Pakistan’s Twin Crises
Pakistan’s current approach of stalling on the IMF’s requirements and implementing fiscal half-measures put it on track for economic failure, which will stoke public discontent; its policy of downplaying the Taliban’s support for the TTP will also lead to terror attacks. Pakistan’s Chinese allies, who have major investments in Pakistan as part of the Belt and Road Initiative, may step in with last-minute economic support as the crisis peaks, but their terms for such an intervention will further erode Pakistan’s sovereignty without alleviating either of the economic or terrorism crises. The United States should not help Pakistan get reprieve from IMF-mandated reforms but steer it toward a debt-restructuring process. It should also push Pakistan to limit economic ties with the Taliban and, at the same time, expose the Taliban’s support for terror groups, such as the TTP. That alone will not solve the dysfunction ailing Pakistan, but it will provide the basis for an economic recovery and containment of the terrorist threat—and advance U.S. interests.
In response, Sharif has pleaded to partners in China, the United States, and the Middle East for help to evade IMF-mandated reforms. China, which holds 30 percent of Pakistan’s $100 billion external debt, has extended some help, including a $700 million loan for refinancing. But Beijing has not been obliging in the way Islamabad had hoped—for example, by providing accelerated loan rollovers and additional financing large enough to offset Pakistan’s debt burden. In the current fiscal year alone, Pakistan owes nearly $9 billon out of $15 billion in debt servicing to China. Because the government is dragging its feet on reforms and the IMF is skeptical of its pledges to change in the future, Pakistan has missed out on a crucial IMF tranche to replenish its dwindling foreign exchange reserves, which has aggravated the crisis.
Khan’s and Sharif’s recent economic mismanagement and evasion of reform are part of a long-standing pattern. For years, Pakistani leaders have underinvested in human capital. The military, which wields tremendous power, has warped economic policy by prioritizing rivalry with India and taking significant chunks of the country’s narrow resource base. Elites have rigged much of the economy, which has disincentivized foreign direct investment and innovation. Both military and civilian elites have avoided reform while arguing that Pakistan is too big to fail as they seek assistance—in aid from the United States and from backers in the Middle East, as well as expensive debt-laden projects from China. All of this has contributed to low productivity, poor tax collection, and debt that is excessive relative to Pakistan’s ability to repay it. Over the last decade, proceeds from exports have not made up for the low investment and declining assistance inflows, in particular from the United States, thereby raising Pakistan’s debt stress.
The TTP’s resurgence is fundamentally driven by the rise of the Taliban in Afghanistan—who were supported by Pakistan to counter purported Indian influence in the country. U.S. officials had tried to reason with Pakistani leadership that their support for the Taliban was feeding the TTP, but Pakistani officials remained confident in their ability to both fight the TTP and support the Taliban. At one stage, the TTP was weakened by U.S. drone strikes and Pakistani military campaigns. The group retreated to the mountains of eastern Afghanistan. But the Taliban takeover in Afghanistan has given the TTP a massive boost. Almost instantly, the Taliban provided the TTP’s top leadership with political asylum and cover for its campaign of violence in Pakistan.
Today, the TTP has thousands of fighters ready for a war against Pakistan. The TTP’s leadership has found safe haven in Afghanistan, where many Taliban fighters are also now joining the TTP. Pakistan has repeatedly asked the Taliban to restrain the TTP. In return, Pakistan has offered to advocate for the Taliban’s normalization with the rest of the world and dangled economic inducements, such as expanding transit trade and bilateral Afghan-Pakistani trade. In 2022, Afghanistan under the Taliban sent over $1 billion in exports to Pakistan and raised significant revenues from taxes on border crossings between the two countries. Still, the Taliban remain unmoved in maintaining their support for the TTP. Some Taliban leaders, in particular Interior Minister Siraj Haqqani, have on occasion yanked the TTP’s leash. But most Taliban leaders back the TTP’s political agenda and its campaign against Pakistan.
As Pakistan drifts toward an economic abyss in both scenarios, it will face significant pressures from the TTP. These pressures will be different from those Pakistan faced from the TTP a decade ago. Back then, even though the violence was dire, the United States was providing over $1 billion in yearly aid, targeting terror groups through drone strikes within Pakistan, and fighting the Taliban in Afghanistan. This time, Pakistan lacks aid from abroad, and the Taliban in Afghanistan are much stronger. Pakistan can hit back through cross-border assaults on the TTP but that may only incite violent reprisals from the group and rile the Taliban, leading to a bloodier conflict.
The TTP will look to press its advantage by increasing the number of attacks, including suicide bombings, and contest for territory in the country’s northwest. This will also afford opportunities to a range of transnational and regional terrorists to establish bases in TTP-dominated territories in Pakistan. At that point, Pakistan’s inability to import enough oil will erode its military and policing capacity. The TTP will also have an opportunity to exploit public anger caused by the economic meltdown and commodity shortages. With Pakistan slated to have a general election in 2023, political turmoil in the country will worsen. All this will put substantial stress on the cohesion of Pakistan’s army, which is already reeling from Khan’s accusations that the military colluded with the United States to remove him from power.
In Washington, Pakistan’s current predicament does not elicit much sympathy, as U.S. officials remember Pakistan’s efforts to undermine their war effort in Afghanistan. Pakistan’s troubles also serve as a reminder that its leaders made reckless economic choices and engaged in dangerous brinksmanship with terrorist proxies. Competing priorities and a shift away from counterterrorism limit U.S. interest in addressing Pakistan’s crises. Letting Pakistan stew in its juices also appears compelling—particularly as this may be more painful for China, which is heavily invested in Pakistan.
Still, there are U.S. interests at stake. Even if the United States is not looking to outbid Beijing’s development finance and military transfers to Pakistan, Washington is better served by a sovereign Pakistan free from China’s coercion. Dissuading Pakistan from spoiling Indo-Pacific priorities is also a critical objective. In addition, it is important for the United States to deter transnational terrorist threats from Afghanistan and Pakistan and ensure the security of Pakistan’s nuclear weapons. Should the economic crisis and the terrorism escalation begin to feed off each other, these interests will come under stress. China may step in with last-minute assistance, but that will mitigate neither the economic conundrum nor the problem of mounting terrorist violence. Instead, it may pile on more debt and come with coercive terms, such as Chinese demands for more military basing and intelligence access—a decidedly negative outcome for the United States.
Given these risks, the pragmatic way forward is to attend to the twin crises with the aim of preventing them from happening simultaneously. To this end, the United States should press Pakistan to reckon with the reality of the Taliban’s support for the TTP and scale back economic ties with and diplomatic advocacy for the Taliban, who have cruelly banned women and girls from schools, universities, and nongovernmental organizations. Separately, the United States should expose the Taliban’s continued dangerous support for international terrorists, including the TTP. In addition to hosting Ayman al-Zawahiri, the late chief of al Qaeda, the Taliban are in violation of the U.S.-Taliban Doha accord and several of their own pledges to not let their territory be used by international terrorist outfits. {This is a non starter. Nothing more can be done than what has already been done on this front}
On the economic front, the U.S. government cannot and should not offer Pakistani elites the shortcuts that they seek, such as by interceding with the IMF for a reprieve on reforms. Instead, the United States should push Pakistan toward a debt-restructuring process, similar to the ones Sri Lanka and Zambia are in. The G-20 Common Framework program for debt relief, meant for countries poorer than Pakistan, provides a template. Pakistan will need a new IMF program even after it completes the current one—and the United States should push Pakistan to start the restructuring process now. Much of Pakistan’s debt is owed to multilateral institutions, China, Paris Club countries, and private creditors that can relax repayment terms in exchange for a plan of genuine reform that makes long-term expenditure cuts while also mapping ways of boosting Pakistan’s tax revenue, investment, and economic growth. Pakistani elites will try to avoid the pain and reputational cost associated with restructuring and perhaps the anger of their Chinese allies, who may oppose it to avoid losing money or setting a precedent. But if Pakistan can successfully renegotiate debt repayment terms with other major creditors, China will be left with no option but to restructure, too. That will reduce China’s leverage over Pakistan and diminish the risk that China would strong-arm Pakistan for military access. On the other hand, if Pakistan remains in debt distress and the Taliban continue to support the TTP, it is inevitable that Pakistan will stumble into an economic crash when terrorists are becoming more brazen.
This is a non-starter. Even the talibs figured this out 
, the TTP uses the tribal belt along the Afghanistan-Pakistan border to train and deploy its operatives.