Islamabad’s Deepening Financial Crisis And Rawalpindi’s Apathy – OpEd


The bad news is that three years after Sri Lanka was forced to hand over Hambantota port to China on a 99-year lease due to loan repayment default, media reports indicate that Uganda’s Entebbe airport may soon go the Hambantota way for the same reason. However, the good news is that even though China has taken over control of its operations, Gwadar port, it’s still in Pakistan’s possession [atleast on papers] and with a friendship “sweeter than honey,” between the two, there’s no need for Islamabad to fret [or so it presently seems]. 

Bad news for Pakistan is that not only has its current debt liabilities crossed the Rs 50 trillion mark [which exceeds the country’s GDP], but the International Monetary Fund [IMF] has also rejected Islamabad’s contention that taking loans from the central bank to finance its operations was its constitutional right. Yet the good news is that Saudi Arabia has come to Islamabad’s rescue by giving it a USD 2 Billion loan for a year alongwith USD 1.2 billion oil loan on a deferred facility agreement. 

That Saudi Arabia has extended this loan at an interest rate of 4 percent [which is one-fourth times higher than the previous loans] doesn’t seem to bother cash strapped Islamabad, nor does the clause that should Riyadh demand early repayment, Islamabad would have to reimburse this loan within 72 hours. Such an exacting and humiliating clause has probably never ever before been invoked by the House of Saud while extending loans to any other country. 

But then, currently, Islamabad can’t be a ‘chooser’.

Normally, any country neck deep in debt would think twice before taking a loan that comes with a ‘72 hours’ reimbursement clause, but then, Islamabad is an exception. Prime Minister Imran Khan sees this loan as “The latest generous gesture by the Kingdom of Saudi Arabia reaffirms the all-weather friendship between the two states.” He also and knows that should Riyad ask for early repayment [like they recently did], he can always bank upon yet another “all weather friend” Beijing to bail out Pakistan, just like it happened when Riyadh demanded premature reimbursement.

Many in Pakistan believe that Beijing’s munificence stems from its “sweeter than honey” relationship with Islamabad. They also feel that Beijing has been a genuine friend and helped Islamabad by extending loans under the bilateral currency swap agreement, which is not required to be reflected in its books, and hence does not appear in Pakistan’s external debt figures. However, there are others who don’t think so. As loans taken under the currency swap agreement aren’t reflected in books as outstanding loans, it doesn’t give an accurate indication of Pakistan’s actual debt position and hence indirectly encourages indiscriminate borrowing. 

This is exactly what an eight-year-old report published in Pakistan’s International Tribune [“Money out of nowhere: SBP utilises Chinese currency swap agreement to shore up reserves,” May 30, 2013] had mentioned. An official speaking on the condition of anonymity had warned that “Use of the Chinese trade financing facility should not be perceived as help from a friendly country. This is a loan Pakistan will have to return.” So, those who contend that by giving unrestricted loans under the currency swap agreement, Beijing is actually pushing Islamabad into an inextricable debt trap, aren’t wrong! 

With Riyadh specifically listing ‘sovereign default’ [failure of Islamabad to repay its external debts] as one of the reasons for invoking the ‘72-hour repayment’ clause, it’s evident that apprehensions of Islamabad defaulting on loan repayment isn’t mere speculation, but a distinct possibility. However, Islamabad has rubbished repeated warnings issued by renowned international organisations and think tanks with established non-partisan credentials.

So, with Beijing serving as its proverbial golden egg laying goose, it’s business as usual for Islamabad. It was ironical that in 2020, while Prime Minister Imran Khan was on the one hand requesting rich countries to consider a “global initiative on debt relief” by saying, “We don’t have the money to spend on already the overstretched health services and to stop people from dying of hunger,” on the other hand, his government approved a whopping 11.9 percent increase in Pakistan’s defence budget.  

National security is of paramount importance and non-negotiable and so, while defence expenditure cannot be drastically cut, it can always be reduced. With a pro-Pakistan Taliban regime in Kabul and a ceasefire along the Line of Control [LoC] as well as international boundary with India, there has been a marked reduction in threat perception for Pakistan. Moreover, due to Sino-Indian border tension and reinvigorated Sino-Pak bonhomie, the chances of Indian belligerence on its Western front doesn’t seem likely. 

So, while overall threat analysis does not justify a 11.9 percent increase in defence spending, Rawalpindi’s over obsession in matching India’s military capability is the main reason why it consumes a lion’s share of Pakistan’s national budget. For example, on November 25, Pakistan test fired its Shaheen-1A surface-to-surface ballistic missile and the reason cited was “re-validating certain design and technical parameters of the weapon system.” 

Ballistic missiles cost a fortune and at a time when Pakistan is facing an unprecedented financial crisis, “revalidation” is most certainly an unessential luxury. But then, since India had test fired its Agni -5 intercontinental missile in October end, it was obvious that Rawalpindi would follow suit. Similarly, while the Prime Minister of Pakistan is announcing that “Our biggest problem is that we don’t have enough money to run our country due to which we have to borrow loans,” Pakistan army is still going through with a USD 1.5 billion deal with Turkey for buying 30 Turkish-made T129 Atak helicopters.

In 2019, Rawalpindi announced a “voluntary cut in defence budget” saying that this would not be at the cost of “defence and security” and assured the nation that Pakistan army would “maintain [an] effective response potential to all threats.” However, this announcement was clearly meant to get into the good books of IMF and far removed from reality, because Pakistan’s defence spending has consistently been heading north thereafter. This has resulted in pragmatists asking-if the armed forces of Pakistan were cocksure that they could effectively manage national defence with a budget cut, then why the perpetual increase every year? 

For the uninitiated, Pakistan army has a phenomenal private financial empire and in 2016, while responding to a query raised by Pakistan People’s Party [PPP] Senator Farhatullah Babar, Federal Defence Minister Khwaja Asif responded by disclosing that nearly 50 commercial entities were being operated by Pakistan’s armed forces. These include virtually everything under the sun- be it stud farms, sugar mills, shoes, wool and apparel dealerships, restaurants and wedding halls, insurance, oil, cement, fertilizers, power generation and, believe it or not, even a bank! 

Noted Pakistani analyst Ayesha Siddiqa [author of Military Inc: Inside Pakistan’s Military Economy], has pegged the net worth of commercial assets owned by Pakistan’s armed forces at approximately USD 20 billion on a conservative scale.

Surprisingly, the same army that so graciously voluntarily recommended a “cut in defence budget,” is unwilling to help in alleviating the country’s fiscal woes by handing over full, or a part of its non-military profit making enterprises to the government. Au contraire, Rawalpindi has been so concerned in protecting and expanding its commercial empire, that just the other day, observing that “What the colonels and majors desire, happens,” Chief Justice of Pakistan Justice Gulzar Ahmed sarcastically asked the Defence Secretary Lt Gen Mian Mohammad Hilal Hussain [Retired]- “Were wedding halls, cinemas and housing societies built [by Pakistan army] for defence purposes?”  

Could there be a more dishonourable observation on the officer cadre of a country’s armed forces?

Nilesh Kunwar

Nilesh Kunwar is a retired Indian Army Officer who has served in Jammu & Kashmir, Assam, Nagaland and Manipur. He is a ‘Kashmir-Watcher,’ and now after retirement is pursuing his favorite hobby of writing for newspapers, journals and think tanks.

3 thoughts on “Islamabad’s Deepening Financial Crisis And Rawalpindi’s Apathy – OpEd

  • December 2, 2021 at 9:27 pm

    Interesting comments. So how do you think this evolving financial relationship between China and Pakistan impacts the level of hostility between China and India? Does China have a growing sense that they have a new ‘front’ in their border conflict with India? Is this likely to make China more aggressive in their quest to expand borders?

    • December 3, 2021 at 8:35 am

      Sino- Pak financial relationship isn’t evolving. It’s a one way street with China ‘buying’ it’s way by extending loans without collaterals and has thereby lured Pakistan in an inextricable debt trap.
      Today Islamabad is Beijing’s ‘lap dog’ and has no option but to toe it’s master’s line.
      Hence Pakistan’s support to China is axiomatic.

  • December 4, 2021 at 5:32 am

    It is only a matter of time that Gwadar may go the Sri Lanka’s Hambantota way but the good news is the local Pakistanis are standing up and protesting. China’s game of “Go’ BRI has no rules and is leapfrogging across continents occupying ports, lands and trapping nations through debt traps through building infrastructure. China’s Silk roads are less silken having poisonous fangs which poison the nation with slow sweet poisoning. This friendship “sweeter than honey,” between the two is likely to turn bitter in the long run. India as a well-wisher of its neighbour wishes well for Pakistan and will not like the Chinese presence in Gwadar.


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