Monday July 15, 2024

Crashing economy?

By Farhan Bokhari
June 07, 2023

Ahead of Finance Minister Ishaq Dar’s expected budget speech this Friday which is set to come with more than the usual sugar coating, the glaring writing on the wall presents just one dismal reality – that Pakistan’s economy is simply crashing.The sharp contrast between the ‘sub achha’ or all is well spin from the Dar-led official quarters versus the reality on the ground became widely evident recently, when the exchange rate of the rupee versus the US dollar rapidly slid in the open market after banks were permitted to make foreign credit card payments from their coffers.

The change briefly ended the practice of the purchase of foreign currency from the open market for banks to settle payments of credit card bills incurred in foreign currencies. This short-lived rise of the rupee coincided the same day with the announcement of the highest inflation rate of 38 per cent in Pakistan’s history.Together, these sharp contrasts powerfully painted a familiar picture of the official view of the economy remaining far detached from the reality on the ground. As Dar, the team leader on Pakistan’s economic side remains defiant in public, there are multiple indications of a lost grip on the country’s finances in the midst of the economy remaining just flat.

An obvious indicator of this powerful reality will soon become evident next month when Pakistan enters a new financial year from July 1, saddled with an increasingly tough burden of foreign debt repayments alongside the worst economic slowdown in the nation’s history. In very sharp contrast to Dar’s oft-repeated claim of Pakistan remaining safely away from a default on its foreign debt payments, the opposite is indeed the truth. As Pakistan’s foreign reserves remain dangerously low, the absence of the country’s return to an IMF loan programme has only aggravated the outlook for sustaining payments of the foreign debt.

Tragically, Pakistan’s downward present economic slide began when Dar inherited the finance ministry from well-reputed economist Miftah Ismail, and began his new tenure with an ‘I don’t care about the IMF’ notice to the Washington based lender. It was an act almost akin to a hugely indebted borrower walking up to their bank’s manager and defiantly demanding to be given further loan without the promise of deep rooted reforms to guarantee the safe return of the existing stock of debt.

In continuation of that defiant streak, the finance minister even publicly counted the existing stock of private onshore private foreign currency deposits among the existing stock of Pakistan’s paltry foreign exchange assets. That public view immediately triggered fears of a repeat of 1998 when shortly after Pakistan’s maiden nuclear tests under former prime minister Nawaz Sharif, onshore deposits in foreign currency accounts were swiftly frozen, in effect marking a default by the government at the time after borrowing heavily from those deposits.

Pakistan’s position today is far more fragile for two inter-related reasons.On the one hand, the political mayhem across the country recently has already fueled the kind of uncertainty that has clearly discouraged the most vital stakeholders in the economy, notably members of the business community. Unless a very clear roadmap is put in place quickly showing a credible build up to a political transition later this year, the political risk that has already undermined the economy will simply grow.

On the other hand, long-term players across the spectrum must revisit their expectations from the IMF. Dar has more than once said publicly that Pakistan has fulfilled all the conditions sought by the IMF for release of its next tranche of about $1 billion under a $6.5 billion loan programme that’s due to end soon. Yet, the fund’s refusal to step ahead with the disbursement obviously points towards a remaining gap.

Additionally, Pakistan needs to urgently take another vital reality check. Unlike the past when the IMF ignored many shortcomings in Pakistan’s economic performance and offered one or more waivers while disbursing funds, today’s conditions are vastly different. Pakistan just doesn’t have the same strategic clout as in the past to be backed by global capitals, while money from lenders such as the IMF flows in with relative ease.

As Pakistan awaits Friday’s budget apprehensively, a word of caution is essential. Dar and other members of the ruling clan may well be tempted to announce generous provisions for spendings by members of the legislature, as the countdown takes place to elections later this year. However, such allocations will be ill advised in the midst of a shortfall in revenue collections as Pakistan remains not too far from a default on its debt payments. More vitally, such largesse would stand in contrast to the plight of Pakistan’s public at large which might face further belt tightening if the country heads towards an international bailout soon. And the reality of an already crashing economy is just not reassuring.

The writer is an Islamabad-based

journalist who writes on political and economic affairs. He can be reached at: