Pakistan economy – Central News Hub

Political instability aggravates Pakistan’s economy crisis

Pakistan is likely to miss the bailout package by the International Monetary Fund (IMF) that is required to protect the cash-strapped country from default….writes Dr Sakariya Kareem

Pakistan stares at a bigger economic crisis as the aggrieved political instability after the inconclusive election results has thrown the country into chaos and hopelessness.

The government formed through a coalition of dissonant political parties will lead to policy paralysis, obstructing crucial economic reforms. All this would be detrimental to the country’s economy, which is already suffering from an array of problems such as hyperinflation, unsustainable external debts, and low levels of foreign reserves.

Pakistan’s debt profile raises an alarm thanks to unsustainable borrowing and spending patterns. The debt per capita has increased by 36 percent between 2011 and 2023 while the GDP per capita decreased by 6 percent during the same period.

Pakistani Currency.

The widening financing gap has necessitated further borrowing. Against such a backdrop, the ongoing political instability, which may affect the external financing flows, is going to hurt Pakistan’s economic trajectory in the longer term, cautioned Fitch Ratings, a global credit agency.

This means Pakistan is likely to miss the bailout package by the International Monetary Fund (IMF) that is required to protect the cash-strapped country from default. “Continued political instability could prolong any discussions with the IMF, delay assistance from other multilateral and bilateral partners, or hamper the implementation of reforms,” Fitch Ratings noted.

Pakistan People’s Party (PPP) has announced conditional support to the Pakistan Muslim League-Nawaz (PML-N) to form a new government. However, the rival Imran Khan-led Pakistan Tehreek-e-Insaf (PTI) too is trying to come to power by allying with a few smaller parties.

Now Pakistan faces high tensions and a political slugfest, the first victim seems to be its economy.

Pakistan had protected itself from a default last year thanks to a USD 3-billion bailout from the IMF. However, it needs to renew the IMF support by March, which seems challenging amid political instability.

Amreen Soorani, head of research at Karachi-based JS Capital, said “Lack of clarity has always been a killer for the market as it leaves existing and prospective investors indecisive on outlook.” Pakistan is set to see more instability in the near future.

Islamabad-based think tank Tabadlab called Pakistan’s borrowing and spending habits “unsustainable” as Pakistan USD 49.5 billion in debt maturities in 2024 and its economy’s ability to grow or increase output is constrained. “This is unsustainable. Unless there are sweeping reforms and dramatic changes to the status quo, Pakistan will continue to sink deeper, headed towards an inevitable default, which would be the start of the spiral” reads the latest report by the think tank.

Pakistan Army is often blamed for dominating national decisions, interfering the civilian government affairs, and even influencing electoral results. This time however people of Pakistan have defied the army, said Hina Jilani, Chairperson of the Human Rights Commission of Pakistan. “Things are still very fluid post-election, and that in itself shows how this period is not going to be a very stable one,” she said. The current political situation does not favour any hope or stability for Pakistan, Jilani added.

People buy peanuts at a shop in northwest Pakistan’s Peshawar on Dec. 9, 2020. (Photo by Umar Qayyum/Xinhua/IANS)

Syed Munir Khasru, chairman of the international think tank IPAG Asia-Pacific, said the next prime minister of Pakistan will have to walk on a tightrope as the government could collapse while making hard decisions for economic recovery. “The next prime minister will have to accommodate the demands of coalition partners while confronting economic crises,” he said.

If Pakistan seeks to get another IMF bailout, it will have to implement more austerity measures, which will translate into reducing subsidies on essential commodities. “Imposing draconian economic measures on an already struggling population will not be easy… We can expect serious social unrest down the road,” said Claude Rakisits, a visiting research fellow at the Brussels-based Centre for Security, Defence and Strategy.

Around 40 percent of people in Pakistan live below the poverty line. The IMF conditions are hard to meet as Pakistan has been witnessing unbearable inflation, which hovered around 30 percent in the past year. The elections in Pakistan were supposed to bring stability to the country. However, the inconclusive election results have rather added to the political instability, which can harm Pakistan’s economy in the long term.

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The Economy Takes a Backseat as Pakistan’s Elite Squabble for Power

Economy is no priority for squabbling political class of Pakistan. With the urgency over IMF threat passed for now, the political leadership and other institutions of the country look oblivious to a looming economic crisis of mammoth scale. Major financial indicators are pointing towards stress across segments including manufacturing, services and exports. However, for unconcerned leaders engrossed in political slugfest, the economy does not appear to be a priority… writes Dr Sakariya Kareem

The recent onset of the caretaker government in Pakistan to ensure fair and smooth elections could not quell the political squabbles in the country. With the judiciary and military actively contributing to the ongoing tussle among political opponents, the situation is expected to remain volatile until elections. With a schedule of elections still uncertain, political analysts expect the recent controversy over the enactment of two bills empowering the military and security establishment to turn into the next big crisis. Meanwhile, amidst the deafening political noise, no side seems to be noticing the frail cries of a faltering economy.

With the urgency over the IMF threat passed, for now, the political leadership and other institutions of the country look oblivious to a looming economic crisis of mammoth scale. Major financial indicators are pointing towards stress across segments including manufacturing, services and exports. However, for unconcerned leaders engrossed in political slugfest, the economy does not appear to be a priority. The devastating floods of 2022 combined with supply shock, forex shortages and crippling import restrictions have dealt a long-term blow to the economic growth of the country.

According to the Pakistan Bureau of Statistics, all three main components of the economy i.e. agriculture, manufacturing, and construction have seen a contraction in FY 2022-23. During the year, the major crop sub-sector witnessed a decline in output of 3.2% while the large-scale manufacturing suffered a contraction of around 10%. Moreover, the value of construction activity decreased by almost 6%. Similarly, the wholesale and retail trade sector which is the mainstay for the self-employed in the country underwent a decline of 4.5%.

The state of other fiscal indicators is not calming either. With the inflation staying close to 30 per cent for most of the past year, consumers remained praying for a respite. The latest round of hike in petroleum prices is feared to add fuel to the fire due to its spiralling nature. Meanwhile, the decline in labour demand coupled with runaway inflation is leading to a fall in real wages for all kinds of workers. According to the State Bank of Pakistan (SBP)’s data, the total debt position of Pakistan is likely to emerge as the prime challenge for the next government. At the end of FY 2023-23, the total debt and liabilities of the country were towering at PKR 77 trillion after registering a growth of around 29 % during the year.

Apparently, the external position of the Pak economy is yet to recover from the COVID-induced shocks. The remittances received from Pak workers in various countries is a foremost support for several households here. However, a weakening pattern in the crucial inflows indicated by the latest SBP data reveals strain developing in the budgets of many households. Managing to cloak a total of just $27 billion during FY 2022-23, the remittances witnessed a significant decline of 13.5 % from $31.2 billion seen at the end of FY 2021-22. The story is not different in the case of FDI inflows into the country. According to SBP, the fiscal year gone by saw a huge decline in net FDI from $1.94 trillion to $1.46 trillion. Close to a quarter downfall in the volume of net FDI for a developing country looking to expand its infrastructure and economy underscores the misdirection in policy making.

The consistent deterioration in fiscal parameters indicates the accumulation of stress in the Pak economy for the coming many years. Considering the stagnation seen in incoming investments during the past few years, Islamabad needs to work out internal solutions to fix the issues. Redressing these problems would invariably involve fiscal discipline and deep-rooted reforms in the way various institutions and economic participants function. Simultaneous handling of a difficult fiscal situation and a vulnerable external sector requires structural transformation for which political manoeuvring would have to cede space to policy making. Moreover, it would warrant a shift in the focus of the government and other institutions of power from the promotion of corruption, extremism, terrorism and religious hatred.