PESHAWAR – Pakistan’s new government faces major economic challenges on both the internal and external fronts. Economists say the previous Imran Khan government made a mess of the economy and failed to live up to its economic agenda of providing 10 million jobs and 5 million homes, good governance, economic growth and tax reforms.
Analysts claim Khan has not only left the economy in a shambles, but also failed to sweep away the entrenched corruption and cronyism in the system, a buzzword on which his party election campaign was run in 2018.
Shahbaz Sharif, Pakistan’s new prime minister, takes charge at a time when the economy is causing alarm and reserves are hitting rock bottom amid record food inflation, rising debt, unemployment, growing imports and a more than US$35 billion trade deficit.
Khan became the first premier of the country to have been voted out through a no-confidence motion. Before Khan, Shaukat Aziz in 2006 and Benazir Bhutto in 1989 survived no-confidence moves against them.
Atif R Mian, a renowned Pakistani-American economist and Professor of Economics of Public Policy and Finance at Princeton University, wrote a long thread on Twitter that Khan – voted out of office by the parliament after three-and-a-half years – inherited a bad economy, but left it in even worse shape.
“It is extremely unfortunate that a government that millions had pinned high hopes on has ended in such colossal failure. I hope those who come next learn from this, and their own past failures,” he added.
Analyzing the Khan government’s economic report card, Mian wrote that there had been a zero increase in average income as Pakistan never shook off the balance of payment (BoP) crisis.
“Covid did give temporary respite to the BoP crisis, as oil imports and domestic demand contracted due to the pandemic, but with receding Covid infection rates, Pakistan is back in serious trouble,” Mian observed.
No planning, reserves wasted
He said the largest failure of the previous government was an incapacity to understand Pakistan’s macro challenges. Khan’s government had done no planning and precious reserves were wasted on silly schemes, he added.
“The government policy went for the usual shortcut benefits like opening the capital account for speculative portfolio investment, encouraging unproductive real estate investment, subsidizing an elite-favoring rentier economy and going on foreign begging trips,” he wrote.
The month-long political instability and constitutional crisis, emanating from the opposition’s drive to dislodge the Khan government, plunged the country into a deep economic crisis. Analysts claim Pakistan is going to face an economic disaster like no other.
The International Monetary Fund (IMF) is holding a $6 billion bailout package because it needs to interact with the new government as and when it takes the oath.
Central bank data reveals a heavy outflow is putting a burden on foreign exchange reserves, which already shed $2.9 billion by the end of March.
Another outflow of $900 million is due for payment to Australian firm Antofagasta – one of the companies engaged in the settlement of the Reko Diq goldmine dispute in which a global arbitration tribunal slapped a fine of almost $6 billion on the country.
The country’s external debt payments, including the retirement of major syndicated Chinese loans, weighed heavily on the fast-depleting foreign currency reserves, which dipped to a 3-year low of $11 billion at the end of March.
“The new government, however, is up against serious challenges. The rupee has lost 50% of its value over the past 3 years,” Farrukh Saleem, an Islamabad-based Pakistani political scientist, economist and financial analyst, told Asia Times.
“The SBP (State Bank of Pakistan) has $11 billion, which cannot even buy two months of imports. The SBP has to pay out $14 billion in the next nine months. That is what a balance-of-payments (BoP) crisis is.”
A BoP crisis “occurs when a nation is unable to pay for essential imports or service its external debt repayments.”
The State Bank of Pakistan noted that heightening domestic political uncertainty contributed to a 5% depreciation in the Pakistani rupee. In an emergency meeting of the SBP’s monetary policy committee on April 7, the bank announced a 250 basis points hike in benchmark interest rates, taking it to 12.25%.
Foreign exchange reserves decline
This strong and proactive policy response was necessitated by a deterioration in the outlook for inflation and an increase in risks to external stability.
“In addition, there has been a decline in the SBP’s foreign exchange reserves largely due to debt repayments and government payments on settlement of an arbitration award related to a mining project,” the bank said.
Pakistan faced a default situation last week when it struggled to deal with the external pressure to pay off debts against fast-sliding foreign currency reserves. Pakistan’s State Bank reserves, which dipped to $11 billion, include $6 billion worth of deposits obtained from China and the United Arab Emirates.
Amid an emergency, China and the UAE came to the rescue and bailed out the country from a looming debt default situation. Pakistan’s major creditor China and the UAE have rolled over their loans worth $6 billion, giving Pakistan some breathing space amid tight financial stress.
The UAE rolled over a $2 billion loan for a further one year. However, Pakistan also needs to pay yet another debt of $450 million to the UAE, which became due a few weeks ago. Dubai has demanded its money back, but Islamabad wants to get it rolled over given reserves constraints.
Pakistan’s former foreign minister Shah Mehmood Qureshi, who visited Beijing last month, disclosed that China would roll over a whopping $4.2 billion debt repayment to provide a major relief to its all-weather ally to tide over its current economic crisis.
The relief was part of Pakistan’s formal demand to Beijing for financial support of about $21 billion on the rollover of existing loans of $10.735 billion and a further $10 billion as a deposit fund to deal with external pressures and future financial demands.
Pakistan’s Ministry of Finance is actively pursuing the proposal for further facilities with Chinese officials, seeking an early release of $21 billion. Islamabad has directed its ambassador to China, Moin ul Haque, to follow up the three proposals with relevant Chinese authorities to bring in external account stability and meet budgetary needs.
The ambassador has also been directed to arrange a meeting of the governors of the central banks of the two countries to discuss the proposals.
“Pakistan is spending too much on imports. The current account deficit is about to hit the $20 billion mark, which is 6% of the GDP,” said Saleem, the Islamabad-based Pakistani political scientist. “A full-blown balance of payment crisis is high, but the state is in ‘deliberate denial.’
“The BoP crisis is a fabricated, deliberate depression. Public services have collapsed and the main burden of the crisis fell on the middle and the poor classes. The BoP crisis is a trigger for 100 other crises. The BoP crisis becomes a threat to a country’s long-term stability and social peace.”