Rising economic difficulties

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

At present Pakistan is facing grim crises. On the constitutional front, the matter is sub judice for which one needs to refrain from commenting lest one is subjected to contempt of court. Regardless of the Supreme Court’s decision, the real question is whether our economic difficulties will get resolved by restoration of the assemblies and coming into power of any political party or an alliance through an in-House change or by virtue of fresh mandate by holding early elections. On the economic front, the grim realities are hyperinflation, currency devaluation, unbearable foreign debt, depleting reserves, growing fiscal imbalances and dwindling foreign direct investments. These should have raised alarm bells for all the concerned quarters for immediate remedial actions. However, the newly-ended coalition government of the Pakistan Tehreek-i-Insaf (PTI) opted to trigger a self-inflicted constitutional crisis, which many allege, is aimed at creating a smokescreen to cover its economic failures.

The recent event of dissolution of National Assembly was followed by the Speaker’s ruling read out by Deputy Speaker, rejecting the no-confidence resolution declaring it untenable under Article 5(1) of the Constitution of Islamic Republic of Pakistan [“the Constitution”]. Shortly after this ruling, the Prime Minister asked the President for dissolution of National Assembly within next few hours, which he did swiftly. This chain of events, indicate that all was pre-planned. The consequence is: Pakistan since April 3, 2022 has no functional government to take any decision.

The Supreme Court took suo moto action immediately under article 184(3) of the Constitution. It is perplexing for ordinary citizens that the honorable apex court after taking notice at its own, raised the question whether the ruling and proceedings of House could be examined by it or not. The nation hopes that contrary to its past legacy, the highest court—empowered to do complete justice—will decide this matter strictly under the Constitution, not invoking the doctrine of necessity again.  

In view of this ongoing constitutional crisis and announcement of early elections, the International Monetary Fund (IMF) has put on hold the loan programme for Pakistan with positive note that it will restore the same once new government is in place. This decision will certainly affect the balance of payment situation and Pakistan’s financial needs on external front. There is a risk that other lenders might also follow the same path, thus, creating a severe financial crunch. It is important to note that our dependence on external financing front has already reached US$32 billion for the current year—expected to exceed US$35 billion for the fiscal year 2023 making IMF once again indispensable for Pakistan.

On the one hand, our foreign reserves are fast depleting, and on the other, currency is losing its value with every passing day. Even after rebasing GDP, our debt to GDP ratio is 86%—the highest in the region. According to recent report of Asian Development Bank, Covid-19 and Economic Recovery Potential in the CAREC Region, Pakistan’s debt to GDP ratio significantly increased in 2020, violating the Fiscal Responsibility and Debt Limitation Act, 2005, prescribing 60% limit. The report says that debt-to-GDP ratio should be decreased to 64% by 2030 by maintaining the primary balance at a level close to zero. It emphasises that the sustainable debt level will be achieved if GDP growth is higher than 4.5% annually. The report further highlights that debt-to-GDP ratio will increase in the case of a negative primary balance and with a historical real interest rate of 2.7%, 10% GDP growth will be required to achieve requirements of the Fiscal Responsibility and Debt Limitation Act, 2005 by 2030. However, in the last three and half years of the PTI government, our GDP growth was severely impacted. The focus remained on generating maximum revenue by extracting the most from the existing taxpayers as well as imposing additional taxes but not curtailing unproductive expenses. Resultantly, economic activities declined, and inflation went up.   

Revenues generated by the government are largely consumed by debt servicing and meeting current expenditure—please check figures and analyses as well as solutions given by us in various articles published regulalry. Heavy reliance on internal and external borrowing has brought us to a position where our debt quantum is increasing at an abnormal and alarming pace. As per data of the State Bank of Pakistan (SBP), domestic lending reached around Rs. 28 trillion as compared to Rs. 16.5 trillion at the end of tenure of the previous government—depicting an increase of 70%.

Similarly, Pakistan’s foreign loans and liabilities also witnessed an unusual rise. However, the government remained clueless about its impact on the overall economy. Resultantly, it started relying on loans and financial support to beef up reserves/funds placement by friendly countries. These actions not only compromised the financial independence of the country but also lost its credibility. External lending agencies are the only lifelines that are providing support against the possible risk of default. Pakistan’s external debt has increased to US$ 130.6 billion, and it is expected to increase further as the gap between imports and exports widens significantly beyond estimated levels. Based on recent data by the Pakistan Bureau of Statistics, imports rose to US$52.50 billion during July-February FY22, compared to US$33.85 billion during the same period last year. The balance of trade deficit is around US$31.95 billion.

Increasing fuel prices coupled with foreign debt payments are adding further pressure on our reserves. The foreign exchange reserves held by SBP have depleted sharply in the last few months. The significant decline recorded from August 2021 to March 2022—approximately US$ 8 billion.

The PTI government in its tenure failed to tap cheap energy sources due to incompetence and mismanagement. However, for taking political mileage, it set the petrol price at Rs. 150 per liter despite the summary, moved by Oil and Gas Regulatory Authority, asking for raise to compete with the international market. This action of the government has been adversely affecting the budget deficit and creating chronic balance of payment crisis.

In the forthcoming budget, after the present crisis, we will have historically high debts—internal, external and circular—and all kinds of deficits. There is little hope that the next budget will bring any relief for the less privileged. It is expected that in the name of “rationalisation” and “harmonisation”, new taxes/levies will be imposed. This will add up to the cost of business and enhanced miseries for the citizens who are already trapped in vicious hyperinflation. Since we do not have a functional government at the moment and there is no clarity about the future set-up, the decline in foreign exchange reserve and rupee value will continue. The situation will further deteriorate leading to further economic challenges, which can only be met by political stability. The only way forward is to prioritize our collective efforts beyond party lines towards revival of the economy and political stability, for fear that it would be too late.

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Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of 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