India’s Indus Waters Treaty Faces Challenges Amid Economic Struggles
Pakistan is grappling with a severe economic crisis, as Prime Minister Shehbaz Sharif recently highlighted the country’s precarious financial situation. Despite the government’s desire to attract international investments rather than seek aid, Pakistan’s reliance on external financial assistance remains evident. The nation is currently navigating a challenging $7 billion International Monetary Fund (IMF) program, which demands significant structural reforms to stabilize its economy.
Economic Challenges and IMF Conditions
Pakistan’s economy is facing multiple hurdles, with the National Accounts Committee reporting a disappointing GDP growth of only 2.68% for the fiscal year 2024-25, falling short of the targeted 3.6%. The country is under pressure to implement crucial reforms as part of its ongoing $7 billion IMF program. This financial package comes with stringent conditions, including raising electricity rates and introducing additional taxes. These measures are aimed at addressing the fiscal deficit and improving economic indicators that have long been stagnant.
The government is also striving to secure $4.9 billion in external commercial funding for the fiscal year 2025-26, with plans to obtain $2.64 billion through short-term bank borrowings. However, the economic landscape remains fraught with challenges, including the impact of geopolitical tensions, particularly with India, which complicates Pakistan’s recovery efforts.
Impact of the Indus Waters Treaty Suspension
The agricultural sector, which employs around 40% of Pakistan’s workforce, is facing significant disruptions due to India’s recent suspension of the Indus Waters Treaty. This decision has led to a drastic reduction in water levels at key dams, such as Mangla and Tarbela, which are essential for irrigation and hydroelectric power generation. The kharif planting season is particularly at risk, with a reported 21% deficit in water flow and a 50% reduction in live storage at these dams.
The Indus River System Authority (IRSA) has raised alarms about the reduced water availability, attributing the crisis to India’s management of water supplies. As Pakistan prepares for the summer sowing season, the water shortage could severely hinder agricultural productivity, exacerbating the economic challenges the country already faces.
India’s Strategic Moves Against Pakistan
In a bid to counteract what it perceives as state-sponsored terrorism, India is taking steps to limit Pakistan’s access to international funding. Following its opposition to Pakistan’s IMF bailout, India is also looking to challenge upcoming World Bank loans intended for Pakistan. Furthermore, India plans to engage with the Financial Action Task Force (FATF) to advocate for Pakistan’s return to the ‘grey list,’ which would complicate its financial dealings and investment opportunities.
Pakistan’s previous exit from the FATF grey list in 2022 had bolstered its credibility with financial institutions, making it easier to secure necessary funding. However, a return to the grey list could hinder Pakistan’s ability to attract investments, further straining its already fragile economy.
IMF’s Increased Demands for Continued Support
As Pakistan navigates its agricultural and economic crises, the IMF has issued a stern warning regarding its bailout package. The organization has raised the bar for Pakistan’s financial assistance, outlining 11 new conditions that must be met to ensure continued support. These include passing a federal budget of Rs 17.6 trillion aligned with IMF targets by June 2025 and implementing agricultural income tax reforms across all provinces.
Additional requirements involve publishing a governance reform plan, developing a long-term financial sector strategy, and adjusting tariffs for electricity and gas. The IMF’s demands reflect the urgency of Pakistan’s situation, as the country seeks to stabilize its economy amidst growing internal and external pressures.
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