Economy in distress

Dr. Ikramul Haq & Abdul Rauf Shakoori

The gargantuan challenges faced by Pakistan’s economy are the outcomes of continuous mismanagement and bad governance. Over the years our problem statement has remained the same i.e. high debt level, increasing trade and current account deficit, limited exchange reserves and high cost of doing business. No government has been able to structurally address these problems in a sustainable way. Due to short sightedness of our policymakers, Pakistan has been experiencing only short intervals of booms, followed by busts. After every few years, the economic mess reaches a level where government is forced to undertake macro-economic adjustment measures that hamper the growth and business cycle in the country.

Our advantageous geo-political position has never been utilized in a way that is beneficial to the country as a whole. This has impacted the overall investor confidence. Despite being sixth most populous country, having an affordable labour and significant number of young people, we have never been a preferred option for global investors. This is largely due to deteriorating investment climate, which is directly linked to short term policies, political turmoil and an inefficient governance structure.

Over the years, we have been navigating through critical times with the help of global lenders and bilateral partners. However, the ongoing crisis has increased multifold due to cold shoulder by our bilateral partners, friendly countries (sic). They have been rescuing us in recent past but it seems that they have also started treating us as suspects, rather than making concrete efforts to resolve long outstanding issues. This time too we are finding an easy way out—trying to avert crisis through calling help from other countries. Experts believe that such situation practically tantamount to a default, where the gap is bridged by asking countries to place funds as “safe deposits” with us, and in case we fail to secure timely rollover, the situation can worsen at an alarming speed.

The unusual delay in long overdue ninth review by the International Monetary Fund (IMF) under the Extended Fund Facility (EFF) has raised serious concerns about Pakistan’s ability to pay off external obligations. Apparently, the current situation is to stay for some time. The ongoing challenges would have significant implications for the economy in the years to come. Unless we make concrete policy changes and attract foreign investments, there is little hope to come out of the prevalent chronic crisis. Unfortunately, response by the ruling alliance government of Pakistan Democratic Movement (PDM) has been diametrically opposite to what the situation requires/demands.

After taking charge of affairs in April 2023 the current regime took around five months to resume the stalled EFF programme. It was mainly because of Government’s reluctance to remove the unfunded subsides on petroleum and energy. There was inordinate delay in undertaking other pending matters/reforms, as the alliance government feared the risk of diminishing its political capital. However, at last sanity prevailed by taking prior actions and other steps. The IMF programme resumed and dark clouds that engulfed the economic prospects started to disperse.

Shockingly, immediately after resumption of the IMF programme, the PDM Government made the same mistakes as were committed by the coalition regime of Pakistan Tehreek-e-Insaf (PTI) earlier in February 2022. The PTI government deviated from agreed plan of action. Later, the PDM government also backtracked itself from the written commitments made under the seventh and eighth review of EFF and the Federal Finance Minister indulged in making causal remarks like “he doesn’t care about the IMF mission whether it comes or not….”

These irresponsible remarks and casual behavior have reflected badly on Pakistan’s high-level commitments offered to get the EFF back on track and have negatively impacted the lender confidence in us. Most recently, Prime Minister Shehbaz Sharif announced petrol subsidy of Rs. 50 per litre for low-income individuals who have motorcycles, rickshaws, 800cc cars and other small vehicles. Subsequently the Petroleum Minister announced increase in the proposed subsidy to Rs. 100 per litre. Apart from its economic fallouts, it has added to the risk of successful completion of ongoing ninth review of already troubled EFF programme with IMF. The petrol and flour subsidies have proved to be nothing less than landmines in an already ailing economy in distress.

Prima facie, the PDM Government was banking upon friendly countries and an emphatic response from IMF, however, both wishes remained unfulfilled. Resultantly, the already critical economic situation further worsened. It has pushed the country to a situation where ability to pay off its external obligation has substantially eroded. Pakistan’s external financing needs has been growing at an alarming pace. For the ongoing year the country needs to pay US$ 20.49 billion, whereas for the next four years, it is estimated to be an average of US$ 25.23 billion each year. These are exclusive of the additional problems that may arise due to current account deficit (CAD)..

Based on IMF report, if we add-up estimated CAD, Pakistan’s average annual gross financing requirement in next four years may rise on average of US$ 37.5 billion per year. The PDM Government must be cognizant of the fact that the burning caused by overheating on account of large fiscal and external deficits in fiscal year 2021-2022 has already eroded our reserve buffers.

We are already moving on a borderline where our reserves are barely enough to fund a month’s import bill. This is in the event of import restrictions, allowing only necessary items to enter the country. Despite all these challenges, the path and hope for recovery of Pakistan’s economy lies in long outstanding structural and governance reforms and eliminating perils like corruption and inefficiency. This will help to improve the country’s business climate and attract foreign investment.

Our large and growing youth population can work as major tool for a sustainable higher economic growth in the years to come. We should prioritize and channelize our efforts in sectors such as agriculture, technology, and renewable energy. While Pakistan’s economy still faces significant challenges in short term, but with the right policies and investments, the country has potential to emerge as stable, stronger and more resilient in the long run.

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Dr. Ikramul Haq, Advocate Supreme Court and writer, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of the Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions with Huzaima Bukhari.