Pakistan’s economic crisis is deepening, with the Pak rupee hitting its lowest level in history against the US dollar, foreign exchange reserves are running out, the state has cash only to pay for the vital imports that too the import bill of few days only. IMF is in standoff with the government on various known and unknown matters. IMF has asked for structural reforms, which should have been done a long time back, though it’s late, yet it should be done now so as to revive the economy. On top of that, Pakistan faced the worst flood in living memory, which had actually put half of the country under water and now untimely rains have destroyed most of the wheat crop. The deep political divide in the country is mainly driven by self-interest, where high inflation is adding fuel to the political tussle. These are examples of a few of the current crises Pakistan is facing.
Banks in Pakistan are neither opening new letters of credit nor are they honoring previously opened letters of credit, thus there is a shortage of imported items as well in the country. Banks are discouraging importers due to a shortage of US dollars in the country. For the last couple of years, Pakistan is importing wheat, where the country was once a net exporter of wheat. This is just one example to understand how bad things are now in the country of the economy’s weakness.
The rupee has tumbled against the dollar; in just one year it has gone from Rs. 154 to 295 against its counterpart. One of the fundamental reforms, IMF has been asking Pakistan to have a single exchange rate policy, Pakistan currently has three different exchange rates; one is being followed by the banks, the other is being managed by the currency traders in the market and the third is the notorious Hawala system. Pakistan has finally come out of the gray list of FATF yet it is unable to control the Hawala system.
Pakistan gets most of the foreign remittances from the US, UK and the Middle East, therefore, the Government of Pakistan should engage these countries to crush the Hawala system. With the black market in place, the Afghans buy US dollars from the market even by paying a premium and then take that to Afghanistan. This is another area, where government officials know everything yet they are unable to control the smuggling for some unknown reason.
State-owned entities in trouble
Pakistan’s foreign exchange reserves are at an all-time low. In order to secure future financing needs; it has been negotiating a deal with IMF for the last many months. There were various ups and downs in this whole process; one of the demands of the IMF is to make and implement structural reforms thus permanently resolving similar situations in the future. Pakistan’s loss-making state-owned entities and pension payments are a huge burden on the cash flows of the government. These loss-making state-owned enterprises have virtually bankrupted the country now. How can 220 million people feed a few thousand employees of these state-owned entities, just rationalize the workforce and lay off extra staff? There is no possibility to revive these state-owned entities without controlling expenses where salaries, bonuses and pensions are the single largest expense item. Whatever operational efficiency one can bring in, this overhead will eat up the positive impacts.
Therefore, either reforming or privatizing these loss-making state-owned entities can only be the way forward to managing the budget and controlling money bleeding. Else, all efforts are just a waste of energy and time with ultimately zero impact.
While looking at the whole crisis — realistically speaking, the present-day crisis is not because of one day or one month or one year of bad governance; it is the culmination of the failure of numerous monetary and fiscal policies of the last two decades. The situation will never improve unless reforms are not made across the board.
High inflation has destroyed the livelihood of an ordinary citizen, there is no shortage of essential goods, but the prices are so high that they are now virtually out of the range of an ordinary person.
Pakistan has developed a culture of subsidies over the decades, which is basically a culture of grants and donations. How can a country financially survive by buying oil at Rs300 and selling at Rs200, no country, even the richest nation cannot survive with this level of subsidies. Moreover, both a bullet/bombproof Landcruiser owner and a person having a CD-70 motorbike or 800 cc car is buying petrol at Rs. 200 (say). This is just so unfortunate. The government says that it is difficult to monitor price differences on the basis of class or category and difficult to implement, which is not a fair argument. In the present day, with technological advancement, everything is possible. But the issue is how can an elite put the burden on themselves.
Economic growth has dropped massively, while Pakistan has the lowest tax-to-GDP ratio in the world, then there is corruption and uncontrollable smuggling despite having a vigilant custom department. The country is relying on loans especially from China, Saudi Arabia, UAE and from various multilateral. Even now, friends of Pakistan have also asked Pakistan to make structural reforms. Over the years, Pakistan has diminished its position on the international front. The country’s inconsistent foreign policy has actually damaged more than anything else. Foreign policy and relations with other countries were made on the basis of personal likes and dislikes. Strong relations with other countries (that can only be done through foreign policy and office) can help secure cheap loans and can also be a source of attracting investment.
Pakistan is an emotional nation, there is no place for emotions in business and foreign relations. The sooner it understands this, the better it would be. In short, looking at the present situation; there are mainly four factors that have brought the country to its knees today; first, Covid-19 which damaged businesses badly though the government claimed that the damage was minimal, yet that the minimum loss was enough to put a lot of pressure on finances. Putting an issue under the carpet doesn’t mean that the issue was addressed successfully, rather most of the time, it comes out with multiplying effects at a very unexpected time, thus damaging more; second, the war in Europe i.e. Russia Ukraine war has a huge impact on the cost of energy in Pakistan.
Oil prices have gone up while there is a shortage of LNG in the world thus prices of LNG in Pakistan also went up. Pakistan has tried to secure LNG contracts but failed as Europe procured all available stock. Pakistan imports 90 percent of its energy needs (oil and LNG) thus high prices of oil and LNG has badly affected the government’s ability to fund the import bill of energy. Third, Pakistan faced a devastating flood in 2022, which took nearly 3,000 lives, a collective loss of approximately $40 billion, while almost 10 million acres of the crop were completely destroyed. Due to the flood; there is now a shortage of food items and the government has to import food items as well. Fourth, the collapse of governance is causing political unrest, which is mainly because of personal interests and corruption and uncontrollable smuggling.
Discount rates have crossed 20 percent now; those manufacturing units that had done expansions in the last couple of years are now facing difficulty in repaying their loans at this level of KIBOR. No business can survive at 21 percent interest rates; government should seriously look into controlling inflation through other means. Pakistan’s inflation is not fully linked with interest rates and is more of a governance issue. Therefore, trying to control inflation through interest rates will not serve the purpose.
Pakistan is presently like a vegetable and fruit shop as opposed to an electric equipment shop. One can easily see the difference between a vegetable and fruit shop and an electronics shop, the level of money flow, the level of status of living, and the level of facilities in those shops. Pakistan has been exporting agri products and textiles for years therefore, it is now important to diversify its exports. Pakistan should focus on industrialization and should work on exporting high-value items rather than relying on exporting fruits, vegetables and textile goods.
Lastly, there might be very good provisions of the 18th constitutional amendment, but it has financially weakened the federal government and has given huge financial independence to the provinces. Sadly, the federal government has provided to the provinces all that was in the benefit of the provinces but didn’t transfer that was in the benefit of the federal government. It is not a win-win situation for the federal government. The transfer of electricity distribution companies to the provinces is just one example, no province is willing to take these loss-making distribution companies thus federal government has to fund these loss-making entities from its share of cash flows.
The best way forward would be to make consistent policies for new investments. Over the period, the Government of Pakistan has lost its credibility by first issuing a policy and thereafter making abrupt changes at a later stage, thus diluting the entire positive impact of the policies. In parallel, the federal government should also encourage local investors for new investments even in the Small and Medium Enterprises (SMEs) sector by giving them tax holidays and offer concessional interest rates on new loans for greenfield and brownfield projects; crush smuggling whatsoever and monitor prices of necessary items by improving governance. Apparently, it seems that decision-makers are exhausted and tried now therefore, it is also important to excuse the tried and tested professionals and a young lot should be given a chance to make an impact.