood?

First and foremost, IMF funds will help Pakistan avoid default on its international obligations, which could have seismic consequences for its economy and its people. Replenishing foreign reserves is crucial in this regard. Aid programs will also help address the flood recovery, but this will be much more manageable if Pakistan’s reserves rise to levels that instill confidence in its ability to pay its debts.

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What is happening in Pakistan’s continuing crisis?

Subscribe to the center for middle east policy newsletter, madiha afzal madiha afzal fellow - foreign policy , center for middle east policy , strobe talbott center for security, strategy, and technology @madihaafzal.

May 20, 2022

Even by the standards of Pakistan’s perpetually unstable politics, the last ten weeks in the country have been exceptionally turbulent. Pakistan has a new government as of April 11 after Imran Khan was forced out via a vote of no confidence. The weeks leading up to the vote, from the filing of the motion on March 8 to the vote on April 10, were dramatic and full of intrigue. Now, the country is in economic and political crisis. Shahbaz Sharif’s new government has been in a state of decision paralysis and is struggling to find its footing, while the ousted prime minister is leading rallies across the country attacking the government’s legitimacy and calling for fresh elections. At the same time, Pakistan is also in the grip of an acute climate emergency. It’s not only political temperatures that are spiking: an unprecedented heat wave has enveloped Pakistan for weeks.

The fall of Khan’s government

Crucial to the current crisis is understanding how Khan’s government fell. While Khan was Pakistan’s first prime minister to be ousted via a  no-confidence vote, he joined each of his predecessors as prime minister in not lasting five years — the length of parliament’s electoral term — in office. Pakistan’s major opposition parties had been clamoring for Khan’s exit since he came into office — calling him “selected” by the military as opposed to “elected” — and had formed an alliance, the Pakistan Democratic Movement (PDM), in the fall of 2020 for that purpose. This spring, the opposition gained traction. On the surface, the opposition blamed governance and economic failures under Khan. But the underlying reason their maneuvers were successful was that Khan had lost the support of Pakistan’s military, which helped him rise to power.

Several factors were responsible for the fracture between Khan and the military, who previously had functioned on a much-touted “same page.” The biggest was an impasse over the transfer of the director general of the Inter Services Intelligence (ISI) in October 2021. Khan refused to sign off on the director general’s transfer, already approved by the military, for weeks. The then-ISI chief was a Khan loyalist, and speculation was that Khan wanted him to be around for the next election (or perhaps even to appoint him the next army chief).

Once Khan lost the military’s support — though the military said it had become neutral — space was allowed to the opposition to make their moves. Two small parties allied with Khan in the ruling coalition switched to the opposition, enough to deprive him of his razor-thin majority in the National Assembly.

Khan hatched a conspiracy theory to blame for his government’s collapse — alleging , without evidence, U.S. “regime change” for following an “independent foreign policy,” and claiming “local abettors” were responsible — claims that Pakistan’s National Security Committee has rebuffed . But Khan and his allies have also alluded to the military being responsible for his exit — sometimes in veiled language and sometimes pointing fingers more directly at the “neutrals,” as they now refer to the military. In so doing, they are testing the limits of political confrontation with the military, receding only when it pushes back on their claims.

An intense polarization

Khan has used his ejection to galvanize his supporters. Day after day, in huge rallies across the country, he calls the new government an “imported government” and the new prime minister a “crime minister.” Khan has used his rallies and interviews to command media attention, and argues that his government’s fall returned to power the corrupt politicians that are responsible for Pakistan’s problems. His supporters, many of them middle class, young, and urban, and furious at what they see as Khan’s unceremonious, orchestrated ousting, repeat his words on social media. With this narrative of grievance, Khan aims to undermine the new government’s legitimacy; his party resigned from parliament and he is calling for fresh elections. He now plans to lead a “freedom march” to Islamabad, likely later this month , to further pressure the government for elections.

By contrast, supporters of the parties that constitute the government see Khan’s exit as having occurred democratically and see his politics as dangerous. Pakistan today has echoes of the post-January 6 moment in the United States, a polarization so deep that each faction sees no validity in the other’s arguments. Khan’s supporters in particular distrust anything the new government or the military says. In recent weeks, politicians from each side have also resorted to using religion to attack the other side, dangerous in a country where the weaponization of religion can spell a death sentence.

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The new government

The new government, led by the PML-N’s Shahbaz Sharif, faces formidable challenges — and not just from Khan. Shahbaz’s brother, three-time former prime minister Nawaz Sharif, who was deposed in 2017 on corruption charges and now lives in London, still exercises outsized control over the party, and indeed the government. Shahbaz, a three-time former chief minister of Pakistan’s largest province of Punjab, has throughout his political career played second fiddle to the more charismatic Nawaz. Last week, the prime minister and key members of his cabinet made a sudden trip to London to consult with Nawaz on the direction of the new government. While they were overseas, Pakistan’s economy continued its downward spiral. The rupee continued its precipitous slide relative to the dollar; the stock market also lost value.

The government faces a key decision on whether to continue costly, unsustainable fuel subsidies that Khan’s government installed, and that the International Monetary Fund wants removed as a precondition for renewing Pakistan’s loan program. Removing subsidies would certainly be unpopular, which worries a government with limited time in office before the next election. So far the government has stalled, announcing earlier this week, against its own finance minister’s advice, that it would maintain subsidies (for now).

Shahbaz’s overall hesitancy likely reflects deference to Nawaz and his team, who may have different views, and the fact that he commands an unwieldy coalition of rival parties, who will be competing against each other in the next election. But part of the indecision has to do with the fact that the main goal of the PDM was to oust Khan; they did not actually devise an alternate governance plan or economic strategy before coming into power. That lack of a plan is now showing in the face of Pakistan’s economic crisis.

The next election

A major question contributing to the political uncertainty in Pakistan is the timing of the next election, which must be held by the summer of 2023. Khan has made clear that he wants to ride his present momentum to immediate elections. In the days preceding his downfall, he aimed to deprive the then-opposition of a runway in government by extra-constitutionally dissolving parliament, a decision Pakistan’s Supreme Court (correctly) reversed. The new government, for its part, can use its time in power to turn things in its favor, including resolving outstanding corruption cases.

There is the question of whether Nawaz can or will return to Pakistan before the next election. If he does, that could boost the PML-N’s base, but if he does not face prosecution on his return, that will bolster Khan’s argument that the Sharifs have politically manipulated the corruption cases against them. The PML-N also faces considerable hurdles, including an economic crisis that is partially shaped by exogenous factors, a tussle over power in Punjab, and a president who belongs to and is loyal to Khan’s party. The coalition government this week has said it will not go to early elections; former president Asif Ali Zardari has insisted that elections not be held before parliament can undertake electoral reform.

Whenever the next election is held, it’s far from clear what the outcome will be. What matters in Pakistan’s parliamentary system is which party can get the most “electables” — powerful politicians in local constituencies — on their side. Large urban rallies may attest to Khan’s personal popularity, but will not necessarily define how his party does in parliamentary elections. The other factor, one that has historically determined which party electable politicians align themselves with, is where the powerful military’s support is leaning.

The bottom line

That brings us to the bottom line. The fundamentals of the system in Pakistan, beneath the intense ongoing political tug of war, remain the same. What matters for political success is whether you have the support of Pakistan’s military. Political parties now directly point to the military’s interference in politics, but only when they are in opposition; when they are in government and enjoy that support, they do little to challenge it. This was true of Khan’s party when it was in power, and it is true of Sharif’s government now.

In the end, what Pakistan’s soaring political tension amounts to is an opportunistic struggle for power. It has left the country a political tinderbox. And in all of it, little regard is displayed on either side for the ongoing suffering of ordinary Pakistanis, who continue to pay the price for the country’s long history of political instability.

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The Current Situation in Pakistan

A USIP Fact Sheet

Monday, January 23, 2023

Publication Type: Fact Sheet

Pakistan continues to face multiple sources of internal and external conflict. Extremism and intolerance of diversity and dissent have grown, fuelled by a narrow vision of Pakistan’s national identity, and are threatening the country’s prospects for social cohesion and stability.   

The inability of state institutions to reliably provide peaceful ways to resolve grievances has encouraged groups to seek violence as an alternative. The country saw peaceful political transitions after the 2013 and 2018 elections. However, as the country prepares for anticipated elections in 2023, it continues to face a fragile economy along with deepening domestic polarization. Meanwhile, devastating flooding across Pakistan in 2022 has caused billions in damage, strained the country’s agriculture and health sectors, and also laid bare Pakistan’s vulnerability to climate disasters and troubling weaknesses in governance and economic stability.

Regionally, Pakistan faces a resurgence of extremist groups along its border with Afghanistan, which has raised tensions with Taliban-led Afghanistan. Despite a declared ceasefire on the Line of Control in Kashmir in 2021, relations with India remain stagnant and vulnerable to crises that pose a threat to regional and international security. The presence and influence of China, as a great power and close ally of Pakistan, has both the potential to ameliorate and exacerbate various internal and external conflicts in the region.

USIP’S Work

The U.S. Institute of Peace has conducted research and analysis and promoted dialogue in Pakistan since the 1990s, with a presence in the country since 2013. The Institute works to help reverse Pakistan’s growing intolerance of diversity and to increase social cohesion. USIP supports local organizations that develop innovative ways to build peace and promote narratives of inclusion using media, arts, technology, dialogues and education.

USIP works with state institutions in their efforts to be more responsive to citizens’ needs, which can reduce the use of violence to resolve grievances. The Institute supports work to improve police-community relations, promote greater access to justice and strengthen inclusive democratic institutions and governance. USIP also conducts and supports research in Pakistan to better understand drivers of peace and conflict and informs international policies and programs that promote peace and tolerance within Pakistan, between Pakistan and its neighbors, and between Pakistan and the United States.

USIP’s Work in Pakistan Includes:

Improving police-community relations for effective law enforcement

The Pakistani police have struggled with a poor relationship with the public, characterized by mistrust and mistreatment, which has hindered effective policing. USIP has partnered with national and provincial police departments to aid in building police-community relationships and strengthening policing in Pakistan through training, capacity building and social media engagement.

Building sustainable mechanisms for dialogue, critical thinking and peace education.

Nearly two-thirds of Pakistan’s population is under the age of 30. Youth with access to higher education carry disproportionate influence in society. However, Pakistan’s siloed education system does not allow interactions across diverse groups or campuses, leading to intolerance, and in some cases, radicalization. To tackle growing intolerance of diversity on university campuses, USIP has partnered with civil society and state institutions to support programs that establish sustainable mechanisms for dialogue, critical thinking and peace education.

Helping Pakistanis rebuild traditions of tolerance to counter extremists’ demands for violence

USIP supports local cultural leaders, civil society organizations, artists and others in reviving local traditions and discourses that encourage acceptance of diversity, promote dialogue and address social change. USIP also supports media production — including theater, documentaries and collections of short stories — which offer counter narratives to extremism and religious fundamentalism.

Support for acceptance and inclusion of religious minorities

Relations between religious communities in Pakistan have deteriorated, with some instances of intercommunal violence or other forms of exclusion. USIP supports the efforts of local peacebuilders, including religious scholars and leaders, to promote interfaith harmony, peaceful coexistence and equitable inclusion of minorities (gender, ethnic and religious) in all spheres of public life.

Supporting inclusive and democratic institutions

To help democratic institutions be more responsive to citizens, USIP supports technical assistance to state institutions and efforts to empower local governments, along with helping relevant civil society actors advocate for greater inclusion of marginalized groups. Gender has been a major theme of this effort and across USIP’s programming in Pakistan. These programs empower women in peacebuilding and democratic processes through research, advocacy and capacity building.

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From wars in Ukraine and the Middle East to rising tensions in the South China Sea, there is no shortage of crises to occupy the time and attention of U.S. policymakers. But three years after the U.S. withdrawal from Afghanistan, the threat of terrorism emanating from South Asia remains strong and policymakers need to be more vigilant. Indeed, at the end of March, an Afghanistan-based affiliate of ISIS launched a devastating attack outside of Moscow, killing over 140 people.

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Sustained Reform Commitment is Needed to Overcome Pakistan’s Economic Crisis

ISLAMABAD, April 4, 2023 —Pakistan’s economy is expected to grow by only 0.4 percent in the current fiscal year ending June 2023. According to World Bank’s latest Pakistan Development Update: Recent Economic Developments, Outlook, and Risks , released today, the slower growth reflects subdued private sector activity amid deteriorating confidence, import controls, belated fiscal tightening, and the impacts of the unprecedented floods of summer 2022.

Over FY23, Pakistan faced devastating floods and increasing global commodity prices following Russia’s invasion of Ukraine. An inconsistent policy response, involving monetary tightening, new subsidies, and an informal exchange rate cap, saw the depletion of foreign exchange reserves and undermined progress with planned fiscal consolidation. Rising macro risks and tighter global liquidity conditions curtailed Pakistan’s access to international capital markets. Facing increasing debt, rapidly eroding foreign exchange reserves, and delays with the IMF-EFF 9 th program review, the Government recently course-corrected. It reduced subsidy spending, further increased energy tariffs, and allowed the exchange rate to float leading to a sharp depreciation and alignment between the interbank and open rates. However, with limited financial inflows, foreign reserves remain at precariously low levels and inflation is at a record high. Private sector activity has slowed sharply with deteriorating consumer and investor confidence and disruptions arising from administrative import controls. With slowing activity, the lower middle-income poverty rate is expected to increase to 37.2 percent in FY23.

“The resolution of Pakistan’s economic crisis requires a commitment to sustained macro-fiscal and structural reforms,” said Najy Benhassine, the World Bank’s Country Director for Pakistan. “This is needed both to unlock fresh financing and avoid a balance of payments crisis and lay the foundation for a recovery of private investor confidence and higher growth over the medium term”.

The report notes that the outlook and progress with the IMF-EFF program depends heavily on securing new official external financing, with ongoing delays contributing to a further deterioration in confidence. To facilitate new external financing, regain stability, and establish a base for medium-term recovery, the Government must maintain overall sound macroeconomic management, including a flexible exchange rate and controlling inflation through adoption of an appropriate monetary policy stance; increase revenues and rationalize expenditure (including reducing untargeted energy subsidies); and implement trade and private sector reforms to support improvements in investment, competitiveness, and productivity.

According to the report, if the required reform agenda is rapidly implemented with strong political ownership and adequate external support, output growth could gradually recover in FY24 and FY25. Growth will remain below potential, however, while external adjustment continues. Due to higher energy and food prices, inflation is projected to rise to 29.5 percent in FY23, but moderate as global inflationary pressures decrease. With dampened imports, the current account deficit is projected to narrow to 2.0 percent of GDP in FY23 but widen to 2.1 and 2.2 percent of GDP in FY24-FY25 respectively as import controls ease. The fiscal deficit, excluding grants, is projected to narrow to 6.7 percent of GDP in FY23 and further over the medium term as fiscal consolidation takes hold.

“Downside risks to the outlook remain very high,” said Adnan Ghumman, author of the report . “They include, inter alia, politically-driven slippages in fiscal policy in the context of upcoming elections, constraints on foreign exchange liquidity and uncertainties around external funding inflows, rising levels of public debt, growing exposure of banks to the public sector, and political instability”.

The Pakistan Development Update is a companion piece to the South Asia Economic Focus, a twice-a-year World Bank report that examines economic developments and prospects in the South Asia region and analyzes policy challenges faced by countries. The Spring 2023 edition titled Expanding Opportunities: Toward Inclusive Growth , launched on April 4, 2023, shows that South Asia’s growth prospects have weakened due to tightening financial conditions, with large downside risks in most countries given limited fiscal space and depleting reserves faces. It also analyzes the high level of inequality of opportunity in the region and offers recommendations to achieve more equitable and inclusive growth.

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Baba’s Explainer – Pakistan’s Economic Crisis

• January 12, 2023

Economics , International Relations

• GS-2: India and its neighbourhood
• GS-3: Economy & challenges

Context : Currently, Pakistan sits on the verge of economic collapse with its hopes pinned on getting concessions from the IMF on the Extended Fund Facility (EFF) established in 2019, as well as getting help from friendly nations in the form of long-term loans or donations.

• At the International Conference on Climate Resilient Pakistan (ICCRP) that began in Geneva Pakistan’s Prime Minister, Shehbaz Sharif, made a desperate plea for help.
• very high inflation
• very low foreign exchange reserves
• high indebtedness and a weak external position.
• rising unemployment
• Deemed to be a consequence of climate change, the floods inflicted an estimated loss of $3 billion on the country, caused over 1,700 deaths, and displaced 8 million people.
• In 2019, Pakistan had come to an agreement with the IMF about an EFF worth $6 billion, which was later increased to $7 billion.
• increasing energy rates,
• imposing more taxes, and
• artificial control over the exchange rate.
• Currently, the country is in the midst of a severe cash crunch with its foreign exchange reserves in the State Bank of Pakistan (SBP) depleting to $5.576 billion during the week ended on Dec 30, 2022.
• According to data released by Pakistan’s central bank, the reserves are less than half of what they were a year ago and at an 8-year low.
• Along with another $5.8 billion held by commercial banks, the forex reserves are just about adequate to pay for 3 weeks of imports to the country.
• As Pakistan still reels from the effect of the 2022 floods, servicing foreign debt and paying for crucial commodities such as medicine, food, and energy are among its chief concerns.
• However, Pakistan is scheduled to pay $8.3 billion to external lenders over the first three months of 2023. Without any relief, the country is set to default on these payments.
• As its leaders try to rally global support, ordinary citizens have been suffering.
• With massive spikes in prices of food products and other essentials, Pakistan recorded an inflation rate of around 24.5% in December. This number was even higher in rural Pakistan, close to 29%
• Prices of perishable food items have soared by nearly 56%.
• Wheat, a staple in the Pakistani diet, has seen prices increase by 57%.
• Ordering shopping centres to close at 8 pm local time, and marriage halls and restaurants by 10 pm.
• 20% of government employees have been asked to work from home.
• Pakistan Prime Minister stated that the people of Pakistan were “doubly victimised” by climate disasters and “morally bankrupt” global financial systems. “This system routinely denies middle-income countries of debt relief and concessional relief needed to invest in resilience against natural disasters”
• Currently, Pakistan has its hopes pinned on getting concessions from the IMF on the Extended Fund Facility (EFF) established in 2019, and getting help from friendly nations in the form of long-term loans or donations.
• Pakistan has also received funding pledges from US, France, Saudi Arabia, China, and Japan, with the Asian Development Bank and Asian Infrastructure Investment Bank also promising help.
• Help could potentially come from China, Pakistan’s “all-weather friend”.

Main Practice Question: Recent times have witnessed economic crisis in neighbouring countries of Sri Lanka and Pakistan. What do you think are the learnings for India from these crisis?

Note: Write answer his question in the comment section.

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• 2022 Floods , Economic Crisis , IMF , Neighbour , Pakistan

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Today's Paper | June 05, 2024

Uncertainty clouds budget presentation.

• Meeting of the pivotal National Economic Council yet to be scheduled • Premier, finance minister unavailable until June 8 to lead key consultations • Annual Plan Coordination Committee meeting continues amid differences • Budget Strategy Paper not shared with parliament due to political uncertainties

ISLAMABAD: The ann­o­uncement of the federal budget for 2024-25 remains in unusual limbo, with key customary ingredients still missing, casting doubts on its presentation in parliament on June 10.

Sources said the critical National Economic Cou­ncil (NEC) meeting, essential for reviewing the current year’s macroeconomic situation and development programme and approving the next year’s economic and development agenda, has yet to be scheduled. In fact, the government has yet to constitute the Natio­nal Economic Council.

Also, Prime Minister She­hbaz Sharif and Fina­nce Minister Muhammad Aurangzeb will be on a four-day visit to China and thus unavailable to lead key consultations until June 8. Thus, the first available date for an NEC meeting could be after June 8, provided the relevant documentation with provinces, the prime minister and the president are circulated through electronic means for constituting and notifying the NEC.

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Under Article 156 of the Constitution, the president is ultimately required to constitute the NEC, led by the prime minister as its chairman and comprising the four chief ministers and one member from each province to be nominated by the respective chief minister and four other members, normally key federal ministers, as the premier may nominate.

Under this article, the NEC “shall review the overall economic condition of the country and shall, for advising the Federal Government and the Provincial Govern­ments, formulate plans in respect of financial, commercial, social and economic policies; and in formulating such plans it shall, amongst other factors, ensure balanced development and regional equity and shall also be guided by the Principles of Policy set out in Chapter 2 of Part-II”.

Officials confirmed that the NEC had not been notified as of Monday night. Interestingly, the Annual Plan Coordination Commi­ttee (APCC) continued its meeting on Monday, although the Planning Com­mission had anno­unced last week that the forum had recommended to the NEC a Rs1.221 trillion development budget of the federal government along with 3.6 per cent growth target for the current year.

Planning minister bypassed

Officials also confirmed that it was the first time that the APCC meeting, led by Planning Commission Deputy Chairman Jehanzeb Khan, had taken place without even informing the planning minister about its schedule or development and macroeconomic indicators.

The minister, who was on a visit to China and Malaysia, was reportedly flabbergasted to learn on his return that he had been completely bypassed, the sources said, adding that the APCC meeting on May 31 was also unusual as it missed some of the major sectors in the allocation of funds and project review. These sectors included the National Highway Authority, the Ministry of Finance, its development portfolio and the water sector, to name a few.

Therefore, some changes could not be ruled out by the time the NEC meeting is called, although the political head of the planning ministry appeared helpless for now. However, the rules of business required the planning minister to authorise and sign the summary of the presentation of the APCC recommendations to the NEC.

Moreover, aspirations of the governments of Azad Kashmir and Gilgit-Baltistan had also remained unaddressed, as their development portfolios for the next year have been kept frozen at the current year’s level of Rs51 billion each. The two leaderships were in hectic contacts with the ministers for finance and planning on Monday.

An official, who attended the second-round APCC meeting on Monday, said the sectors missed on May 31 were “cleared” on June 3, but the overall envelope of the federal Public Sector Development Programme (PSDP) would remain unchanged at Rs1.221tr, as indicated by the Ministry of Finance.

The official said these agencies had been told that they could prioritise their development projects within their allocated budget. For example, the Higher Education Commission was told that its allocation would remain at Rs21bn for the next year against Rs63bn in the current fiscal year, but they should update in a day about their priority projects for inclusion.

Budget strategy paper

Interestingly, it is also unusual that the budget strategy paper (BSP) for the next fiscal year has not yet been shared with parliament, though it is more because of political uncertainties emanating from the legal status of reserved seats and because of the absence of standing committees of the Senate and the National Assembly, particularly those related to finance.

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This will be the first time in recent history that the BSP has not gone through the parliament, and there is no time left for the exercise. Customarily, the BSP, which envisages broad outlines of the budget allocations, is presented to these standing committees of the parliament.

It would be even more unusual for the federal budget prepared in consultation with the IMF to go directly from the federal cabinet to parliament and, if the Senate and National Assembly standing committees on finance are not constituted, to be passed without the expert review and debate of the parliamentary committees.

Sources in the Finance Ministry said they expected to present the budget to the federal cabinet and the parliament on June 10, but this appeared to be difficult given the latest situation on the ground.

Even if the NEC is constituted and called on June 8 immediately after the prime minister’s return, it would be a very tight schedule for presenting the Economic Survey and the budget on June 9 and 10, respectively, they said.

They, however, pointed out that the macroeconomic plan and development agenda was not approved by the NEC in 2018 when three chief ministers had walked out and boycotted the NEC meeting presided over by the then prime minister Shahid Khaqan Abbasi, and the PSDP and the budget of the following year was selectively revised by the preceding PTI government.

Published in Dawn, June 4th, 2024

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