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Political turmoil and the economy of Pakistan

Pakistani households will continue to bear the weight of foreign and local loans.

Zainab Aamer by Zainab Aamer
March 31, 2022
Reading Time:4 mins read
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Political turmoil and the economy of Pakistan

Suddenly, history is rhyming, if not repeating itself. Pakistan’s defective democracy, which has been hijacked and co-opted by civilian and non-civilian elites, is at a crossroads.

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The most recent wave of instability is being propelled by an incendiary opposition, unified under the banner of the Pakistan Democratic Movement (PDM), with a single aim in mind: to depose Imran Khan from the Prime Minister’s Office.

What is fueling this movement right now, which is allegedly democratic and legitimate because the voting will take place in parliament under parliamentary norms, is a debate for another day.

What Pakistanis should be clear about is that the latest wave of political uncertainty will only make their life more difficult in the coming weeks and months.

Pakistan’s Economy

The economic crisis that Pakistan has been experiencing since 2018 is a big contributor to this near-term uncertainty.

While Khan’s adversaries would say that his government is to blame for everything that has gone wrong since 2018, the reality is a little more complicated. Khan inherited an economy in the grip of a dual deficit crisis when he took office.

In an October 2016 article, I claimed that the impending crisis would cause “the rupee to come under significant pressure, resulting in a tremendous decline in a short amount of time.” The general public will face rising costs, a sluggish economy, and a reduction in real incomes.”

The failure of Khan and his team was their inability to make timely decisions that stabilized the economy and laid the groundwork for substantial development near the end of his tenure. As a result, Asad Umar was in and out of the finance minister in a flash, and an outsider, Abdul Hafeez Sheikh, was brought in to handle the economy.

Economy and Pandemic

As the economy began to recover, a once-in-a-century pandemic struck, delivering a body blow to a system that was already on its knees. The Khan government implemented a stimulus package and a robust public health policy, which was carried out by the NCOC, preventing millions of households from facing the trauma that countries such as India experienced.

However, the Khan administration squandered this crisis by failing to use the chance to pursue underlying structural changes to solve long-standing problems in Pakistan’s economy. This meant that, while government handouts in the form of fiscal spending and the country’s longest-running real estate amnesty plan encouraged growth, the economy began to overheat, increasing concerns about near-term external sector volatility.

As a result, the government entered into talks with the IMF and decided to restart the programme by following through on the obligations it had made to the lender. Such an arrangement would provide access to dollars from the Fund and the foreign bond market, both of which are essential for maintaining economic stability. In exchange, the government passed a mini-budget that eliminated tax breaks on a variety of items and agreed to hike the petroleum development levy.

Global Oil Crisis

At this juncture, global oil prices began to rise dramatically, creating a perfect storm for Khan’s government, which was already facing an opposition alliance bent on deposing him. Inflation was eroding Khan’s popularity, so he decided to provide relief to the public, which is why fuel and power costs were reduced.

This populist choice made political sense: food inflation in Pakistan climbed by 20% between January 2020 and January 2022, while it increased by only 7% in India. This discrepancy occurred despite the fact that India had a disastrous epidemic and farmers were protesting the Modi government’s proposed agricultural policies.

Since at least the 1990s, Pakistan’s economy has been plagued by fundamental challenges that have only evolved and metastasized. Pakistan has had the second-highest average rate of inflation and the lowest average rate of growth among its peer economies, which include Nigeria, Vietnam, Morocco, India, and Bangladesh, since the turn of the century. This essentially indicates that Pakistani households have lagged behind their global counterparts. Furthermore, difficulties in the agricultural and energy sectors are deepening, resulting in an increase in commodities and energy cycle debt.

Khan’s most recent populist moves must be evaluated in the light of Pakistan’s economic downturn, the continual challenges his government has faced, and the PDM’s continued agitation. With a no-confidence vote on the horizon, the last thing Khan wanted was a huge increase in petrol costs to give the opposition even more clout.

The Political Economy of Pakistan

Pakistan’s economic crises, on the other hand, are a feature, not a flaw, of its political economy. The economy cannot carry the burden of Khan’s populist choices for much longer, which means that when this tale concludes, with or without Khan as prime minister, the government of the day will have to make unpleasant decisions to clean up the mess and then some.

Meanwhile, Pakistani households will continue to bear the weight of foreign and local loans incurred in order to offer them “relief,” such as the recent reduction in petroleum prices. These debts will eventually have to be repaid, along with interest and currency depreciation.

Furthermore, new taxes will be imposed in order to improve the fiscal situation. These taxes are likely to be regressive, which means that the elite will suck even more resources from impoverished populations. In short, the medium-term suffering for regular individuals will outweigh the short-term profits, if they can be called that.

Additionally, the ongoing political unrest is unlikely to abate in the short term, implying that the risk premium associated with conducting business in Pakistan would rise, making foreign investors wary.

Failing to deliver on IMF accords – slashing taxes when the agreement was to raise them — means that the Fund will impose even more onerous preconditions on Pakistan the next time it needs a bailout, which may not be far away.

Political instability, as in the past, is generating economic uncertainty in Pakistan. All of this will exacerbate the suffering of millions of families across the country in the coming months.

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Nonetheless, elites will continue to engage in political maneuverings in order to increase their part of a stagnating and decaying pie. None of this should come as a surprise, considering that Pakistan’s limited intellectual capital has been and continues to be used for political maneuvers rather than addressing the root causes of the country’s rapid socio economic collapse.

Tags: Pakistan economyPakistani Politics
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Zainab Aamer

Zainab Aamer

Zainab Aamer is an A level student enthusiast who writes generally about different aspects of life and particularly about student life fantasies of prospective professional life.

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