On 29 August 2022, the International Monetary Fund (IMF) executive board gave its nod for restoring the Enhanced Fund Facility for Pakistan. The mood in Islamabad was celebratory on two counts. The first was that the IMF programme had warded off the immediate threat of Pakistan defaulting on its debt, and becoming another Sri Lanka, or worse; the second was the failure of a last-minute attempt by Imran Khan and his cronies to sabotage the IMF programme by refusing to adhere to a crucial undertaking by provincial governments to generate fiscal surpluses.
Even so, there was something quite incongruous about the congratulatory messages being exchanged by the ministers and the generally upbeat mood among the commentariat. After all, the Pakistan economy was not quite out of the woods. If anything, it was still on life-support and the tough times were only going to get tougher. Worse, the IMF programme has at best given a breather and isn’t a panacea for the deep structural problems that have made the Pakistan economy unsustainable, even unviable.
The breather is unlikely to last very long. Pakistani politicians are notorious for their profligacy. But they also face a genuine political problem. The IMF has, for very good and valid reasons, made Pakistan jump through the hoops before restoring the EFF programme. This included ending fuel subsidies which meant virtually doubling fuel prices. In addition, Pakistan was asked to levy a Rs 50 per litre tax on petrol. Power tariffs were also raised to bring under control the ballooning circular debt — it has crossed Rs 2 trillion — dogging the power sector. New taxes to raise government revenues were also forced down the throat of the government.
Not surprisingly, inflation went through the roof. It is about to cross a fifty-year high with consumer prices index at over 27 percent, sensitive price index at nearly 34 percent and wholesale prices rising over 41 percent year-on-year. Power bills have broken the backs of all but the very rich, with tariffs ranging from anything between Rs 24 to Rs 50 per unit depending on how many units are consumed. The Pakistan rupee is extremely volatile and after first being exchanged at 240 to a US dollar, it recovered to around 218 and has since fallen to 225 to a dollar. In the open market the dollar is being traded at Rs 235, that is if someone is lucky to get it at that price. The fall in the rupee has also fuelled inflation.
The economic crisis is hitting Pakistan at a time of extreme political instability. Speculation is rife about whether the incumbent government will last until next August or be out of office before October ends and fresh elections are called. Political instability at this stage will only exacerbate the economic uncertainty. Even if elections are held according to schedule next year, there will be enormous pressure on the ruling coalition to give economic relief to the people, or else be ready to get politically decimated at the hustings. In other words, come 2023, the government will have to start dishing out the goodies to not just powerful interest groups, but also to the voting masses. Some of this is already starting to happen.
With a bunch of by-elections scheduled for late September, the government has announced a temporary relief in electricity tariffs and also sanctioned huge amounts of money for development projects in constituencies of coalition partners. When the general election comes, the purse-strings will be opened and fiscal profligacy will once again push the economy into bankruptcy and default. The reason for this is that the tough measures taken so far are the easiest of the difficult steps that need to be taken to restructure the economy. The real structural reforms are still nowhere on the anvil. Even if they were to be unveiled and initiated, they would take at least a few years before they would start showing results. During this period, there will be tremendous upheaval, disruption and pain, which will be quite unbearable for an economy that is already in the throes of high economic distress levels.
The thing is that without structural reforms, it is only a matter of time before Pakistan once again finds itself on the verge of an economic meltdown. What is more, the time gap between the economic crises is reducing from around 3-4 years to around 1-2 years. Compounding the economic mess is the deteriorating security situation which is largely a function of an adventurous Pakistan Army punching way over its economic, political and diplomatic weight. If hostility with India has forced ruinous defence spending on Pakistan, the pyrrhic victory over the US in Afghanistan has imposed an unbearable economic burden on an already tottering Pakistan economy.
All of Pakistan’s calculations of how Afghanistan will become its ticket to the riches of Central Asia and how the Taliban will enhance Pakistan’s security have blown in its face. The Tehrik-e-Taliban Pakistan (TTP) is becoming powerful by the day. The Islamic State Khorasan has also become a potent organisation. And Al-Qaeda is once again active. Simply put, the spectre of a return to the days when bombs were going off all over Pakistan, businesses were closing shop and shifting outside the country, airlines were chary of flying into Pakistan, even diplomats had started leaving, is now hanging over the country.
Meanwhile, Pakistanis who delude themselves into thinking that they are the centre of the world and are paranoid enough to think that the rest of the world has nothing better to do than conspire against them, have successfully ruined most of the external relationships under the leadership of Imran Khan. Unlike the past when countries like China, Saudi Arabia, UAE and other Gulf states were ever ready to bail Pakistan out, now they are a lot more careful with their money, often demanding a quid pro quo. There is also an element of fatigue with dealing with Pakistanis who return year after year, hat in hand. Even the Chinese have been quite parsimonious in bailing out Pakistan — in the current crisis, so far the Chinese have only rolled over old loans but not given any new money. The Americans are also not giving any more free lunches. This means that Pakistan which has for long lived on other people’s money is finding the money flow being reduced to a trickle.
It is against this bleak backdrop that Pakistan has been hit by a natural calamity — the floods. For weeks, the Pakistani authorities and media ignored the devastation caused by excessive rains in parts of Khyber Pakhtunkhwa, Balochistan and Sindh. It was only a couple of weeks back that the government and media condescended to shift its gaze from the political circus in Islamabad to the calamitous floods in the rest of the country. But cynical though it may sound, this focus on the floods was more the result of sensing an opportunity to monetise the misfortune of the wretched and destitute. That the floods have caused enormous damage is unquestionable. But for the Pakistan elite, some good may come out of this tragedy — not for the victims but for the rich and powerful, and of course for the state of Pakistan.
The floods are seen as an opportunity to get the multilateral financial institutions and bilateral partners to cut some slack to Pakistan — give more money, reschedule and perhaps even write-off loans, relax the onerous conditions and prior actions being demanded. No, the Pakistani elite are not ready to pay more taxes to fund relief and rehabilitation. They would rather borrow from other countries. While all the aid and financial relief will be sought in the name of rehabilitating the victims, past experience — the 2005 earthquake and 2010 floods — suggests that very little, if at all any, assistance will go to the affected people.
But whatever temporary relief comes Pakistan’s way, will at best keep the IMF off its back until the next crisis. Pakistan cannot undertake any serious reform because it neither has the time nor the financial space, and certainly not the political will, much less political consensus, to do what is needed. What will happen is skirting around the difficult issues, some patchwork economics and then back to square one.
The problem however is that with politics deeply polarised and economic distress levels are breaking point, something’s got to give. The floods might not have affected the elite but will have left an impact on the economy that will be worse than whatever relief Pakistan expects to get. For instance, the cotton crop, so critical for Pakistani industry and exports, is badly affected. Importing cotton will require foreign exchange which is running dangerously low. Since trade with India is closed, Pakistan will be forced to pay extra for importing cotton, affecting the competitiveness of its industry. Economic growth is expected to plummet next year, partly because of floods and partly because of the IMF programme. This means very few jobs are being created. Meanwhile the power and fuel prices along with general inflation will produce a pressure cook like situation in a country where politics is totally toxic.
The next few years are going to be quite tumultuous in Pakistan. This is a huge opportunity for India to widen the gap with Pakistan to a point where Pakistan ceases to remain a challenge, even ceases to matter because it cannot even afford to be a nuisance. The question is will India use this time to its advantage or will India fritter away this advantage by being chivalrous and forgetting that in international relations goods deeds seldom go unpunished.
The writer is Senior Fellow, Observer Research Foundation. Views expressed are personal.