Devastated by the floods, inflation, political instability, and economic mismanagement, Pakistan is on the verge of becoming yet another Economic Graveyard of South Asia.
As of 2022, Pakistan has loaded with PKR 59.7 trillion debt, which is a whopping 89.2% of the entire Pakistan Economy.
Pakistan’s Economic crisis is not a new occurrence, and since 75 years of its independence, it has suffered several economic crises. The IMF alone has bailed out Pakistan 13 times in just the last 35 years, and the numbers are going to increase in the future as well.
However, in the last few years, the inherent factors have intensified and caused a sudden spike in Pakistan’s ill economic condition.
For instance, there has been a 25% increase in the overall debt from last year. While the total external debt of Pakistan alarmingly rose by 35% in a single year.
Therefore, this article would mainly analyze the economic mismanagement of Pakistan in recent years and how several factors together caused its economy to push to the hem of a collapse.
It is pertinent to understand that the economic issues of Pakistan have not been a recent phenomenon but a culmination of bad economic policies, political turmoil, terrorism, fundamentalism, inherent corruption, and military dominance over the years that has morphed into a giant snowball bomb. Which, if bursts, will impact not only the country but also the world.
Not a single government in Pakistan’s history has completed its full tenure, which shows that political instability has been a dominant phenomenon in the country. This led to neglect in the development and economic planning for the country as well.
The recent backdrop of ousting Imran Khan is directly linked to the country’s political culture and how the government makes decisions.
As the politics of Pakistan majorly revolves around India and governments are volatile, they make decisions not based on pure economic reasoning but vote bank politics. This ultimately blows up the prospects of building long-term fiscal policy to control the debt miasma and maintain sustained economic growth.
Therefore, Pakistan is the textbook example of how political instability has the potential to damage the growth of the country.
Analyzing the history, it can be observed that Pakistan’s inherent culture of religious fundamentalism never allowed it to break the shackles of age-old traditions and usher into the modern Capital formation.
The same fundamentalism is being further used by Imran Khan and his Party, Tehreek-e-Insaaf, to create divisions, which can potentially be the last nail in the coffin in starting the civil war within the nation.
Resultantly, the Army would take over the administration, and millions of people will be affected due to violence, hunger, and terrorism.
As the homegrown terror groups such as Tehreek-e-Taliban are now vying for power in Pakistan, the civil war would not only be on one or two fronts but many. This will be further exacerbated by Liberation groups of Balochistan and Khyber-Pakhtunkhawa that want to break free from the country altogether.
It might seem improbable. However, recent developments, including floods in these regions, incessant violence by the Army, and constant bombings by rebel groups, tell a different tale.
Coming back to the economy, how would the economy function if there was no country?
Politics of Freebies and Subsidies
The politics of freebies has put additional pressure on the government’s treasury. High Subsidies have brought a major dilemma to the current government as to whether to maintain the popularity among citizens or end the freebies to reduce the pressure on the economy.
So, how does this work?
The incumbent government gives immense subsidies and takes foreign debt to channel the population’s vote. As the new government comes, it already has a massive debt problem. But to maintain popularity, they cannot remove subsidies and thus take more loans to somehow move the wheels of a rusted economy and avoid economic disaster for the time being.
And the loop continues….
Resultantly, Pakistan’s external debt, excluding China, has already reached $65 billion, with the free-falling currency as the cherry on the top.
You see, the debt is not used for economic growth, but as a palliative pill to somehow drag the economy. And that is one reason for falling economic growth, even with the increase in loans.
As the absolute authority is in the hands of the Military Establishment, the major decisions are not based on the population’s needs but on the military. This is apparent from the high allocation of budget heads to the military (17.5%).
In fact, the total percentage of military expenditure and debt repayment (29.5%) for the 2022-23 budget is a whopping 47% of the total budget.
It means that almost half of the Budget expenditure is allocated for seemingly no productive use if we analyze it in purely economic terms.
Another significant amount is directly pumped into the economy through subsidies and freebies, another cause of concern.
As it is often accused that China’s Debt trap policy has been the cause of Pakistan’s current state, we have to look deep down into the issue and understand that China is only the catalyst in the already dying economic health of the country.
China proposed an overgenerous loan at a very high-interest rate for building China-Pakistan Economic Corridor (CPEC) under its BRI megaproject. Under BRI, a total of 26 projects, including dams, roads, bridges, and Gwadar Port, are being constructed by Chinese companies and workers all around the country.
Interestingly, as no Pakistani companies or citizens are directly employed, the money is going back to China, and nothing beneficial in terms of employment or allied benefits is happening for Pakistani citizens. Instead, the projects have caused significant distress for the people living around these projects.
Therefore, China’s Belt and Road initiative seems to have failed, given that the major projects under the BRI have not yet been able to generate money or completed on time as expected.
Moreover, as the loans are taken on very high-interest rates compared to global standards, Pakistan’s external debt servicing has also risen. Now Pakistan is taking loans at high commercial rates to repay the past loans.
Another Loop continues….
Another related issue is the disparity in the economic progress across all the regions. The Heart Of Pakistan, mainly the Punjab and Sindh region, is highly developed compared to Balochistan and KPK.
Religious fundamentalism and discrimination have degraded the people of these regions, which mainly consist of Ahmediya and Pashtun communities, to be second-class citizens in their own country.
Security and Terrorism
As foreign investments are concerned, the political instability and security lapses are the most discouraging aspect for foreign investors to invest in the country. Apart from that, Pakistan’s war-mongering attitude towards India has caused billions of dollars to be washed away.
Another discouraging factor is the recurring attacks on Foreign nationals. This can be corroborated by the recent terrorist attacks on Chinese and Sri Lankan Nationals.
Moreover, with the increasing poverty, Pakistan, which is already a factory of Terrorists, might create terror groups with more people having nothing to lose. It will also make the existing organizations powerful, among which ISIS-Khorasan is the primary concern for the entire region.
With Pakistan on the FATF gray list, the scope for foreign investments has further worsened.
The Pakistani Rupee is free falling and has been hovering around the value of 220 compared to the US Dollar. Resultantly, the Pakistani Rupee has become the worst-performing currency in South Asia, with a fall of nearly 16.5% in June alone.
The situation has further worsened due to high inflation all around the world. In Pakistan, inflation has reached 300% due to Floods and IMF conditions. And if, as it seems, the world economy plunges into a recession, Pakistan won’t have much air to breathe.
Now, going back to the original question as to why Pakistan’s failure will also impact the world and India. Pakistan being a Nuclear-powered country makes it too big to fail. If Nuclear warheads come into the hands of Terrorists, the world might suffer irreparable damage.
Pakistan has suffered from a major flood since 2010, which has caused inflation and Pakistan’s Rupee to suffer a major hike. The government has estimated the Loss of $40 billion from the floods, and the cost may further increase. People, who are already suffering from the economic crisis, are now laden with floods and inflation.
As far as foreign exchange reserves are concerned. Pakistan has only $2 billion worth of reserves, which can hardly pay for 5 weeks of imports. The problem is also evident from the high Balance of Payment Deficit ($15 billion), Debt servicing, and massive devaluation of the Pakistani Rupee.
Going further, the pertinent issue is also reflected in the lack of coherent long-term fiscal policy. For instance, Pakistan’s taxation policy changes every 2-3 months with incompetent taxation authorities, which is evident from the fact that the country’s major population still doesn’t pay taxes.
Moreover, the country is virtually shut out of private capital markets due to the huge 16% spread between the low-valued PKR and Dollar. This led to almost negligible foreign portfolio investment, FDIs, and other foreign exchange inflow sources.
Interestingly, the country has become a net food importing country as well, including wheat, tea, and sugar.
Meanwhile, Russia’s invasion of Ukraine has become a pinching salt on the wound for Pakistan. The invasion caused a spike in global fuel and commodity prices. It means that now Pakistan has to pay more to buy the same amount of fuel or commodity from the outside world.
And as Pakistan’s politics highly revolves around freebies and subsidies, the government has not increased the prices subsequently, which led to a further burden on the country’s exchequer.
However, with the IMF’s approval of the loan, Pakistan has accepted some conditions and decreased subsidies substantially. Still, the government has to fulfill more conditions to receive the further tranche of the package.
Now the question is, what exactly is happening to Pakistan?
As Pakistani origin Economist Atif Mian said, the country is outsourcing its growth by taking huge debts. So, for instance, Pakistan delegated its infrastructure project to China under China Pakistan Economic Corridor (CPEC) by taking debt from it. Now the choice is with the Chinese, and as all the money returns back to China, it leaves no scope for multiplier growth. It is the opposite of what we call trickle-down economics.
That’s why the delegation of growth has become the devil in Pakistan’s crisis.
Moreover, Pakistani Political instability has to be taken care of to witness a stability period. Politicians must move away from freebies and religious politics and focus on taking bitter pills to seek immediate relief.
As several economists and policymakers have pointed out, the transition will be painful.
So can we say the political instability has caused the present state of Pakistan?
Let’s understand this; the economic crisis has been caused due to the culmination of an unfortunate series of events spread over a long period of time and are directly or indirectly connected to the single string of Political instability and incompetence.
Here political instability isn’t only limited to governments, but all the political institutions, including permanent ones, have culminated into what we are witnessing today.
The idea here is that Extractive political and economic institutions are at the heart of the unmaking of any country. The term has been explained in detail in the book “Why Nations Fail?” which gives a deep-down historical anecdote on how some countries emerged and failed.
Looking at Pakistan, saying that governments are responsible can’t be taken as the edifice of the argument that political instability is the primary reason for the economic crisis. The corruption and incompetence inherent in all the institutions have eaten the foundations of the country.
Though the IMF has announced the 14th package for Pakistan of $1.1 billion out of $4 billion, the fundamental tenets of governance are still unsupportive of large-scale economic reforms and correction.
IMF’s loan also comes with conditions. It has asked the government to increase fuel prices and decrease subsidies to improve their state coffers, causing the government to face the wrath of the citizens. This will also affect the citizens who are already struck with incessant floods.
Pakistan doesn’t have many choices as its traditional allies, including Saudi Arabia, UAE, and China, are in no mood to extend financial support.
Therefore, it’s going to be a tough decision for the government. Though the recent budget has cut off the subsidies in gas and fuel, a lot has to be done.
If Pakistan wants to witness something tangible, in that case, its military establishment must not divert the foreign grants and aid to their purpose. Moreover, being a highly corrupt nation, transparency must be ensured in order to provide equitable distribution of aid and policies across the country.
For now, what’s apparent is that the situation in Pakistan will remain in flux, perhaps worsened. Inflation will reach a new high, given that the IMF will ensure the authorities fulfill the conditions.
Any natural disaster that can change the country’s appearance from the satellite will have long-term ramifications. With 33 million people, including 16 million children, across 118 districts affected by ongoing floods, the numbers are nowhere going to stop soon, and repairing the damage will take more money and time.
As the floods have affected the poorest regions of Pakistan, there is a big chance of a rise in terror activities and secessionist groups.
For the military, in December 2022, the military leadership is set to change. However, as the military has entrenched its power in every sector, it’s nowhere going to give way to democratic leadership.
With the massive population of 220 million, the critical thing to note is that a big country like Pakistan, or even Russia, brings a huge stake in the world economy. That’s why Global leadership cannot ignore the elephant in the room.
Not this time!
With inflation reaching more than 300% in flood-ridden Pakistan, the country has a long way to go.
Pakistan’s economic crisis is not equal to Sri Lanka’s. The reason is that when a country with a vast population, on the brink of collapse, has nuclear weapons and is a womb of terrorism, the neighboring countries and the world, in general, cannot ignore its dying existence.