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Thursday July 07, 2022

Economic meltdown?

May 18, 2022

As Pakistan’s economic team begins meeting with IMF officials in Doha today (May 18) to pave the way for more funds from the Washington-based lender, the writing on the wall for the country’s mainstream households is abundantly clear: the increasingly pressing need to tighten belts excessively more just to stay afloat.

Prime Minister Shehbaz Sharif has so far remained wary of reversing an ill-advised drop in domestic fuel prices, left behind among the last pre-departure legacies of Imran Khan. Whether this was the former prime minister’s booby trap of choice for his successor or a well-thought-out plan to insulate Pakistan from globally rampant inflation remains a matter of speculation.

But with Pakistan’s stock market and the value of the rupee versus the US dollar rapidly plummeting, the country’s economy remains increasingly in crisis. In brief, Pakistan faces the danger of an economic meltdown unless its national decision-makers in partnership with foreign stakeholders successfully set the course for stability.

Unlocking further funds from the IMF not only requires a reversal of the Khan imposed drop in oil prices. The exercise may also force the government in Islamabad to accept additional painful steps to rein in an increasingly out of control economy. A failure to rebuild Pakistan’s ties with the IMF could well take the country towards some of the worst imaginable economic trends ever witnessed in Pakistan’s history.

Not too far from Pakistan, continuing turmoil across crisis-stricken Sri Lanka must work as an eye-opener. The sharp contrast from the once much touted tourism-led island nation armed with prospects of joining Asia’s tiger economies, versus the riots that have engulfed Sri Lanka in recent days clearly shows the reality of a journey gone sour. The ever swelling crowds of protesters stung by their government’s failure to provide basic needs are out on the streets of Sri Lanka, amply demonstrating the consequence of economic turmoil turning in to a full blown national calamity.

Meanwhile, recent events such as a mob ransacking the home of Sri Lanka’s former prime minister Mahinda Rajapaksa and the subsequent imposition of a curfew, clearly demonstrate the worst outcome from an economic crisis spiraling out of control.

Any honest study of Pakistan’s economic history will convincingly highlight the many gaps that have evolved over a long period, not only in undermining the nation’s economy but more so the critical element of national stability.

Though Pakistan has witnessed periods of relative economic improvement, those eras have been far too few to be counted in the long term. Such periods of relative success have failed to sustain themselves for a longer haul. In hindsight, it is very obvious that the surgery required to put Pakistan on the road to economic stability requires painful and unpopular surgery as never witnessed before.

At the center of Pakistan’s economic challenges lies the repeated failure to reform the country in two fundamental ways.

First, Pakistan’s rich and powerful elite have repeatedly defied the state on matters related to paying up their dues. It is hardly surprising that influential Pakistanis, notably those linked to powerful individuals and lobbies, have repeatedly failed to keep up with their tax obligations. Unless Pakistan turns around this legacy and forces affluent figures – ranging from large landowners to affluent industrialists and business figures – to pay their dues, the country will remain locked in recurring fiscal crises.

This exercise to force significantly greater financial discipline will remain incomplete unless undertaken in tandem with a massive effort to cut wasteful expenditures. Pakistan has been heaped upon with ever-growing financial pressure year after year from unproductive areas, notably a large lineup of public sector companies repeatedly running in loss. It is a legacy that has weakened the country’s finances and forced it periodically to turn to the likes of the IMF for bailouts.

Second, Pakistan has failed over time to build the fundamental ingredients necessary to secure its balance of payments in a safe zone. The result has witnessed periodic crises surrounding the country’s foreign exchange reserves, typically following periods of high expenditure on imports, including luxury imports, while export growth has tagged behind. Pakistan must take steps to first pump up its exports before the country can afford larger expenditure on imports. For years, Islamabad has relied on remittances from its expatriates worldwide to bridge the gap. But even this valuable resource has shrunk over time, forcing policymakers to accept the need for alternative emergency measures.

These objectives – improving the fiscal balance and tackling out of control balance of payments – require both short- and-long term measures are essential first steps to secure Pakistan’s increasingly rudderless economy. Unless the country is nudged fast towards greater discipline, Pakistan will have to brace for a meltdown with unpredictable consequences for the future.

The writer is an Islamabad-based journalist who writes on political and economic affairs. He can be reached at: farhanbokhari@gmail.com

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