By Rohit Muthiah

Abstract

Pakistan’s economy has been going through extreme distress and the country is struggling to make ends meet. In this article, we will explore the underlying reasons for this and analyse the options available to Pakistan going forward.

Pakistan’s economy has generally been in a state of perpetual rumbling. Other than occasional periods of growth, it has been marked by several challenges, resulting in a persistent cycle of economic instability.

Adding fuel to the fire, it has only been severely exacerbated in recent times as Pakistan faces its worst-ever economic crisis. With inflation at an all-time high, increasing unemployment and what seems like a ceaseless period of low growth, the picture looks very bleak for Pakistan. With uncertainty looming all around, accepting foreign aid seems to be the only way out.

The latest numbers coming from Pakistan look incredibly grim. The country’s foreign exchange reserves stand at a measly $4.3 billion dollars which is just about enough to sustain a month’s worth of imports. Economic hardship has trickled down to all parts of society, with millions of people struggling to afford even basic necessities or put food on their plates. The more affluent parts of society, too, find it hard to keep up with the rocketing inflation coupled with stagnant incomes. The epitome of this was the nationwide power cut, which left the country’s 230 million people without electricity for an entire day. 

Pakistan is precariously positioned at the crossroads of 2 hostile neighbors, both of whom present a unique set of challenges. On one hand, there is the Taliban-controlled Afghanistan, on whose border with Pakistan operates the militant group Tehrik-e-Taliban Pakistan (TTP) which works against the Pakistani establishment. TTP poses serious issues in terms of security and the volatile situation in these border regions proves to be a stranglehold on Pakistan’s regional power dynamics. On the other hand, there is India whose tense relations with Pakistan continue to deprive it of a potentially lucrative trading and investment partner.

Now, what exactly has sent Pakistan into this rabbit hole of a mess? The answer to that is threefold – economic trouble, political instability and global uncertainty.

The primary reason for this crisis stems from the fact that Pakistan is unable to keep up with its woefully large external debt obligations. According to the latest reports, its overall debt is nearly at a staggering $300 billion dollars which is about 80% of the country’s GDP. Pakistan has repeatedly struggled to repay this money, resulting in global rating agencies steadily reducing its credit-rating. With its reputation as a credit-worthy borrower plummeting, global investors have kept well away from infusing much-needed capital into the country. As foreign investment has become hard to come by, Pakistan has resorted to more borrowing as a result of which it is now reeling over the clutches of an economic collapse.

On top of this economic impasse, Pakistan’s perilous state of affairs has only undermined further due to fluctuations on the international level and general global uncertainty. Pakistan is a highly import-dependent country, especially in terms of energy. However, Russia’s war in Ukraine has caused a massive increase in global oil and gas prices, leaving Pakistan in jeopardy.

All these economic dilemmas are not inherent in themselves but rather mired in Pakistan’s chaotic political environment, which makes it arduous to implement any meaningful policy measures. Since its inception, the country’s military and government have been known to have been at odds with each other. Internal political vengeance is also dangerously high. The parties of the current Prime Minister Shehbaz Sharif and former Prime Minister Imran Khan squabbling to eliminate each other politically, has further complicated matters.      

The situation at the moment is looking extremely worrying, so much so that it is fair to say Pakistan has reached a point of no return. From this state, it is nearly impossible for Pakistan to revive itself on its own. An external bailout seems to be the only thing that can save Pakistan.

The crisis in Pakistan now is similar to that of Sri Lanka last year. However, unlike Sri Lanka, Pakistan is a nuclear power with ten times more population and its failure has far more implications for the regional and global order. A credit default by Pakistan is something the international community should seek to avoid at any cost.  

Over the last few months, Pakistan has been in a frenzy to secure a bailout package from the international community to avoid a default on its debt commitments. A myriad of reports has come out on the multitude of bailout deals that have been proposed. This is where Pakistan has to tread carefully and make a conscious choice. It has 2 options – either to accept a bailout by the IMF which comes with a set of stringent conditions or accept a deal with the likes of China and Saudi Arabia. Both have their own perils – Pakistan has a difficult decision to make.

With the IMF deal, Pakistan would be required to create an anti-corruption task force to mitigate any structural flaws. It would also involve a significant increase in electricity and gas prices and substantial hikes to tax rates. If a deal with the IMF materializes, it would provide Pakistan with some respite and much-needed space for breathing. The finer terms of the deal would also allow Pakistan to iron out all the underlying structural roadblocks like corruption and inefficiency, acting as a starting point for long pending reforms. However, there are fears that these measures could unintentionally trigger more inflation and more importantly, is a very tricky political decision for the Prime Minister, Shehbaz Sharif, to make.

It is important to keep in mind that an IMF deal would only provide a temporary respite. It would earn Pakistan at most $10 billion dollars, which is not enough to climb out of the crisis altogether. What it will do, however, is provide a way out to improve its foreign exchange reserves and stir up investor confidence, such that funds start flowing back to the country. It is then up to Pakistan to ensure that its rickety public and private institutions function in tandem, that the military does not clash with the government and that adequate steps are taken to prevent the same mistakes from happening again.

The other option is to sign a deal with countries like China and Saudi Arabia. While these deals are not as requirement-heavy as the IMF one, they are laden with implicit catches and caveats. China will try to leverage its upper hand with Pakistan to further strengthen its geopolitical hold over the region. China has already pumped outrageous sums of money into Pakistan, bankrolling dozens of projects as part of its ambitious Belt and Road Initiative (BRI). Not only that, China has already lent Pakistan large amounts of money. Nearly one-third of the debt Pakistan has is owed to China. Taking more money from China, however, would mean that Pakistan becomes more susceptible to China’s ‘debt-trap’ diplomacy and would also be expected to support China in its geopolitical endeavors, from Taiwan to Ukraine. 

Likewise, Saudi Arabia has also shown some interest in bailing out Pakistan. In such a scenario, Pakistan would be expected to become a key purchaser of oil for Saudi Arabia and also an ally in standing-by Riyadh’s ambitions in the Arab world. A Saudi bailout, although plausible, is still far-fetched given that this is unprecedented and other players such as China have far more skin in the game.No matter what, the road ahead for Pakistan is an incredibly long and painstaking one. Pakistan is unfortunately caught between IMF demands and Chinese interests. The way out is not easy and there are several variables at play. This current crisis is unlike what Pakistan has ever seen. It is unprecedented in scale and relentless in depriving its people. Pakistan must act fast and act smart, for the decisions it takes now could very well shape the country’s trajectory for the next decade.

About the Author

Rohit Muthiah is a first-year student at Ashoka University, pursuing a degree in Economics and Finance.  

Image source: https://www.istockphoto.com/photo/graph-falling-down-in-front-of-pakistan-flag-crisis-concept-gm1218758973-356239553