Pakistan is striving to get reasonable policy to overcome its current economic crisis. A policy which might help to achieve the goal of sustainable development. We should search for economic opportunities where it has scope for engagement. Moreover, Pakistan desperately needs a reliable and trusted partner, which can act as an anchor.
Impact of Global Economic Crises
Pakistan’s current economic struggles demonstrates the impact of the global economy heavily due to the battle during a pandemic. Pakistan depends on imported commodities like others in countries e.g. Bangladesh, Sri Lanka or Ghana. The fellow Pakistanis are seeing food and fuel prices skyrocketing. Foreign exchange reserves are shrinking as they are being used to pay for imports essential commodities like food and fuel. God forbids if we continue to use our foreign exchange reserves more like this we might face bankruptcy. Petrol prices are going up and up. Pakistan is heavily dependent on imported fuel and cooking oil, but also on machinery and food grains from overseas.
All of this has made day-to-day activities more challenging. Power outages are not uncommon in the country, even when the economy is strong – they become frequent and long when the economy is under duress. This happens because energy companies struggle to operate when the costs of power generation are higher than the revenue they collect. Over the past few weeks, residents of major cities have had to go without electricity in their homes for as much as 10 hours a day – in rural areas for even more. Foreign exchange reserves with the SBP currently stand at US$10.3 billion. This is a sharp drop from US$16.6 billion in January 2022. Though recently strengthened by Chinese bank lending, reserve levels have been volatile since late April 2022, due to country’s current political crisis.
How to preserve dollar
In Pakistan imports are far higher than exports. To preserve foreign currency, an early measure taken by the newly appointed government in May 2022 was to ban many types of imported goods deemed non-essential luxury items. Poor countries cannot borrow in their own currency, but need to use one of the major currencies being traded on the international exchanges. The US dollar is the most used currency. These “hard” currencies are those which indebted countries must regularly purchase to pay for imports and to repay and service the loans they owe to private bondholders, international financial institutions and lenders. Global sanctions on Russia and Iran complicate Pakistan’s economic situation. Pakistan was not able to use a supply of relatively cheap Russian oil because of international pressure over Ukraine. Given the need for drastic measures, Pakistan’s government may now follow in the footsteps of Sri Lanka and turn to Russia for cheap fuel.
Pakistan has also refrained from importing oil from neighboring Iran. Smuggled Iranian oil remains attractive to those living near the border. Fuel and energy cooperation between Pakistan and Iran is an especially prickly issue given opposition from the US and Saudi Arabia, another nation that has often financially assisted Pakistan.
The Ukraine factor
Historically, Pakistan has maintained moderate economic relations with both Russia and Ukraine. In 2020, mismanagement as well as exports in hopes of a bumper crop led to acute wheat shortages in Pakistan. This compelled the government to allow private companies to import wheat to stabilize prices and accumulate stocks. Between July and November 2020, Ukraine was the main supplier of wheat exporting 1.2 megaton (MT) to Pakistan. During the same period, Russia supplied 0.92 MT to Pakistan. Wheat imports from the two countries exceeded 2.1 MT over 2020-2021.
Russia and Ukraine – both of which are important agricultural suppliers in the global food chain – are off the market due the ongoing war between them. Russia’s blockade of Ukrainian ports has further prevented Ukrainian wheat and other essential exports from reaching several countries. Resultantly, many countries have already reported food shortages; and Pakistan has also been compelled to find an alternative wheat supplier. The government may have to cover any shortages with expensive wheat imports.
Russia’s invasion of Ukraine has also resulted in a record surge in LNG rates as the global supply chain is threatened with disruptions. This has caused immediate issues for Pakistan, as LNG companies have backed out of their contracts with Pakistan to exploit lucrative European markets. Pakistan is now compelled to purchase expensive LNG. Also, Pakistan’s imports of fossil fuel – oil, LNG and coal – from Ukraine have come to a halt. So, in the coming months, Pakistanis will be faced with frequent and prolonged power outages, extortionate utility bills and impediments to other services. Global oil prices have exceeded $100 per barrel since the start of the war, and supply and development have slowed down. Future fuel price hikes would be detrimental to Pakistan as its forex reserves would deplete further. The construction industry has also taken a hit because Pakistan was importing steel from Ukraine. Also, Pakistani exports to Ukraine have ceased, which will harm local industries and the economy.
Role of IMF
As usual, Pakistan is now awaiting assistance from the International Monetary Fund (IMF). The IMF is likely to step in and commit to a bailout of approximately US$1.85 billion. If, and when, this happens, the exchange rate between the Pakistan rupee and US dollar will stabilize. Given that the dollar has risen more than 15% against the rupee since January 2022, policy makers will welcome a stronger Pakistani currency to calm surging prices. But the heavy costs of a deal with the IMF have already driven a cost-of-living crisis as fuel subsidies have been sharply withdrawn and made food and transport unaffordable for many. Tax increases have also added to day-to-day pressures. Currency issues and cost-of-living crises in Pakistan are inextricably linked. A more expensive dollar makes fuel more expensive, and these price increases are quickly reflected in daily essentials. Given that Pakistanis spend more than 40% of their income on food, inflation makes large segments of the population marginalized and vulnerable.
Unless exports drastically increase in coming years, Pakistan’s economy will remain precarious and high prices will remain a threat. Given this situation, financial assistance is the only way to overcome crises. Unfortunately this tends to come with financial or political strings attached. Pakistan continues to reel from uncertainty as its political transition — ill-timed during a period of domestic and global economic tumult — has yet to consolidate.
Political volatility during the new governing coalition’s first two months in power has led to policy paralysis. But this paralysis has begun to ease as the army has signaled support for the government and the International Monetary Fund (IMF) continues to press for austerity measures.
The IMF has made clear that it will only release the next $1 billion tranche from Pakistan’s $6 billion Extended Fund Facility if Pakistan raises fuel and electricity prices and takes aggressive measures to reduce the fiscal deficit. And the resumption of the IMF program is essential to unlocking assistance from other bilateral and multilateral partners and staving off a balance of payments crisis.
These measures will ease Pakistan’s twin deficit challenge, involving both fiscal and current account deficits, but they will also take a heavy toll on the average Pakistani. Inflation, which hit 13.8% in May, could rise to around 20% and remain in the double digits into next year. This will be a painful summer for Pakistanis as they’re hit with a one-two punch of rising energy prices and electricity supply cuts.
The Charter of the Economy
Understandably, the PML-N government would like other power brokers, including the army, to share the political burden of economic reform. Prime Minister Shehbaz Sharif has called for the adoption of a Charter of the Economy— a national consensus on economic reform.
The idea of “Charter of the Economy” is seems good, but politically infeasible in the current situation. What is more important is to go beyond firefighting and push forward essential reforms — including in agriculture, energy, and local governance — that are key to ensuring the country’s political and economic stability and long-term growth prospects.
The big picture is this: Pakistan’s economy is working, but only for its elite. Sustained, rapid, and equitable economic growth has remained elusive due to policy distortions that serve its civilian and military elite.
What’s need to be done?
Pakistan needs a path toward sustained, rapid, and equitable economic growth that incorporates its fast-growing population into the labor market. But Pakistan is a net energy importer with a narrow export base. Periods of economic expansion have been consumption-driven and import-dependent. As a result, Pakistan’s economy overheats once growth passes the 5-6% range. It is vital that the current government devote its energy and reallocate resources toward facilitating export growth, improving agricultural productivity, and addressing the domestic fuel production deficit.
Pakistan’s agricultural sector has grown at an average rate of less than 2% since the 2014-15 fiscal year. Declining agricultural productivity, a rapidly growing population, increasing water stress, and the worsening effects of climate change are all exacerbating an already-serious food security challenge. The agricultural industry also contributes to the massive electric power industry arrears. Pakistan provides hundreds of millions of dollars in annual electric power subsidies for agricultural tube wells. Policy experiments in Pakistan in recent years have identified solutions to these challenges. For example, conditioning the provision of low-interest loans for solar tube well installation on the use of high-efficiency irrigation systems or allowing net-metering can promote water conservation, lower input costs, and help curtail power sector debt. Pakistan’s federal and provincial governments should also incentivize innovation in the private sector seed development industry and the local production of edible oils. With domestic gas and oil reserves in decline, Pakistan’s vulnerability to surges in global fuel prices will grow. It needs to ramp up domestic energy exploration, promote renewables, and assess the feasibility of green hydrogen and ammonia production, especially in southern Balochistan.
Finally, Pakistan must strengthen the “last mile” of governance. Pakistani politicians often hail China’s model of governance, but few recognize the role of decentralization of power and empowerment of local governments in China’s growth story.
To their credit, Pakistan’s politicians banded together to devolve power to the provinces under the 18th Amendment. Yet most have been averse to devolving power down to elected local bodies, with some provincial governments repeatedly delaying local elections. That has left large metropolises like Karachi orphaned when it comes to local governance and stunts their ability to grow and develop independent sources of revenue, including through the issuance of bonds.
Political stability in Pakistan cannot be ensured simply through intra-elite deals made in Islamabad. It also requires improving the last mile of governance and the responsiveness of the state to the needs of the public.
The author, Nazir Ahmed Shaikh, is a freelance columnist. He is an academician by profession and writes articles on diversified topics. Mr. Shaikh could be reached at [email protected]