Pakistan's Economic Crisis Could Squeeze Rawalpindi As IMF Asks For Cuts In Defence Spending

In a move that could see reduction in the Defence budget of Pakistan’s Army, the International Monetary Fund (IMF) has asked Pakistan to either decrease its defence spending or increase its GST, reported News18.

The IMF, in its recently concluded staff-level visit, has asked Pakistan to decrease its defence spending, the News18 report says.

However, if it cannot reduce its defence spending, Pakistan has to increase its Goods and Services Tax (GST) to 25 per cent of consumer spending to reduce inflation.

Pakistan has to follow through with the staff-level agreement and also come up with a repayment plan to get access to the next tranche of the $1.2 billion loan, the report further added.

Pakistan has entered a $6 billion International Monetary Fund (IMF) programme during Imran Khan's government in 2019, which was increased to $7 billion last year.

However, the IMF has suspended the loan program due to Pakistan’s inability to meet the agreed conditions in the loan agreement.

Since then Pakistan's foreign reserves (Forex) have plummeted to a decade-low of $3.08 billion, which is only sufficient to cover imports for a mere 18 days.

These tough IMF conditions could pressure Rawalpindi, the Pakistan’s Army General Headquarters (GHQ), in cutting down its defence spending.

However, the report suggests that Pakistan has decided to increase the GST rate to 25 per cent, as decided by the Shahbaz Sharif-led government, instead of lowering the defence spending.

The report also says that the IMF was particularly miffed by Pakistan's failure to completely liberalise the ‘exchange rate’, which has led to the creation of black and grey markets.

The Pakistan government in accordance with the staff-level agreement has drafted a proposal to increase the GST rate to 25 per cent from the earlier 17 per cent.

With these rate hikes, the Pakistan government hopes to help collect PKR 7 billion in the next four months.