On 10 April last year, Shahbaz Sharif became the Prime Minister of Pakistan. Stitching together a weak coalition, barely making the magic majority mark, Sharif was the sixth Prime Minister in ten years. The biggest victim of the unstable polity in Pakistan has been policymaking, reforms, and the overall economy of the state. For the last decade, since 2010-11, Pakistan’s annual growth rate has been around four to five per cent. In the last twenty five years, Pakistan’s annual growth rate has exceeded 6 per cent, annually, only on two occasions; 2004 and 2005. For the larger part, it has been a story of slow growth.
Consequently, a majority of the population today is reeling under miserable living conditions, uncontrolled inflation, muted manufacturing, stagnant exports, and external debt servicing. Food shortages have now become common, with video clips of citizens chasing trucks and rioting for grains now surfacing on social media. So what is it that it taking down the economy of Pakistan? Pakistan’s economy is overheated. Courtesy of its unstable polity, subsidies have been used as a substitute for policy for a long time. Even during the previous regime, under Imran Khan, subsidies were the last resort to save a dying government. The subsidies, justified in the name of the pandemic, came in the form of reduced fuel prices, reduced electricity tariffs which were later deferred as well for both households and commercial ventures, and tax holidays. Further, increase in minimum wages, pensions, and food subsidies sent the fiscal discipline for a toss.
With the central bank acting like a sitting duck, the generous stimulus was not balanced by monetary tightening, resulting in severe inflation. Core inflation has more than doubled in the last 18 months while headline inflation (that includes food and energy) has gone from a little over 8 per cent in December 2020 to around 12 per cent in December 2021 to to 24.5 per cent in December 2022. Projections estimate it cross 30 per cent in 2023. However, the percentage increase does little to indicate the magnitude of inflation and the impact it is likely to have on the majority of the lower-income population of Pakistan. To give a perspective, the annual change in the price of onion is over 500 per cent. Price of salt and rice have gone up by 50 per cent. Even necessary edibles like milk and bread have registered a 33 per cent price increase in the last one year, leaving many desperate. Meat has become a luxury for many, with a price increase of 80 per cent.
Price increase is also a result of the increased transportation costs, given the fuel costs. This has had a domino effect on businesses, adding to the inflation woes. The headline inflation is also impacting the medium and small industries. As one of the largest cultivators of mangoes in the world, Pakistan’s business owners are losing out on profits due to the high transportation costs and weakening demand, thus dented selling prices. Last year’s floods that impacted one-sixth of the population added to the losses of the farmers. Other businesses, aligned to manufacturing, our unable to garner investment and thus cannot expand and upgrade. The Russia-Ukraine war has also taken a toll on the country’s current account deficit. Pakistan’s exports have been stagnant, but in 2022, their CAD increased five-fold, as compared to 2021, due to the rise in oil prices. This consequently impacted the gross reserves that halved between December 2021 and June 2022.
The Pakistani rupee is also in free fall, going from a little above 150 to one American dollar, to more than 225 today. Hit by inflation, the central bank has hiked the interest rates, but that will take its toll on credit access and cost of doing business. Thus, in the short-term, Pakistan’s economy will be in dire straits, for there will be inevitable suffering to exit the vicious loop they are in. Given the war in Ukraine coupled with a slowdown that is engulfing the world economy, experts in Pakistan anticipate financing and investment pressures, outflow of capital, and supply disruptions. Food and energy inflation, assuming it persists, would create its own set of problems, given the cost cannot be passed on to the consumers beyond a limit. Another concern for Pakistan’s economy stems from its polity. With Imran Khan not holding back, experts fear this could usher social unrest and riots further impacting investor confidence. In the short-term, the bigget hindrance to Pakistan’s economic growth is its polity itself. The government of the day could be put under pressure to continue the subsidies, furthering the downward spiral, or having incentives to suit the army of other political groups. The politically-motivated subsidies could cost both fiscal discipline and reform windows, aided by the International Monetary Fund (IMF).
Pakistan’s external debt is a huge mess as well. About to touch 40 per cent of its GDP this year, it adds to the economic uncertainty. In the next three months alone, Pakistan owes more than $8 billion to external lenders. Overall, more than one-third of the external debt is owed to China. While debt restructuring with creditors continues, Pakistan has reached out to the international community, requesting financial assistance. Already, around $9 billion has been pledged, with the majority share coming from Islamic Development Bank ($4.2 billion). This morning, news came that Pakistan’s central bank reserves had dropped to $4.34 billion, half of what they were six months ago. Starved for development between fuel imports and debt servicing, the economy of Pakistan is performing worse than most junk bonds. In the short-term, inflation will be on the rise, demand will be hit as consumers reel under increasing costs, and GDP growth is expected to be less than 4 per cent for the financial year of 2023. Put simply, no breather for Pakistan’s economy. Quite like Sri Lanka and Bangladesh, Pakistan’s hopes are pinned to a generous grant from China and the IMF. However, quite like its faltering Asian counterparts, Pakistan would have to undertake harsh structural reforms that allow an expansion of the tax base, manufacturing, and ease of investment. Even projects like CPEC (China-Pakistan Economic Corridor), once promised as an economic fortune, will have to realigned to the interests of the local population on employment and wealth creation front, but that would warrant a hard bargain by the leadership before its major lender- China. What remains to be seen is if the historical goal of bleeding India through military overspending will still take precedence over the suffering or citizens. And if the anticipated social unrest or worse, civil war, ushered by the political opposition, will plague Paksitan before any economic recovery. Pakistan is in a race against both; the devils within and time. They lose. The country collapses. — INAV