Regime Change, Political Unrest, and Deepening Debt Crisis in Pakistan

Regime change in Pakistan is one of the most hotly contested issues here. Imran Khan’s rule has been rumoured to have been overthrown by American intervention. Let’s find out what happened.
After the dismissal of Prime Minister Imran Khan on April 10 through a no-confidence motion against the PTI government, Pakistan has been thrust into a severe political crisis. There has been a month-long political crisis in Pakistan, which began on March 8 when the country’s three major opposition parties – the Pakistan Muslim League–Nawaz (PML-N), led by Shehbaz Sharif, the younger brother of former prime minister Nawaz Sharif; the Pakistan People’s Party (PPP), led by Bilawal Zardari, the son of former prime minister Benazir Bhutto; and the Jamiat-ul-Ulema-e The administration was accused of bad governance, persecution of the opposition, and economic and foreign policy failings in the motion that brought it to the floor of the house.

Khan has accused the United States of conspiring with local politicians and a powerful establishment to remove him from office. The United States has refuted Khan’s claim, but a vast majority of Pakistanis believe him, giving him a new boost in fame. Ex-Prime Minister Yousuf Raza Gilani has called an anti-conspiracy protest against his administration in the final week of May. The current political situation is expected to worsen in the following weeks.

With his anti-American and anti-imperialistic themes, Khan is stirring up public opinion, especially among the country’s youth, and causing consternation among the establishment and newly elected government officials who make up the unified opposition. PTI, the dominant party in Pakistan’s parliament, has also resigned from parliament, causing a political crisis in the country.

Is it possible that Imran Khan’s foreign policies and currency swap deals contributed to his downfall as prime minister?

Outgoing Prime Minister Imran Khan has accused the United States of interfering in Pakistan’s sovereignty by sponsoring a regime change against Khan’s government and investing in competing for democratic institutions.

The US was irritated by Pakistan’s multilateral approach to Khan’s foreign policy. A developing relationship with Russia is crucial to Pakistan’s political turmoil. As a direct result of Khan’s journey to Russia despite US pressure and the Russian invasion of Ukraine, the Russian foreign ministry’s spokesperson, Maria Zakharova, called it “punishment for the disobedient Khan.”

Also, Pakistan’s participation in the de-dollarization drive supported by China, Russia, and Turkey is said to be a significant factor in Pakistan’s political upheaval. When the State Bank of Pakistan extended the Currency Swap Agreement with China for another five years under the CPEC dynamics, it was seen as a meaningful step that drew the attention of the United States. Since then, the bilateral currency swap value has grown significantly, from Rs 475 billion in 2020 to Rs 731.7 billion in 2021.

Did Khan dare multinational businesses by contesting their investment treaties?

One thing to be applauded about Imran Khan’s economic policy is his strong opposition to international investment agreements that give multinational businesses too much control over national governments. [i] A process of cancelling 23 bilateral investment treaties (BITs),[ii] which allow companies to sue governments in unaccountable international tribunals, was already underway by Khan. His preference was for local arbitration to resolve these kinds of disagreements.

For the first time in 2019, one year after Khan took office, the International Centre for Settlement of Investment Disputes (ICSID), the World Bank’s dispute resolution arm, ordered Pakistan to pay an Australian mining company $6 billion in damages for refusing to grant it a mining permit due to environmental concerns.

At the same time, another tribunal under the International Chamber of Commerce [iii] raised the total amount Pakistan owed Tethyan Copper [iv]to $ 11 billion. Because of Pakistan’s failure to provide Tethyan with “fair and equal treatment,” the ICSID found that the two countries had breached their BIT, a nebulous commitment that corporate litigants love to abuse.

“Indirect expropriation” was also found to be the case when the tribunal denied Tethyan’s Reko Diq gold and copper project a licence. Yet it is a fact that because of Pakistani mining and contract regulations violations, the company’s authorization was declared unlawful by the Supreme Court of Pakistan. ICSID ordered Pakistan to take hundreds of billions of dollars from its public coffers to compensate for Tethyan’s lost future revenues. There was just a little investment of $150 million [v] by the corporation. Following a series of discussions, it was only later that the $11 billion penalty against Pakistan was waived, and the corporation was granted permission to restart the project under a new contract [vi].

Rapidly deteriorating debt

Despite the ongoing political turmoil, Pakistan’s mounting external debt remains the country’s most pressing issue. By 2021, the country’s external debt will be $119.8 billion. For 2018, we owed $93 billion, for which we had to cough up $6 billion in interest payments. More than $12 billion will be paid in debt repayments on external debt in 2020. Pakistan’s entire debt payment in 2017 was 39 percent of FBR taxes five years ago. Currently, 75% of FBR taxes are used to pay off our debts. The debt-to-GDP ratio has risen from 76% in 2018 to over 90% in 2019.

In the same way, we paid 19 percent of our exports in debt service in 2018 when looking at the debt to export percentage. Our debt service cost us nearly 35% of exports in 2021. According to present trends, by 2025, our debt payments will eat up all of our FBR tax revenue. As a result, Pakistan will depend entirely on the bank and non-bank borrowing and international help.[vii]

There are approximately 47% multilateral loans, 31% bilateral loans, 14% commercial loans, and 9% Eurobonds/Sukuk in the country’s debt as of December 2021. Although commercial borrowing has expanded over the past few years, multilateral and bilateral sources still account for 78 percent of the external public debt portfolio.

On the list of nations that have received BRI aid from China, Pakistan’s condition is the most problematic, with $24.7 billion in projects. [viii]Since 2011, Pakistan has been using the Currency Swap Agreement, a Chinese trade finance facility, to repay foreign debt and maintain its gross foreign currency reserves at a comfortable level rather than for trade-related objectives, which is essential to note. With this arrangement, Pakistan doesn’t have to worry about including the additional Chinese loan in its national budget or treating it as part of Pakistan’s external public debt.

Profile of Pakistan’s External Debt

Until December 2021, the Composition of External Public Debt

Imran’s PTI continued past regimes’ massive borrowing

The PPP and PML-N regimes had buried the country under a mountain of debt, and the former prime minister was outspoken about his disapproval. On the other hand, the net debt of his government shattered all prior records. During Khan’s 43-month rule, his government borrowed a total of $57 billion. Of the $57 billion, the previous administration remitted $26 billion in repayments while accruing an additional $31 billion in external public debt, all of which fall within the purview of the Ministry of Finance. During its first four years in office, the PML-N government borrowed around $33 billion in gross foreign loans. Khan’s net addition could reach $30 billion during his time in office.

IMF imposes strict criteria for bailout renewal

The International Monetary Fund (IMF) has set out five significant conditions for the revival of the much-needed $6 billion bailout package, including reversing fuel subsidies, increasing electricity tariffs, imposing new taxes, and withdrawing the tax amnesty scheme, the new finance minister, Miftah Ismail, has said[ix]. Under the 7th assessment of the programme, the requirements have been laid out for the following loan tranche of around $960 million. The IMF programme is blocked due to the former government’s backpedalling on implementing the condition it had agreed with the Fund. A total of $3 billion will be released in three more tranches until the programme concludes in September once three programme reviews have been completed.

As reported by the media, the IMF has decided to prolong the stalled bailout package for up to one year and increase the loan sum to $8 billion[x]. The loan’s size will be boosted from $6 billion to $8 billion, a total of $2 billion more than the current amount, according to the finance ministry.

A 39-month Extended Fund Facility (EFF) agreement was agreed upon between the former PTI-led government and the IMF (July 2019 to September 2022) worth $6 billion. There were still $3 billion in unpaid bills from the previous government, which caused much of the programme to be inactive for most of its duration. Media reports also indicate that the new government is attempting to acquire further loans from Saudi Arabia, the United Arab Emirates, and Qatar, totalling $ 7-8 billion.

Overall, Pakistanis, particularly those from the country’s lower classes, face a very gloomy future due to the country’s mounting debt and deepening political turmoil. According to a recent World Bank estimate, three-quarters of Pakistanis survive on less than $3.20 daily. It also notes that rising inflation has disproportionately harmed low-income and vulnerable households, which spend a higher part of their income on food and energy. Several essential indicators in the report show that Pakistan’s fiscal situation has deteriorated even further this fiscal year, indicating the need for immediate action to ensure its capacity to service its debt obligations.

[i] https://ips-dc.org/ousted-pakistani-leader-was-challenging-investment-treaties-that-give-corporations-excessive-power/

[ii] https://tribune.com.pk/story/2313937/pakistan-to-terminate-23-bilateral-investment-treaties

[iii] https://www.clearygottlieb.com/news-and-insights/publication-listing/corruption-defence-to-challenge-tribunals-jurisdiction-rejected

[iv] https://www.reuters.com/world/asia-pacific/barrick-agrees-deal-with-pakistan-waive-11-bln-penalty-restart-reko-diq-2022-03-20/

[v] https://www.iisd.org/itn/en/2019/12/17/tribunal-finds-pakistan-breached-fet-expropriation-non-impairment-obligations-mining-joint-venture-with-australian-investor-tethyan-copper-company-tethyan-copper-company-v-pakistan-icsid-arb-12-1/

[vi] https://www.thenews.com.pk/print/943365-pakistan-gives-reko-diq-project-to-canadian-firm

[vii] https://www.thenews.com.pk/print/807304-implosion-2025

[viii] https://www.aninews.in/news/world/asia/china-snares-pakistan-in-bri-debt-trap-with-high-interest-rates-stiff-repayment-terms-lack-of-transparency20220324231428/

[ix] https://tribune.com.pk/story/2353561/imf-sets-tough-terms-for-bailout-revival?fbclid=IwAR3EGPAXFp8ob1ZzIyivxNuRdrAC24yjL6EpWiJbEUf18AAjrG4kWw1WpJc

[x] https://tribune.com.pk/story/2354052/breakthrough-in-pak-imf-bailout-talks-loan-amount-to-be-8bn