Pakistan is flirting with an economic meltdown, but it’s politicians and constitutional institutions are too busy fighting each other to care. The country has been facing a huge budget deficit, weak currency, stagflation (sky-high inflation and slowed economic growth), and historically high-interest rates for a while now. With the depreciation of the rupee, food and energy is getting more expensive with every passing day. Only a few months ago, it saw people dying in stampedes to get their hands on basic necessities like wheat flour. The country’s foreign reserves are running out. It can keep cutting imports (which hurts industry and business) to save foreign currency, but if things don’t change, the rupee may fall even more against the dollar and worsen the crisis.
The IMF was to lend Pakistan US$7 billion under a program that ends in June 2023. However, Pakistan has received only US $ 4.2 billion; the rest is stuck because of disagreements over external financing targets that Pakistan needs to meet to get the staff-level agreement (SLA) signed. The delay in signing SLA is eroding Pakistan’s economic resilience, as without a seal of trust from the IMF, it cannot access external financing.
Pakistan is banking on China, Saudi Arabia, and UAE for external financing. However, China has explicitly advised Pakistani politicians to resolve their differences through dialogue and uphold the constitutional order and stability of the country. In other words, China has conveyed that a bailout from them was linked to bringing political stability to Pakistan. Instead of listening to Chinese advice, Pakistani politicians are hell-bent on escalating their differences to an unprecedented level in recent history. The political tug of war for power has reduced Pakistan’s creditworthiness, and multilateral lenders like the World Bank (WB) and Asian Infrastructure Development Bank (AIIB), too, are reluctant to lend to Pakistan.
Among the external finances that Pakistan needs for signing SLA with the IMF, it was counting on nearly $700 million from the WB and AIIB for the “Resilient Institutions for Sustainable Economy (RISE-II) program.” Receipt of RISE funds would have made it easier for Pakistan to get IMF’s tranche, but the AIIB has linked its co-financing with the WB’s program approval. To avoid investing in a turbulent situation, the WB has made signing SLA with the IMF a precondition for releasing RISE funds. So here, too, Pakistan is stuck. The WB has warned Pakistan that it will lose some of its funds from the International Development Association (IDA) for not completing the prior actions under the RISE-II program.
It seems impossible for Pakistan to complete the remaining three reviews of the IMF in less than one and a half months when the program ends. Knowing this, the Ministry of Finance seems to have given up on the IMF and is working on its own to prepare the budget for the next fiscal year. But such a budget would be very unrealistic. If Pakistan quits the program, the government may be able to present a “pre-election, popular” budget. However, in the next fiscal year, the government of Pakistan, no matter who will be in power, will have to negotiate a new IMF program on even tougher conditions and prior actions.
Pakistan needs external money to survive, but without an IMF program, it won’t get any. Most countries and organizations that lend money to Pakistan follow the IMF’s lead, especially when Pakistan is in a politico-economic mess. If the IMF says no, they say no too. This means Pakistan would have difficulty paying back its huge foreign debt, which is about $113 billion or 40% of its GDP. Imagine owing more than half of your income to someone else. That’s how bad it is. Quitting IMF would also mean running out of foreign currency, which would affect its imports and the value of the rupee.
The jury is still out on which is more bleak, Pakistan’s economic or political situation is bleaker. However, neither the government nor the opposition seems to be bothered about Pakistan’s economy right now. The unfortunate violent protests and arson attacks across the country in reaction to the arrest of former prime minister Imran Khan and the response of the government first by shutting down the internet and blocking social media services, and then by staging a day-long sit-in against the superior judiciary right in the heart of sensitive red zone (and next to the diplomatic enclave) is bad news for Pakistan’s economy.
We saw how political uncertainty and economic vulnerability are linked on 9th May. The rupee lost its value by thirteen rupees (4.5 percent) against a dollar on that day amid the violence and then recovered within 24 hours. This shows how unstable and volatile the domestic currency is and how political misadventures can increase exchange rate risks.
Our political parties and key institutions, through their power struggle, are not only worsening the current state of the economy but also damaging Pakistan’s reputation and credibility as an investment destination, a reliable trade partner, and a trustworthy borrower. The situation is hurting Pakistan’s future prospects.
I hate to say it, but Pakistan is inching toward an economic abyss. It might fall off the cliff if its politicians do not start prioritizing the country’s economic stability over their political agendas. It is time for all concerned to wake up and start focusing on the economic and social development of Pakistan and the well-being of its people. The political drama and institutional infighting must come to an end if Pakistan is to survive and thrive. Alternatively, everyone should be ready to face a lose-lose situation where the people of Pakistan would be the main victims.
