Emerging economies hoping to grow their way into the ranks of the developed have faced a seemingly never-ending series of setbacks in recent years—Pakistan has been no exception: Trade tensions, a pandemic, supply-chain snarls, inflation and war (closer to home and as far as Eastern Europe) have together dealt serious blows to the economy. The devastation to the developing world has been collected in that over the past three years more than half of its population has lived with income growth, in purchasing-power terms, less than one-third of that in the US—the first such episode since the 1980s. In the case of Pakistan, the IMF economic forecast not so long ago marked that economic output will expand by more than 5 percent annually, and seems to have been marked down significantly to almost around 1 percent or perhaps even lower. As the contours of the post-pandemic landscape start to come into focus, a lost decade for Pakistan—a period of slow growth, recurring financial crises and social unrest—looks increasingly plausible.
Financial pressures pose the most acute threat. In the early 1980s, the Federal Reserve raised interest rates dramatically as it sought to tame inflation. For developing countries that had borrowed in the preceding years, the ensuing tightening in financial conditions and strengthening of the dollar against their respective currencies became too much to bear and waves of debt and banking crises followed—history to seems to be repeating itself today here in Pakistan. Our external debt has ballooned beyond $130 billion (not accounting for contingent liabilities), the currency has almost halved in so many months and the exorbitant domestic has not only crowded out the private sector but also has eaten away all fiscal space for any kind of development spending, as the debt servicing figure reach a colossal PKR 4 trillion. Naturally, inflation is rampant (clocking 46 percent last week), and business and industry are in tatters leading to fast-rising unemployment & poverty. In addition, as we witness higher interest rates in the US (just as in the 80s), markets are heaping their own pressure on the Pakistani economy. Capital is flowing out to take advantage of higher returns and safer capital values abroad, resulting in an eroded stock market and an absence of any meaningful FDI. From the look of things, unless there are some dramatic changes or some gross largesse from supposed friends, we may probably have to follow the lead of Sri Lanka, which on April 12th, 2022, defaulted on its hard-currency government debt. Embarrassing, but nonetheless, a good fighting chance that the systemic crises that were a feature of the previous lost decades may be avoided this time.
So far, the government in Pakistan seems to believe otherwise, as they rather go the route of IMF first (at any cost) in order to avoid a default, as against the Lankan choice who defaulted first and have then gone to the IMF to steady the ship. The basic difference is that here in Pakistan the government and its institutions (who are largely responsible to bring us into this position) want to avoid any pain on themselves while shifting the entire threshold on the people, whereas, in Sri Lanka, by taking a hit on government debt the burden will be shared both the government institutions and the people at large. Now one can argue either way on who is right and who is wrong and without getting into the debate, the reality is that if we want to adopt the strategy that we have chosen, then it really needs to be with some sort of plan on how to ultimately resurrect the economy.
No point in continuing to keep inflicting pain on people and industry in search of self-serving dollars and in the process taking the economy to a point where recovery becomes impossible. This is exactly what seems to be happening right now. With interest rates reaching levels that are unworkable, supply-chain constraints that are choking manufacturing, an inflation level that is primarily policy and currency driven rather than due to excess capital flows, a public sector that is simply out of control and a government that is looking to tax and extort its way out of its intra-government financial squeeze, the situation is deteriorating by the day with mounting frustration amongst the investors and the general public. For example, how on earth can one justify passing on the burden of SOEs’ inefficiencies on to manufacturing and expect them to remain competitive? Anyone expecting the industry to remain competitive or to even survive on the present energy rates must be living in fool’s paradise or for that matter to hope for any investment (both domestic & foreign) to take place with an unbridled tax collector hell-bent on hoovering all capital from the markets just so that the party can last for another day. The mistrust grows especially when promises and contracts made to the people by the state under amnesties and operational guarantees are arbitrarily ditched and it this breach and perhaps a brewing perception of mistrust could very well be the main hurdle in securing an increasingly elusive IMF deal!