There is a grave economic crisis facing Pakistan, with a possible loan default looming in the future and the IMF prepared to provide financial assistance under tough monetary conditions. There is fierce political rivalry between former prime minister Imran Khan and the current government in Pakistan. This rivalry makes it difficult for the country to resolve its economic and political problems.
Islamabad’s top priority is the financing of debt relief for the beleaguered nation, given the state of Pakistan’s economy and the political turmoil in the highly radicalized Islamic Republic. As a result of IMF loan conditions that require Pakistan to raise electricity tariffs and levy additional taxes to raise revenue, Islamabad has now approached Washington to ask the Bretton Woods institution to become softer on the Islamic Republic. In addition to being politically disastrous for the current PDM regime, such measures would also give a handle to Imran Khan Niazi, the arch-rival and rabble-rouser.
Pakistan is not only out of money, but also out of ideas on how to save the country, which is unraveling at an alarming rate. It would not be so terrible if it was only the economy that was at risk of bankruptcy. As the economy melts down, the polity is also polarized and pulling the country apart. Social cohesion and coherence have been broken, and the security situation has spun out of control due to the Taliban’s belligerence.
In Pakistan, the poly-crisis is getting more severe by the day, as each component crisis reinforces the other and there is no clear exit for the present regime. Simply put, Pakistan is drowning. However, its citizens seem to believe that they will be able to swim out of these troubled waters because the world cannot afford to see them sink.
However, the world does not appear to be ready to bail out Pakistan until and unless Pakistan is prepared to help itself. Despite this, Pakistanis are more preoccupied with the political circus in their country than with sweeping economic reforms that could lift them out of their present economic plight.
The excesses of the Pakistani elite politicians, military personnel, civil servants, landed gentry, and business and trade organizations have resulted in the economy reaching rock bottom. The current focus is on preventing a default that will cause the economy to incinerate and unleash an uncontrollable civic and political mess in its wake.
The incorrigible Pakistani elite is trying to terrify the rest of the world to ensure that Pakistan’s economy stays afloat, even though default is certain to cause unbearable suffering. In the same way that they used the floods as a bargaining chip to obtain a slew of concessions from international lenders, they are now using the imminent economic collapse as a bargaining chip.
Pakistan is essentially scaring the world by threatening nuclear weapons being let loose and radical Islamists taking over the country in a revolution. While these fears are alarming, they are exaggerated as they have been in the past. In spite of the romanticism of revolution, Pakistanis do not have the stomach for any sort of revolution, especially an Islamic revolution, which would have the greatest impact on the elite.
However, the economy has reached a dead end. In the event that the IMF program gets back on track, it might postpone the economy going belly up until June 2023, probably by the end of the current financial year. Over the next six months, Pakistan will need around $10 billion. The Saudis will give around $2 billion, the UAE another $1 billion, the Chinese a couple of billions, and Qatar will buy some assets for around $2 billion under the IMF program. But this will last only until June.
Pakistan will need another $30 billion or more in the next financial year. Are the same friends willing to keep pouring money into Pakistan indefinitely? To reestablish the extended finance facility program, the IMF has already imposed very onerous conditions. As a result of these conditions, the people will not only suffer financially, but also politically.
Fuel prices are expected to increase, power rates will increase, and gas prices will spike, resulting in inflation of 40-50%. Additionally, the rupee will collapse. In the event that the rupee is allowed to float, it will depreciate from its artificial level of 230 to around 260-270. The rupee may breach the 300 mark in a couple of months, according to some analysts. Massive inflation will result, which is already a backbreaking problem.
Increasing interest rates will be necessary for Pakistan to control inflation. Consequently, business costs will be unsustainable and unviable. In addition, interest rate hikes will destroy what remains of the government’s fiscal position. Despite the current interest rate of 17%, the debt servicing costs may exceed the entire federal government’s revenue in the near future.
Pakistan faces the stark reality of default. It is not a matter of if, but when. Debt rescheduling is the only feasible option. It is almost as disastrous as a default because it comes with such stiff conditions that make the current IMF conditions seem tame. Politicians and military leaders in Pakistan have hoped the storm would pass them by.
There is no doubt that the Pakistani elite and generals want the rest of the country to make sacrifices. However, they are not prepared to cut their own expenses or privileges. They demand their royal protocol, their golf courses, their holidays in Dubai, send their kids to Western universities. They receive unconscionable subsidies from the empty coffers of the state, but deny the basic right to life to ordinary Pakistanis.
Pakistan’s army is also unwilling to cut costs. Pakistan continues to buy expensive weapon systems that it cannot afford. The country continues its unaffordable strategic adventures on both sides of the border. Unless the strategic environment improves and relations with India and Afghanistan are normalized without legacy conditions, and action is taken against terror groups based in Pakistan, military budgets cannot be reduced.
In much the same way as the military, the political class is more concerned with saving its political capital and securing its political future than with saving the country. Political jockeying at a time when the country is on the verge of collapse is bizarre. Imran Khan wants immediate elections, which he believes he will win.
There is nothing the ruling coalition can use to get to the hustings, so it plans to delay elections for as long as possible. While the Army doesn’t want to disturb democracy, it wants to have the final say. Similarly, it does not want Imran Khan to return to power, at least not right now, and is prepared to stop him by any means necessary.
It appears that the government will sign on the dotted line and rejoin the IMF program. Within a month or two, it will start throwing money at winning back political support. By the time elections are held and a newly elected government takes power, Pakistan will be facing an even more severe crisis than the current one. Therefore, Pakistan’s economy, as well as the current political system and state are headed towards collapse no matter how you cut it up.