New government in Pakistan clueless in the face of a falling economy
Discussions within and about Pakistan during the past few months have
been dominated by political volatility in the country. However, the upheavals which culminated in the ouster of Imran Khan government masked the concerning state of Pak economy.
While everyone including media was fixated on the political tug of war between PTI government on one hand and the opposition aided by the mighty army on the other, the economy quietly slipped out of hands of policy makers.
The new government formed on April 11, 2022 under the leadership of
Prime Minister Shahbaz Sharif is now staring at an economic catastrophe not seen for decades. The position of new Finance Minister Miftah Ismail is
particularly precarious as he has inherited an economy which is dwindling on almost all parameters. Ismail is a Pakistani political economist who earlier served as the Federal Advisor on Finance, Chairman of the Pakistan Board of Investment and as an economist with the IMF. But, the problems facing the Pak economy are far too many and daunting, putting him to a great test.
The main indicators such as growth and inflation are hardly promising while the external sector is still under shocks originated from the Russia-Ukraine
conflict. The combination of these factors have not let the economy recoup from the disruptions of Covid. Major development lenders have lowered the forecast of economic growth to around 4%, significantly lower than 4.8% set in the budget 2021-22. Moreover, the IMF in its recent World Economic Outlook (WEO) 2022 has projected the inflation to touch 11.2% against last year’s 8.9%.
Meanwhile, Moody’s recently projected a current account deficit of $12
billion between July 2021 and February 2022, against $1 billion surplus in the same period a year earlier. Highlighting risks for Pakistan’s economy in a fluid political situation, the agency predicted further deterioration in external position, including widening of current account deficit and erosion of foreign exchange reserves.
Renowned Pakistani-American economist Atif Mian comments that the
Imran Khan government had inherited a bad economy but leaves it in even a worse shape. The twin deficits known as yawning fiscal deficit and current
account deficit are skyrocketing while there’s been zero increase in average
The rising inflation would be another major challenge for the new government. If corrective measures are not taken, then the country might plunge into a crisis like Sri Lanka, warns Dr. Aqdas Afzal, Professor of Economics at
Habib University, Karachi.
Huge rise in foreign debt during the last few years has proved to be another
Achilles heel for Pakistan. The external debt has risen from around $95 billion in 2018 to over $130 billion with the government acknowledging in Parliament that an amount of $10 billion was used for budgetery support.
Amid dwindling foreign exchange reserves, Pakistan needs to repay foreign
debt of around $2.5 billion on account of principal and mark-up obligations during the ongoing quarter (April-June) of the current fiscal year. The country needs to build its foreign exchange reserves, which have declined to a low of $11.3 billion.
Islamabad is hoping for the Chinese rollover of funds as well as active
engagement with bilateral and multilateral partners for increased funding.
Critics allege that the policy makers misrepresent the statistics to hide their
failures. For instance, Pakistan deliberately underestimated its external payment obligations. The IMF in its last review projected that the external debt servicing was estimated at $18.5 billion for FY 2022 against $11.9 billion in the previous year. However, the Economic Affairs Department (EAD) assessed foreign debt servicing at $12.4 billion, lowering estimate to the extent of 33%.
The worsening circular debt in the energy chain will continue to haunt the
new government along with the challenge of dealing with the rising crude global crude prices owing to the Russia-Ukraine conflict. Domestic energy companies are facing financial constraints and are struggling to get their outstanding dues cleared.
“The responsibility for much of the current mess lies with many
governments and the ruling elite of Pakistan, both military and civilian, who have failed their constituencies, their representatives and the people in whose name, and for whom, they claim to govern” noted S. Akbar Zaidi, Executive Director at
the Karachi based International Business Administration.