Pakistan’s Finance Minister, Miftah Ismail warned of “bad days” ahead as he highlighted the looming economic crisis that the nation finds itself in. Addressing a ceremony at the Pakistan Stock Exchange, the Finance Minister blamed the economic policies taken by the erstwhile Tehreek-e-Insaf government for the dire economic state of the country.
A Nation in Crisis
Pakistan’s foreign-exchange reserves have shrunk by more than half in the past year, to just over $9 billion, or about six weeks’ worth of imports. In 2022, the Pakistani rupee has lost about 30 percent of its value against the US dollar. Furthermore, a rise in inflation and unemployment coupled with political instability has only made matters worse. The three major global rating agencies, Moody’s, Fitch, and S&P Global have downgraded Pakistan’s long-term rating from stable to negative, citing the country’s deteriorating economic position.
The current Pakistani government has blamed former Prime Minister Imran Khan for much of its economic woes. These accusations are not entirely unfounded. While he promised to rid Pakistan of its economic troubles, Mr. Khan failed to deliver. His regime saw an increased rate of inflation and widespread economic mismanagement. By March 2022, the country’s total external debt and liabilities reached $128 billion. Unemployment also surged with Pakistan Institute of Development Economics (PIDE) reporting 31% of the youth to be unemployed. The sudden dissolution of his government added fat to the fire, leading to political instability amid grave economic troubles. However, with a tenure of less than five years, blaming Imran Khan for all of Pakistan’s economic troubles seems far-fetched. Undoubtedly, the economy suffered under the Khan administration but this crisis stems from a much larger flawed system.
Economic Fault Lines
There are various structural flaws that can be located in the Pakistani economy that have time and again led to its unmaking.
The Khan administration is not solely responsible for the ongoing debt crisis. The IMF has provided loans to Pakistan on twenty-two occasions since 1958, imposing 13 Structural Adjustment Programmes (SAP). The focus of these programmes has been to stabilise the economy while sacrificing growth in the short term. However, Pakistan’s growth rate has consistently remained the lowest in South Asia since the introduction of the first SAP in 1988. The sustainability and feasibility of these IMF bailouts have also been brought into question considering the frequent visits Pakistan makes to the IMF requesting for bailouts. For instance, the last bailout Pakistan requested was in May 2019, just three years before the current crisis. Furthermore, the China–Pakistan Economic Corridor (CPEC) created a debt of $64 billion for Islamabad which was originally valued at $47 billion in 2014. The excessive borrowing to resolve short term issues has majorly contributed to Pakistan’s economic troubles.
Another major issue with the Pakistani economy is the huge trade deficit that the country incurs. Pakistan’s trade deficit currently stands at $48.66 billion, a record high. This enormous trade deficit has resulted from lack of exports in the face of steadily growing imports. As the industries fail to meet the requirements of the domestic market, Pakistan has to rely on imports for bridging the gap. Similarly, the exports suffer due to low productivity of agriculture and industries. According to the International Labour Organisation (ILO), Pakistan is ranked 143 out of 185 countries on labour productivity, having its GDP per hour worked at a measly $6.3.
Poor fiscal management and failure of the private sector to adapt to innovations has further shackled the Pakistani economy. All of these issues have contributed to the ensuing political instability.
Another Sri Lanka?
The past few months have witnessed the collapse of Sri Lanka from one of the top performing economies in South Asia to its descent into anarchy. With Pakistan in a similar crisis, it is widely argued that the country might be on its way to follow the island nation into a harrowing economic collapse. With the fate of Sri Lanka at display, it is also feared that escalating political instability might lead to an eventual military rule, as has been the norm in Pakistan.
While the situation is bad and might worsen in the coming days, Pakistan is unlikely to follow the Sri Lankan trajectory. The revival of a 2019 bailout with the IMF on July 13, clearing the way for about $1.2 billion, comes as a relief for Pakistan. This much needed help will allow the country to look for alternative channels to bridge the financing gap. The Pakistani military has also been playing an active role in stabilising the situation, with Army Chief Qamar Bajwa seeking financial help from friendly countries including UAE and Saudi Arabia. The involvement of such external lenders should discourage major creditors like China from requesting immediate repayments, easing the pressure on Islamabad. However, this requires the Pakistani government to keep a check on the steadily increasing imports.
While the present measures are likely to provide respite for now, even in the unlikely scenario of a Sri Lanka-like complete economic collapse, the military would not let the political situation in Pakistan slide into anarchy and is likely to take over by dissolving the government in the worst case.
The Way Ahead
Even though Pakistan might just evade the crisis through IMF involvement and bettering the trade deficit by curbing imports into the country, these are measures that tend to serve short term purposes and are no guarantee against another similar crisis in the coming years. The only sustainable answer would be initiating structural reforms. A self-sufficient economy must be at the heart of a rebuilding project. Increased productivity will facilitate an increase in exports while decreasing the imports on basic commodities like food and medicines. Finding economic stability is also detrimental to which path Pakistan’s politics will take in the future as the shadow of military rule looms large on the dwindling democratic set up which has managed to keep it in the barracks since 2008.