Political Turmoil and Strained Ties with the West: A Double Whammy for Pakistan’s Economy

Apart from Pakistan’s army and opposition political outfits, the business lobbies in Pakistan have been flagging the point that strained ties with the US and the EU will have an adverse impact on Pakistan’s economy. While the Pakistan Army Chief, Gen. Qamar Javed Bajwa, had alluded to the importance of Pakistan’s ties with the US in his address on April 2, 2022, Pakistan’s business has expressed its apprehensions with regard to the current political situation and the potential souring of ties with the West, in general, and the US, in particular. The current economic crisis in Sri Lanka also underscores the pitfalls of being excessively dependent upon China and the need for an astute foreign policy.

Pakistan PM Imran Khan has, on more than one occasion, accused the west, specifically the United States (US), of joining hands with Pakistan’s opposition parties to topple his government due to his visit to Russia in the midst of the Ukraine crisis and the neutral stance adopted by the Khan-led Pakistan Tehreek-E-Insaaf (PTI) government on the same. Khan made this point during an address to the nation on March 31, 2022, when he said that Pakistan had received a threatening letter from a foreign country. On the eve of the vote of confidence, which was scheduled to be held on April 3, 2022, Imran Khan reiterated that the US was involved in toppling his government. On April 3, however, the no-confidence motion was rejected by the Deputy Speaker of Pakistan’s National Assembly and Imran Khan nominated Former Chief Justice Gulzar Ahmed as the caretaker Prime Minister of Pakistan. Earlier, Khan had accused Donald Lu, the US Assistant Secretary of State for South and Central Asian Affairs, of sending the ‘memo’ and warning Pakistan’s Ambassador to the US, Asaf Majeed, of threatening consequences for Pakistan if Imran Khan was not removed from the position of PM.

The US State Department has denied Khan’s allegation of meddling in Pakistan’s domestic affairs and of sending a threatening letter to Pakistan. Imran Khan’s anti-West tirades have drawn flak from Pakistan’s opposition parties, and the army for harming the country’s national interests. A day before the confidence motion, Pakistan Army Chief Qamar Javed Bajwa, while speaking at a Security Dialogue in Islamabad, had said that Pakistan has a history of close strategic relations with the US, but did not want to be caught in camp politics. While Imran Khan has dubbed the opposition leaders as stooges of America, the Pakistan army is reported to have categorically dismissed Khan’s accusation that the US has hatched a conspiracy to topple the PTI government.

While Imran Khan has dubbed the opposition leaders as stooges of America, the Pakistan army is reported to have categorically dismissed Khan’s accusation that the US has hatched a conspiracy to topple the PTI government.

A number of strategic commentators also believe that Khan’s diatribes and serious charges against the US will only hurt Pakistan’s national interests. In an article for Dawn (April 5, 2022) titled “Why Imran’s self-serving pseudo sense of national pride is an injustice to Pakistan“, Murtaza Haidar argues:

"As more details emerge, it is increasingly becoming evident that the self-serving pseudo sense of national pride being peddled by Imran Khan will hurt not just Pakistan’s economic and social prospects, but also its diplomatic relations."

Pakistan’s Ties with the West: The Economic Dimension

There is no doubt that the US-Pakistan relationship has witnessed a downward trajectory in recent years and Pakistan’s proximity to China has increased after the launch of the China-Pakistan Economic Corridor (CPEC). It would be important to bear in mind, that both Islamabad and Washington did work closely on the issue of Afghanistan, although post the US withdrawal from Afghanistan the ties have again witnessed a downward slope. Even after the recent strain in ties between Pakistan and the US caused by Imran Khan’s serious charges, a US State Department spokesperson said:

"It is especially critical with countries that have a good deal of leverage with the Taliban (sic). The United States would be included in that, Russia would be included in that, the People’s Republic of China would be included in that, and Pakistan would be included in that."

Even business lobbies in Pakistan have said that further acrimony with the US and the European Union (EU) will dent the country’s economy. While the Pakistan Army Chief had alluded to the importance of Pakistan’s ties with the US in his address on April 2, 2022, the business community of Pakistan has also been underscoring the point that Islamabad can not afford further tensions with the US and the EU given its current economic situation.

It was only last month that officials from both the sides engaged in the relaunch of the Trade and Investment Framework Agreement (TIFA). A US delegation led by Assistant US Trade Repr­e­s­entative Christopher Wilson visited Islamabad. Wilson said that while discussions on the relaunch of TIFA were positive, the visit was aimed at “… reinforcing trade and economic dimensions of the relationship between the US and Pakistan.“

Senior officials in the PTI government have also been batting for improving economic ties with the US, while officials in both the Trump and the Biden administrations have been warning against Pakistan’s excessive economic dependence upon China.

Ties with the US are also important in the context of Pakistan’s need for assistance from the International Monetary Fund (IMF) and its grey list status at the Financial Action Task Force (FATF). As Pakistan continued to remain on FATF’s grey list in the latest meeting held in March 2022, its economy is getting adversely impacted. In 2019, Pakistan and the IMF had reached an agreement for a $6 billion loan under the Extended Fund Facility for a period of 39 months. However, the IMF has put on hold the negotiations pertaining to the release of $960 million due to the political situation in the country.

Ties with the US are also important in the context of Pakistan’s need for assistance from the IMF and its grey list status at the FATF. Even business lobbies in Pakistan have said that further acrimony with the US and the EU will dent the country’s economy.

It is not just the US. Islamabad’s ties with the EU, too, have gone downhill in recent times. Last month, Imran Khan had also lambasted the European Union (EU) after envoys posted in Islamabad had written a letter seeking Pakistan’s support on the Ukraine issue. EU has already been considering the removal of the Generalized System of Preferences+ (GSP+) status of Pakistan due to the increasing misuse of blasphemy laws and other human rights issues (this status was, however, extended until 2024). The GSP is important because 2/3^rd of the exports from developing countries are exempted from duties through this. The EU is an important trading partner for Pakistan. In 2020, it accounted for an estimated 14% of Pakistan’s total external trade and 28% of Pakistan’s total exports. The EU is also an important market for Pakistani textiles (textiles and clothing accounted for 75% of Pakistan’s exports to the EU in 2020).

Predictably, Khan’s recent anti-US stance has received support from Russia. Top Russian officials have stated that Khan has been targeted by the West, because of his visit to Russia. Russian Foreign Ministry Spokesperson Maria Zakharova said that this was an instance of ‘shameless interference’ by the US in Pakistan’s internal affairs. The US was quick to dismiss these allegations saying that it did not favour any one political outfit over the other.

In conclusion, while Imran Khan may gain some support for following an independent policy, Islamabad can not afford further deterioration of relations with the West given its current economic situation, where it is dependent upon international financial institutions like the IMF — a point which Pakistan’s army, opposition parties and the business community have underscored in different ways. The current economic crisis in Sri Lanka also underscores the pitfalls of being excessively dependent upon China and the need for an astute foreign policy.

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