The bungled economy of Pakistan has nigh on turned into a cliche – a tragedy of volatile policies and volte-face politics. Over the course of the past few months after the ouster of Mr. Imran Khan, the recently dethroned prime minister of Pakistan, I have witnessed a brutal deterioration in the politico-economic fabric of the country. Two of the four provinces are without an elected government following a harried dissolution of respective assemblies in Punjab and Khyber Pakhtunkhwa (KPK). The federal government is subsisting on a razor-thin majority of a collective polity of 13 political parties of variegated vested interests.
Inflation has reached 38.4% despite historic monetary tightening by the State Bank of Pakistan (SBP). The foreign exchange reserves have dwindled down to $3.26 billion, barely enough to meet 3 weeks of import cover. While the pivotal economic review by the International Monetary Fund (IMF) still dangles optimism to escape the dreaded default, no prospective foreign inflows are on cards to plug the gap in the budgetary finances of Pakistan.
Many financial pundits are of the view that Pakistan ought to restructure its external debt – currently hovering around $97.5 billion – to escape the fiscal crunch of debt servicing. A motley group of economic gurus has posited their views, revolving around the structural reforms that are imperative to drag the economy of Pakistan from the crutches of foreign dependence entirely.
Unfortunately, while one premise inherently defends the capitalist foundations of the status quo (perhaps even enabling such forces to consolidate), the other side takes on a Populist approach that, quite frankly, defies practicality altogether. The result of the clash of these two paradigms is an admixture of confusion, breeding uncertainty in the economy of Pakistan.
I ask for a very simple answer to my question from the champions of debt restructuring: What exactly is the endgame? Pakistan has already been downgraded to the cusp of precarity; its international bonds have been relegated to junk status by global credit rating agencies. In all fairness, Pakistan is dealing with a double whammy of debt and devaluation. The more the rupee depreciates against the greenback, the more the debt servicing costs swell. A perennial cycle that continues to build pressure on limited state finances.
According to Dr. Miftah Ismail, the former finance minister of Pakistan, the country is due to pay circa $21 billion in the next 12 months; $3 billion needs to be repaid within the remaining 5 months of the fiscal year 2023, according to the SBP sources. Dr. Ismail has further augured that Pakistan would continue facing a similar burden of debt repayments for the next three subsequent years – a cumulative outflow of about $80 billion by the end of the fiscal year 2026 (FY26). How is debt restructuring a solution to such an enduring issue that is clearly endemic to the existing economic structure of Pakistan?
And thus, no amount of debt restructuring, increased taxation or rate hikes, or even administrative restrictions and draconian tariffs would prove potent against runaway inflation and a fraying standard of living.
A country typically borrows when it consumes more than it could afford to produce or procure. This a simplistic rubric but an effective one to describe the lopsided nature of Pakistan’s economy. As reported by the SBP, the country’s Current Account Deficit (CAD) clocked at $17.4 billion in FY22 – roughly 4.6% of the GDP of Pakistan. One would be forgiven to assume that Pakistan entertains abnormally extravagant imports relative to regional standards. Statistically, however, that argument doesn’t hold up. In the corresponding fiscal year, Pakistan ranked 42nd in the world for its nominal GDP. It also ranked 49th for its import volume. This parity reveals a consistency of imports with the size of the economy of Pakistan. But if imports are not the problem, what is? The answer is counterintuitive – exports.
In the same fiscal year, Pakistan’s exports ranked 65th in the world, a detraction compared to its economic heft. As a percentage of GDP, Pakistan’s exports of goods and services were just 9.06% in 2021. The figure is lackluster when compared to Bangladesh’s ratio of 14.8%; Thailand’s 58.2%; and Vietnam’s 93.3%. Pakistan’s domestic industries are notoriously inward-looking as protectionist trade policies and a windfall of state-sponsored subsidies take the incentive out of exploring export markers and developing quality standards. Yet, these industries still utilize imported fuel, machinery, and intermediate goods for production. The end result: the government of Pakistan keeps borrowing to subsidize inefficient industries that bring virtually no foreign exchange but lead to a net outflow of hard (and borrowed) currency.
This circular flow is the reason why Pakistan fails to sustain growth levels above 5-6%. Whenever the threshold exceeds, the country’s forex reserves start to deplete and the disparity between exports and imports widens, exacerbating the current account deficit and forcing the government to borrow while tamping down on domestic demand to curb imports. This is the ground reality today and it has been for the past few months. And thus, no amount of debt restructuring, increased taxation or rate hikes, or even administrative restrictions and draconian tariffs would prove potent against runaway inflation and a fraying standard of living. Because these variables are in-built into the economic infrastructure of Pakistan that would continue to cyclically drag Pakistan into the throes of anemic economic growth and unsustainable debt.
Then is the other facet of the debate worth exploring? Would structural reforms prove to be a lasting panacea for the economy of Pakistan?
Populist leaders like Mr. Imran Khan like to boast about an idealistic model of egalitarian values and social equity. His populist slogan of transforming Pakistan into “Medina ki Riyasat” (a state modeled on the welfare state of Medina founded by the Islamic Prophet Muhammad (PBUH)) surely garnered popular support amongst the masses, enough to project him into high office in 2018. Ironically, his Pakistan Tehreek-e-Insaaf (PTI) government added record foreign debt, to the tune of $35.3 billion, in its 44-month tenure. The money was not used for reforms but to repay previous loans, subsidize electricity and gas prices, and finance export schemes that hardly made a modicum of improvement in forex inflows. His post-ouster laments have been directed toward the alleged jawboning by the Pakistani military and an ever-elusive and corrupt political elite in opposition. The truth, however, is the failure of his narrow-sighted populism and misguided economic agenda.
Structural reforms need a vision. Not a complex vision but a realistic roadmap. Mere sloganeering and popularity are futile without a plan. Just avowing to build oil refineries, for instance, to efface Pakistan’s skewed dependence on imported petroleum products would never cut it. In reality, a constant flow of investment is needed. But how could that possibly metastasize when political chaos rocks the country haywire? Why would Multinational Corporations (MNCs) set up production in Pakistan when the country maintains some of the world’s highest tariff rates? How would domestic investors expand productivity and explore an export-based model when policy rates continue to vicillate around 17% – a prohibitive and inhibitive level compared to regional economies?
The same playbook of heavy taxation and truncating demand would barely contain inflation. However, it would continue to discourage innovation and hinder long-term development. I’m all for the idea of reducing income inequality. But this short-term benefit should not come at the expense of eroding domestic productivity, stifling entrepreneurship, and diverting Foreign Direct Investment (FDI).
Ultimately, I subscribe to neither the capitalist model nor the populist approach. Instead, I believe in a Charter of Economy that establishes a norm of policies and institutions for at least a decade. A charter that doesn’t waver between the two extremes of policy with each change of government. I’d go out on a limb and say that Pakistan needs political uniformity and economic certainty more than debt restructuring or structural reforms. And only after establishing market trust and openness can Pakistan even dream of taking the next step. Otherwise, this tussle of opinion is as abstract as our chances of avoiding a complete socio economic collapse.
