In a recent display of financial diplomacy, India notably abstained from Pakistan’s appeal for a stand-by arrangement (SBA) loan from the International Monetary Fund (IMF). The SBA, designed to extend short-term financial relief to nations grappling with balance of payments challenges, gained approval from the IMF’s executive board on July 12, 2023, to the tune of approximately $3 billion, aimed at bolstering Pakistan’s economic stabilization program.
The Finance Ministry of India, in its monthly summary for the Cabinet, articulated the nation’s stance of abstention from Pakistan’s SBA request. This strategic move comes amidst challenging economic circumstances for Pakistan, including a tumultuous external environment, devastating floods, and policy missteps leading to substantial fiscal and external deficits, escalating inflation, and diminishing reserve buffers during the fiscal year 2023.
The IMF’s executive board, a confidential assembly comprising 24 members appointed by individual countries or groups, granted immediate disbursement of $1.2 billion in loans to Pakistan following their approval. The remaining sum will be disbursed over the course of the program, subject to bi-annual reviews. The inaugural review by the IMF is scheduled for this month.
K. V. Subramanian, India’s executive director to the IMF, who also represents Bangladesh, Bhutan, and Sri Lanka at the IMF board, underscored the perils of unchecked power and the critical role of accountability in shaping a nation’s economic trajectory. He conveyed that power without corresponding responsibility is a recipe for governance failure, with decisions being made without bearing the consequences.
India’s relationship with its western neighbor has been marked by tensions in recent years, notably following India’s revocation of the special status of Jammu and Kashmir in August 2019. This led to Pakistan’s suspension of all trade with India. India, in turn, withdrew Pakistan’s most-favored-nation status and imposed a 200% tariff on all imports from Pakistan in February 2019. While total trade between the two countries stood at $2.6 billion in fiscal year 2019 before disruptions, it plummeted to $607 million in fiscal year 2023, with negligible imports from Pakistan.
The World Bank, in its South Asia report, has warned that despite the SBA, Pakistan’s reserves are expected to remain critically low, necessitating sustained import controls and impeding economic recovery. It also predicts modest real GDP growth and ongoing political uncertainty.
India’s abstention from Pakistan’s IMF loan request underscores the complex dynamics of financial diplomacy in a region marked by geopolitical tensions and economic challenges.