Pakistan Army Backs Shehbaz Sharif in Push for IMF Reforms

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Pakistani Prime Minister Shehbaz Sharif has one advantage over his predecessors in trying to revive an ailing economy: the all-powerful military’s desire for change.

Sharif, whose administration last month secured a much-needed $7 billion loan from the multilateral lender, has promised painful reforms, such as strengthening tax collection and raising household energy tariffs by a fiVscekh.

Previous governments have made and retracted similar promises in the face of public opposition. But Pakistan’s military supported the deal, according to government officials, diplomats and analysts, fearing that prolonging the economic crisis would deepen instability and threaten its significant financial interests.

Islamabad teetered on the brink of default last year as declining foreign reserves and import restrictions triggered shortages of vital raw materials. Inflation soared to 38 percent, fueling widespread public anger.

“The military is supporting the IMF program because they want Pakistan to avoid default at all costs,” said a senior government official, who requested anonymity. “They see themselves as the main guarantors of Pakistan’s policies because they realize that politicians with their history of previous failures will not be able to stabilize the economy.”

Pakistan has a mixed record with the IMF. The country has been forced to turn to the multilateral lender two dozen times, and serial governments, including the previous Sharif administration, have abandoned its prescriptions, doling out energy subsidies or artificially propping up the currency.

This time, Sharif has vowed to step down rather than backtrack on reforms. His government, however, is “not popular,” said Bilal Gilani, executive director of the Gallup Pakistan poll, which is not affiliated with the international pollster.

His administration’s tenure began on shaky ground, coming in second in February elections in which candidates loyal to jailed former prime minister Imran Khan won most of the seats but failed to gain power.

As a result, Sharif has had no time to build public support for reforms. Islamabad has unveiled a fiscally heavy budget that aims to raise 13 trillion rupees ($46.6 billion) by next July, an increase of about 40 percent from the current financial year. The authorities have also said they will expand the tax net, which at about 10 percent is among the lowest in Asia, to more of the agricultural sector, which could spark a clash with the politically powerful farm lobby.

Observers say support from the army, which has ruled Pakistan for half of its post-independence history, could help his government stay on track and break a cycle of fiscal mismanagement, skyrocketing inflation and rapidly growing public debt.

“Shehbaz Sharif has a long and consistent history of good relations with the military,” said Michael Kugelman, director of the Wilson Center’s South Asia Institute, forged during four terms as chief minister of Punjab, the province that is home to most of the military’s top brass. “There is a strong consensus among civilian and military leaders that IMF support is essential.”

Muhammad Aurangzeb, the finance minister, told the Financial Times that Islamabad had “no choice but to push ahead” with reforms to the tax code, the energy sector and loss-making state-owned enterprises. “As a country, we were forced to step in,” he said. Aurangzeb visited China, Pakistan’s biggest creditor and has invested about $20 billion in energy projects, late last month to discuss debt reprofiles.

Ahsan Iqbal, Pakistan’s planning minister, expressed confidence that “cooperation between civil and military institutions” would allay concerns among Beijing and other creditors about political uncertainty and a deteriorating security situation, noting the presence of Army Chief General Asim Munir on an investment promotion council, an atypical role for a military officer.

“If even political governments change… [the military] provides a solid anchor of continuity,” Iqbal said. Last week, army officers were chosen to lead committees tasked with overhauling the energy sector and the tax agency.

“They were on the edge last year,” said one Western diplomat. “Both the Sharif government and the military seem serious about taking tough decisions to … prevent things from getting worse again.”

But the military’s ambition for tax reform may be limited, analysts and diplomats have warned. In 2021, the United Nations Development Programme described the sprawling networks of military-controlled real estate, food, energy and fertilizer companies as “the largest conglomerate of business entities” in the country. The new tax code has preserved exemptions on real estate sales by entities linked to the military and bureaucracy, and defense spending is still rising despite paltry public finances, fueling public outrage.

The government also continued to crack down on Khan’s Pakistan Tehreek-e-Insaf party, raiding the party headquarters, arresting officials and threatening treason charges.

Sharif’s party “believes its survival depends on the failure of the PTI,” said Madiha Afzal, a senior fellow at the Brookings Institution in Washington. “It has focused all its energy on suppressing the PTI, and hopes that Khan and the party’s popular support will wane.”

For now, the army’s support and Khan’s continued detention have limited organized resistance, said Adeel Malik, a professor at Oxford University.

But since most of the tax increases will fall on the middle classes with salaries, “who already comply with the tax regime,” he said, “eventually there will come a time when they will look for ways to stop complying or to take to the streets and protest.”

“This can’t go on forever,” he said.