Pakistan’s resilient economy is, once again, stuck between a rock and a hard place. High political drama and the global geopolitical crisis have given her a cross but the way forward is full of pain and no path towards economic stability is possible without political stability.
The economy has gone from bad to worse in 2022. The outlook for next year suggests that the tough phase may continue for some time, despite the government taking some immediate corrective measures.
A section of experts believe that the country is heading towards witnessing “negative economic growth” for the third time in Pakistan’s history in the current fiscal year (July-June) 2022-23.
The main crisis in the domestic economy is the fall of the country’s foreign exchange reserves to the alarming level of $5.8 billion and the repayment of foreign debt worth $73 billion in the next three years (until the end of the fiscal year 2025).
The rest of the crises in the economy are by-products of the main crisis. They include a 49-year high inflation rate of 27%, a 23-year high key policy rate (benchmark interest rate) at 16%, an increased rate of taxes and a 28% devaluation of the domestic currency to Rs227 against the US dollar in 2022. .
A mistake at this critical juncture is to part ways with the International Monetary Fund (IMF) and consider installing a technical government. Those two options represent economic suicide for the country. The dark clouds of the default ship are very likely on the fiscal horizon.
The best solution to the prevailing crisis is to restructure foreign debt, as soon as possible.
Speaking to The Express Tribune, former finance minister Salman Shah suggested, “The government should resume the IMF loan program worth $6.5 billion despite the difficult conditions attached to it. He should then develop a political consensus to hold parliamentary elections with clear timelines. A caretaker government should then be established, general elections held to make way for a popular government to come to power for the full five-year elected period. The new government must then take tough decisions and oversee reforms across the economy, attract foreign investment, transform the inbound economy (dependent on foreign debt) into an export-driven economy and free the nation from economic hostage.”
The IMF program must be restarted in order to obtain the necessary foreign financing and to become, over time, a self-reliant nation.
Shah suggested that the government “refuses to restructure foreign debt,” meaning it should go to the lenders and convince them to reschedule timelines for repaying the debt, whenever possible.
“The current government in office is a very weak political government. We don’t have the capacity needed to save the nation from the current economic crisis,” he said.
“Installing a technical government is a failed idea. The world has already tested it and found it to be a waste of time and resources,” he said.
“Political instability remains the biggest threat to Pakistan’s economic viability. It is destabilizing the economy with each passing day,” said Shah.
“In addition to the political crisis, the terrible floods hit the economy hard in 2022,” he added.
Ismail Iqbal Head of Securities Research, Fahad Rauf, predicts, “Economic growth will remain slow in the current fiscal year, well below 2%. There is even a chance that the growth will turn negative in the year,” he said.
“Some businesses have been partially or completely closed due to the lack of access to dollars to import raw materials and machinery. In addition, agronomy is declining because the government has no policy focus,” explained Rauf.
“There are two options to move forward. One, the government agrees to implement strict conditions agreed with the IMF to restart the loan program and get some financial space to fix the current economic crisis. The second option is to part ways with the IMF, causing Pakistan to default on foreign debt repayments,” he said.
“In both cases (with or without the IMF), the country will continue to face high inflation readings of 23-24% on average in FY23 along with shortages of goods, especially energy and food,” Rauf said.
“Only a miracle can save us from the coming debt crisis. The miracle could be if one or more friendly countries make a heavy equity based investment (not debt based investment as happened in CPEC) worth $10-20 billion in Pakistan. Our immediate goal is to stop the crisis from multiplying,” he said.
“In the long run, the government needs to make reforms, especially in the energy sector. We need to privatize loss-making state-owned entities (SOEs). This is also a solution that is currently on the table,” he added.