Economic and Political Stability Chaotic
Pakistan is experiencing its most severe crisis in modern times. The nuclear-armed state is struggling with governmental ineptitude, an unstable economy, and devastating effects of climate change. Pakistan and its creditors in the West and in China face difficult decisions.
Political and military leaders in the nation have presided over decades of ineffective policymaking, widespread corruption, and widespread social unrest. The two major parties continue to fight endlessly, yet their policies are quite similar. The next elections are likely to be used as a pretext for more infighting rather than serious attempts to improve Pakistan’s situation. The populace has little hope in the governing elite to improve their lives. Politicians are busy serving their own interests and parties.
As things stand, Pakistan might go into default like neighbouring Sri Lanka, which has faced shortages of essentials like food and medicine.
Financial Circumstances
The prime minister of Pakistan must balance the books with little in foreign exchange reserves in the bank. Shahbaz Sharif’s administration did not cause the present situation, but he still has political ambitions and is acting desperately. Recent events including the post-pandemic vicious cycle in commodities, Russia’s invasion of Ukraine, a policy shift by the US Federal Reserve, and disastrous floods at home might all be contributing factors in the current economic crisis. The World Bank and the IMF have decided that Pakistan cannot be awarded additional loans without first undertaking long-term steps to ensure macroeconomic stability.
The foreign currency reserves of Pakistan dropped with only enough to pay for imports for three weeks. This is the 13th balance of payments problem Islamabad has faced since 1988, and the 23rd Fund program it has been a part in since 1958.
Twenty years ago, Pakistan’s economist Meekal Aziz Ahmed remarked, “Economic management in Pakistan has steadily deteriorated to the point where the economy has lurched from one financial crisis to the next. At the heart of the problem has been poor management of public finances and deep-seated unresolved structural issues in the economy that bad management and poor governance have exacerbated. The consequences are plain to see: macroeconomic instability, high inflation, poor public services, criminal neglect of the social sectors, widespread corruption, crippling power outages, growing unemployment, deepening poverty and a deteriorating debt profile.”
Pakistan has to implement changes to address its underlying structural difficulties if it is to overcome its economic troubles. “Borrowed growth” has done significant harm to the economy of the nation.
Recent years have seen a shift away from Western dependency, with financial aid coming instead from key strategic allies like as China, Saudi Arabia, and the Gulf States.
Incoming Funds
Saudi Arabia, China, the United Arab Emirates, and international financial institutions might immediately begin contributing billions of dollars. Although, if annual inflows are predicted to continue at different rates, the vast majority of these funds will just add to Pakistan’s existing external debts and annual debt payment commitments.
Pakistan’s petroleum sector is expected to be the primary recipient of Saudi Arabia’s potential $10 billion investment in the nation. It also plans to deposit an additional $2 billion with Pakistan’s national bank.
The United Arab Emirates is to provide $3 billion in finance, which includes the transfer of its $2 billion in foreign currency deposits held at the State Bank of Pakistan. Saudi Arabia also agreed to refinance loans from Chinese commercial banks to Islamabad, increase bilateral currency swaps, and provide $1 billion in oil on a payment plan. China is expected to pump in about $9 billion into Pakistan’s economy.
If the government does not significantly increase exports of goods and services, reverse the declining trend in remittances, and foster an atmosphere that is favourable to foreign investors, it might become trapped in foreign debts within a few years. With Pakistan’s deeply ingrained worldview, it’s hard to see the country learning anything.
Threat from Taliban
The ISI saw the Taliban’s triumph in Afghanistan as a chance to dominate Kabul, giving Pakistan great “strategic depth.” Pakistan may have thought it had accomplished its strategic aims in Afghanistan by putting a friendly militia in Kabul after the Taliban’s August 2021 coup. As a result, Pakistan hoped it would be better equipped to deal with the problem posed by the Tehreek-e-Taliban Pakistan (TTP). Nonetheless, the Taliban started to openly reject Pakistan’s interference in Afghanistan’s domestic affairs. Islamabad must now take action against the TTP since their client has openly bitten their hand that has fed them.
The TTP is not a unified group that can be easily disbanded and integrated into mainstream society and politics. This is especially the case when the ideology championed by the violent organization is well recognized.
Relationship with the United States
The United States’ and Pakistan’s relationship is also delicate. The situation escalated in April 2022 when Imran Khan blamed the United States for orchestrating the opposition’s vote of no confidence in him.
It would seem that the current connection between Pakistan and the Biden administration would continue, given the recent retirement of General Bajwa and the selection of his protégé, Gen Syed Asim Munir, as his replacement. After all, General Bajwa sent weapons and ammunition from Pakistan to Ukraine through Royal Air Force. The Biden administration has commented in support of Pakistan’s strategy of cracking down on the Taliban. But, Afghanistan has been called the “graveyard of empires.”
Murky Politics
Support for the Shehbaz Sharif administration seems to be waning. Although it is possible that Pakistan’s economy may recover from its current downturn, doing so would require the government to make unpopular fiscal choices before the general election later in 2023. The current administration’s attempts to prevent Imran Khan from voting have only served to make matters worse.
Relations with India
Although many in Pakistan and India may have been taken aback by Shahbaz Sharif’s apparent friendly overtures towards India, in an effort to improve his standing both at home and abroad, India’s response has not been encouraging because of Pakistan’s continued support for activities inimical to India. The Pakistani Army and the ISI may not appreciate Sharif’s gestures. Sharif has made a mistake for which he will be eventually held accountable. An elaborate and all-encompassing plan is necessary to address all issues.
Loans Repayment Restructuring
The figures are alarming: The country’s foreign currency reserves are only enough to cover imports for one to three weeks at a time. The national debt is almost 79 percent of GDP, or $270 billion. Keeping the lights on, so to speak, seems to be a challenge. Power outages around the nation have been severe.
The purpose of a IMF delegation to Pakistan was to attempt to finalize the release of a $7 billion aid package that was agreed upon in 2019. In an effort to comply with IMF criteria, the government recently abandoned exchange restrictions that had been artificially propping the rupee, sending it to all-time lows. Even if another billion or so is released from escrow, this will only be a temporary fix. It may not be pleasant, but a heavy dosage is necessary if Pakistan is to avoid default.
China is Pakistan’s largest bilateral creditor, holding nearly $30 billion in debt. China denies that its loans put developing countries in a “debt trap.” Pakistan has to get into debt restructuring discussions as soon as possible with China, the IMF, and the Paris Club of creditor countries.
Stark Future Scenario
What happens to Pakistan if its economy goes into free fall as a result to loan payments default or it runs out of foreign exchange reserves. Some of the possible effects include:
Currency Devaluation: If Pakistan runs out of foreign exchange reserves, the value of its currency (the Pakistani rupee) could plummet. This could make imports more expensive and cause inflation to rise, which would hurt the purchasing power of ordinary citizens and lead to economic hardship.
Capital Flight: If foreign investors lose confidence in Pakistan’s economy, they may withdraw their investments, causing capital flight. This could lead to a further depletion of foreign exchange reserves and exacerbate the economic crisis.
Reduction in Public Spending: If the government is unable to borrow or obtain loans, it may have to cut public spending, including on essential services such as healthcare and education. This could have serious consequences for the well-being of citizens and further erode public trust in the government.
Social Unrest: A severe economic crisis could lead to social unrest and political instability. This could exacerbate existing tensions between different ethnic, religious, and socioeconomic groups in the country.
International Pressure: Pakistan may come under pressure from international organizations and countries that have provided loans or aid in the past. This could include demands for economic reform, austerity measures, and political change.
Conclusion
The nation’s political culture has been so ingrained with the practice of relying on others. This demonstrates the failure of economic governance because it entails the cash-strapped nation lurching from one crisis to another, without being able to prevent the next one, and outsiders are regarded as band-aid solutions to its enduring economic issues. Above all, this strategy reduces the nation to the regrettable position of a supplicant whose ability to support its own economy rests on others rather than on itself.
