Pakistan’s Economy Hopelessly Unstable

The term “conundrum” used by economic journalist Khurram Husain in Dawn newspaper (September 21, 2023) aptly describes the situation in Pakistan which is experiencing its worst economic crisis. As its meaning conveys, the country is holding the gun to its head, desperately wanting to be saved by the world.

But the world community itself would seem to be in its own conundrum, in dealing with a nation that is a terror-triggered dilettante — too weak to survive economically, yet posing a threat to others, promoting its militant outfits, exporting them in select places and destabilising its neighbourhood.

Assuming that the figures are not fudged, at 27.4%, though down from 36% some weeks ago, the country has one of its worst inflation rates. Riots and protests over rising prices of essential commodities have not stopped the state-run power companies and private energy suppliers from raising their rates. They have hit the poor and angered the vocal middle class whose purchasing power has shrunk. The government has been using force to compel people to pay ‘inflated’ power bills.

Pakistan’s badly managed economy combines with badly managed national borders. Petrol and kerosene get smuggled in from Iran, while the porous and volatile border with Afghanistan sees Pakistan’s scarce American dollars in circulation and many of the essential commodities get smuggled out. The universal law of demand and supply operates, to cause deleterious effects on Pakistan’s sick economy. Mohiuddin Aazim (Dawn, September 18, 2023) warned that “unless structural issues surrounding smuggling and hoarding are addressed, occasional crackdowns (by the law-keeping forces) will continue to offer what they can, at best — temporary relief.”

Besides the self-created ditches and potholes, Pakistan’s economy is totally dictated by the International Monetary Fund (IMF). It has released a USD 1.2 billion out of the three billion approved in July. By that time, many foreign firms had closed operations and even sold some, while the domestic industry had come to a halt for want of spares and ancillaries that the hard currency crisis barred from importing.

The rattled government had initially promised some relief for the public, mainly to play to the popular sentiment, but later ruled it out citing Pakistan’s commitments with the IMF.

However, the IMF itself is at risk while dealing with Pakistan. Its approval had come after Saudi Arabia and the United Arab Emirates (UAE) deposited $2 billion and $1 billion, respectively, with the State Bank of Pakistan, boosting the foreign exchange reserves.

Yet, Pakistani politicians preparing for national elections that most analysts say will not solve any of the problems, are flying in and out of the country. A caretaker government in office has shown little imagination, but enough force with the army’s backing. With elections likely next January, the interim regime cannot touch the systemic problems afflicting the economy, but can go around with what Nawaz Sharif, a former prime minister, twice ousted, has called the “begging bowl.”

The IMF, entertaining Pakistan’s 23rd desperate bailout plea, wants Pakistan to remove the systemic faultlines inherent in its economic governance. Its Managing Director Kristalina Georgieva asked Pakistan to “collect more taxes from the wealthy and protect the poor people” when caretaker prime minister Anwarul Haq Kakar met her. But Kakar, although he agreed with her, has no mandate. Even if he had one, a feudal-rich himself, he could do little to tax the rich landowners, businessmen and most of all, the serving and retired soldiers who call the shots.

Khurram Husain writes that for successive governments, “the most tempting path forward is to do whatever it takes to arrange for another multibillion-dollar bailout from abroad.” But all this will do is postpone the inevitable reckoning by a few more years, and make the eventual adjustment that much more painful.

“In fact, we are in this situation because we have been postponing the inevitable rather than actually working to resolve the underlying weaknesses in the economy that keep bringing us to this pass.”
“There is no way to pump growth anymore. If a foreign bailout arrives against some sort of asset transfer, as is being envisaged under the so-called Special Investment Facilitation Council initiative, it will provide little more than a fleeting, short-term and very temporary boost. Once those dollars are consumed, it will leave behind an even larger debt overhang, and even heavier outflow obligations to meet. We have been postponing the inevitable rather than working to resolve the underlying weaknesses in the economy,” Hussain warned.(Ends)