Economic crystal-gazing

Political and judicial crises have an unmistakable impact on Pakistan’s economy

Economic crystal-gazing


conomist John Kenneth Galbraith once quipped, “The only function of economic forecasting is to make astrology look respectable.” Economic forecasting in Pakistan, a complex undertaking to begin with, becomes even more daunting due to the dynamics of the country’s political landscape. Despite the challenges, forecasting in Pakistan holds value as it informs policy formulation and aids risk management for individuals, businesses and the government.

The accuracy of economic forecasts depends heavily on comprehending the intricate interplay of socioeconomic factors. Pakistan’s current economic conditions present a bleak picture. The astronomical increase in prices has emerged as a major problem, severely affecting a majority of the population. In April 2023, inflation reached close to a staggering 50 percent, the highest level since December 1973. This rapid surge in prices has eroded citizens’ purchasing power and inflicted immense hardships upon the most vulnerable segments of society.

Soaring prices of essential commodities have placed an overwhelming strain on the poor. Tragically, during Ramazan, the distribution of free flour bags by the government resulted in tragic stampedes that claimed many lives. The heart-wrenching incidents highlight the urgent need for comprehensive measures to address their plight.

The economic challenges faced by Pakistan are compounded by the uncertainty surrounding the revival of the stalled $6.5 billion IMF bailout package. Despite the finance minister’s assurances of an imminent agreement, negotiations have struggled to reach a staff-level understanding. Prime Minister Shahbaz Sharif has acknowledged that the IMF demands are overwhelming and nearly impossible to meet. The lack of transparency both on the government side and the IMF has fuelled speculation and heightened uncertainty. Some individuals perceive this situation as a form of punishment by the IMF and the United States due to Pakistan’s growing alignment with China.

The spectre of sovereign default ominously hangs over Pakistan’s economy, instilling widespread fear and anxiety. The fear of default has permeated public perceptions, casting a shadow of uncertainty over the nation’s financial stability. Recent experiences, such as the struggles faced by Sri Lanka following a similar default, serve as stark reminders of the potential repercussions.

Pakistan has witnessed a tumultuous period since the removal of former prime minister Imran Khan through a vote of no confidence moved by the Pakistan Democratic Movement. While Khan and his party, the Pakistan Tehreek-i-Insaf, remain focused on early elections, hoping to capitalise on the wave of crippling inflation to secure an electoral victory and potentially a two-thirds majority, the PDM government is hesitant to proceed with early elections. The government fears alienating voters on account of soaring prices and economic hardship faced by the population.

However, a recent event has fundamentally altered the political dynamics and seemingly quashed Khan’s hopes for early elections. Khan’s arrest from the premises of the Islamabad High Court on May 9 was followed by a backlash that led to unprecedented and disturbing events. A furious mob stormed the GHQ gates and another highly charged group set fire to the residence of the Lahore corps commander, causing significant damage, including the destruction of some historical artefacts. This has prompted a strong response from the military establishment. The government has initiated strong actions, resulting in the imprisonment of a majority of PTI leaders.

The political and judicial crises have an unmistakable impact on Pakistan’s economy in the short run. The current economic crisis in Pakistan, characterised by hyperinflation, low growth rates and uncertainty surrounding the IMF bailout package, can have detrimental effects on the overall economy. Economic theory suggests that hyperinflation erodes the purchasing power of the population, leading to a decline in consumer spending and a contraction in economic activity. The reduction in consumer demand can further dampen business investments, causing a slowdown in production and employment. Additionally, the uncertainty surrounding the IMF bailout package can hinder long-term planning and investment decisions by businesses, creating an environment of caution and reluctance. This situation aligns with the theory of investment uncertainty, which suggests that businesses are more likely to withhold investments when faced with uncertain economic conditions. As a result, the combination of hyperinflation and uncertainty can weaken the economy, hamper growth and exacerbate existing economic challenges.

The ongoing political crisis in Pakistan, marked by instability, polarisation and uncertainties surrounding governance, can have far-reaching consequences for the economy. Political instability hampers policy implementation and decision-making processes, creating an environment of unpredictability and discouraging long-term investments. Political economy theory posits that prolonged political turmoil can lead to policy paralysis as political leaders prioritise short-term gains over long-term economic stability. This delay in crucial economic reforms and obstructed implementation of measures aimed at addressing structural issues can undermine investor confidence, deter foreign direct investment and hinder economic growth. Furthermore, political polarisation can result in social unrest and conflicts that disrupt supply chains, increase production costs and pose further challenges to the economy.

The ongoing judicial crisis in Pakistan, characterised by controversies surrounding the judiciary’s role in political matters, can also impact the economy. Judicial uncertainty can create an environment of legal ambiguity and unpredictability, deterring investments. Theorists argue that a well-functioning judicial system is crucial for economic development as it provides a framework for enforcing contracts, protecting property rights and ensuring fair dispute resolution. However, when the judiciary’s credibility and impartiality are questioned, businesses may hesitate to engage in long-term investments, fearing potential legal complications and an uneven playing field. This can hinder economic growth, as businesses require a stable and transparent legal environment to thrive. The judicial crisis can also intensify the political and social tensions, further adding to the uncertainty and undermining investor confidence in the economy.

While the current economic conditions in Pakistan present significant challenges, it is important to acknowledge that improvements are not entirely impossible within the next four to six months. To foster positive change, certain key factors must be addressed. First and foremost, the national institutions must operate within their constitutionally defined limits. This includes ensuring that the military establishment refrains from exerting undue influence in political affairs. A genuine commitment to political neutrality would bolster trust in the democratic process and provide a conducive environment for economic stability and growth.

Furthermore, a significant transformation in the political landscape is crucial. It is essential to move away from the culture of polarisation and mutual hatred that has plagued the country in recent years. By fostering a more inclusive and cooperative political environment, Pakistan can lay the foundation for sustainable development and economic progress.

While significant changes may seem improbable in the short run, history has shown that transformative events can defy even the wildest imagination. There are numerous examples of countries experiencing remarkable turnarounds in their economic and political fortunes. The key lies in determined leadership, visionary reforms and a collective commitment to change.

The writer is an associate professor in the Department of Economics at COMSATS  University Islamabad, Lahore Campus

Economic crystal-gazing