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Thursday, May 23, 2024

Mercurial political situation and its inverse impact on Pakistan’s economy

Pakistan has so far managed to stave off riots and repay creditors, avoiding an economic meltdown like that seen in Sri Lanka. Still, Prime Minister Shahbaz Sharif’s coalition government, which took over in April 2022, is grappling with multiple political and economic crises. Pakistan’s rupee is one of the world’s worst-performing currencies, the country’s foreign exchange reserves are abysmally low, and it has been unable to attract much-needed foreign investment.

The Election Commission of Pakistan (ECP) will be unable to hold new elections in Pakistan during this period of political turmoil and economic recession due to the difficulties of new constituency demarcation given the country’s uneven dynamics. Without resolving the complaints, constituency demarcation takes time, and the future of the election process depends on the political will and support of the judiciary. The purpose of this article is to consider how Pakistan’s constant depletion of foreign reserves and current political mistrust is threatening the country’s economic survival.

Since the dawn of 2022, Pakistan’s political parties have been engaged in a constant, discordant struggle that has notably caused an economic recession for the entire country. The general public, who must contend with inflation, skyrocketing commodity prices, and daily struggles for survival, are the losers in such a crisis due to the economic recession. Similar to this, there are discussions of new elections that raise serious economic concerns in the tumultuous political environment that currently characterizes Pakistan’s current economic situation.

Read more: Pakistan economy in long term ICU – Editorial

Understanding the matter better

It is clear that Pakistan is experiencing stagflation because of the unrelenting flow of high prices and the country’s low growth rates. Since 2022, Pakistan’s foreign reserves are depleting and the country is facing an acute current account deficit. As installed industries are not very productive, the general public is still struggling in poverty. Pakistan has always had current account deficits, which means that we have never had more to sell to foreigners than we do to buy their goods. The country has reached the point of no return, where this situation cannot continue open-endedly.

In spite of the fact that the PTI government had restarted the urgently needed International Monetary Fund (IMF) program in December of last year when faced with a vote of no-confidence in the following month, it chose to put political expediency ahead of the interests of the country and scuttled the IMF program in favor of unfunded subsidies for gasoline and electricity and another amnesty for businesses.

The default risk has been trending upward due to repeatedly changing policies and agreements in the IMF loan program. Last year, the country imported $75–80 billion and exported only $30 billion. Now the ECP demanded 45 billion rupees, and the Treasury agreed to 15 billion in installments, just as the Pakistan Bureau of Statistics (PBS) also demands in billions for the coming census.

The country’s default risk has once again increased to frightening levels, and it can be averted by an IMF bailout package or the Asian Development Bank. There is an urgent need for tangible actions that reassure markets and lenders. This demonstrates that the ministry and central bank must be yielding after the IMF twice postponed the discussion over its 9th loan program performance assessment and delayed the distribution of its next loan program of more than $1 billion due to Pakistan’s refusal to carry out the agreed-upon reforms.

Read more: Did Pakistan economy really progress under PM Khan?

The way forward

Despite severely restricting imports, the government has been unable to keep inflation and domestic demand under control as a result of an extraordinary external crisis brought on by declining foreign exchange reserves, a decline in dollar inflows, and a deteriorating fiscal position. Despite the current account narrowing, the rupee has declined.

Negative interest rates are a crucial factor in the rising cost of goods and services as well as the depreciating value of the rupee. The need for the rate rise was also driven by the government’s persistent fiscal lapses, especially in the wake of the floods, which are estimated to have cost $30 billion in losses and damages. However, the inflation that has destroyed millions of homes over the past few years cannot be stopped by monetary tightening alone.

\The SBP has emphasized that the fiscal authorities must contribute by upholding fiscal restraint in addition to monetary tightening, which together would help prevent the entrenchment of inflation and reduce external vulnerabilities. There is currently no alternative choice except for a peaceful transfer of power by announcing and preparing for the general election and an IMF bailout package to address the political and economic issues in Pakistan.


Mujeeb ur Rehman is working as a research fellow at Balochistan Think Tank Network. The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.