PESHAWAR – Taking its cue from Sri Lanka, Pakistan is heading toward bankruptcy amid a highly charged political atmosphere marked by threats of a march on the capital Islamabad by the ousted prime minister, who is demanding fresh elections in the country by May 20.
The political instability, analysts fear, may turn violent in the coming days, affecting Pakistan’s reeling economy, which has been headed toward a default-like situation.
The country’s foreign exchange reserves are falling, food inflation is spiraling and the Pakistani rupee is on slippery ground, showing a massive 21.72% drop during the current financial year.
Economic experts and analysts have been demanding a financial emergency to deal with the looming economic challenges. They suggest that Rs.800 billion (US$4.1 billion) tax exemptions available to the corporate sector be withdrawn and higher taxes be levied on land and property holdings.
They also want cuts to non-combat defense spending, a special emergency tax on vehicles of 1600cc or more, doubling the electricity tariff on residential properties of 800 square yards or more and downsizing federal government departments.
“The pressure on the rupee is mounting due to receding dollar inflows and a lack of support from friendly countries including China, Saudi Arabia and the United Arab Emirates (UAE),” Farrukh Saleem, an Islamabad-based Pakistani political scientist, economist and financial analyst, told Asia Times.
“The delay in the revival of the International Monetary Fund (IMF) bailout package of $6 billion has also plummeted the country’s reserves.”
Rupee at record lows
He said the rupee was at a record low against the dollar, the Pakistan Stock Exchange had shed an additional 900 points, financial markets were crashing, investor confidence was eroding and the State Bank of Pakistan (SBP) was left with only $10.44 billion, including $6 billion in cash deposit loans from China, Saudi Arabia and the UAE.
Farrukh called for a financial emergency to deal with the situation.
Last Wednesday, the Pakistan Stock Exchange (PSX) almost crashed after an intense bout of selling, with the benchmark KSE-100 index losing more than 1,100 points in intraday trading.
According to the PSX website, the present decline came only two days after the PSX saw a meltdown where the KSE-100 lost 1,447.67 points. But while economic activity was slowing down, the political heat has been rising rapidly.
Former prime minister Imran Khan, who was removed from office after a no-confidence motion against him last month, has been pulling massive crowds in his back-to-back public meetings, instigating the masses to rise up against “the US hegemony and its collusive role” in changing his democratic regime through what he says were undemocratic and unconstitutional means.
Khan came to power in 2018 in highly controversial elections, which critics claim were rigged, monitored and manipulated by Pakistan’s premier spy agency, the Inter-Services Intelligence (ISI).
Khan claims the powerful army with whom he had excellent rapport during his tenure did not back him in frustrating the designs of foreign and local conspirators. “I told the military leadership and also sent my finance minister to brief them that if the plan succeeded, the economy would crumble.”
“Now Khan has turned against his own benefactors who brought him to power, complaining that they have gone neutral and stopped lending him help in frustrating the US-backed attempts to dislodge his government and crush his opponents,” Zahid Khan, spokesperson for the Awami National Party (ANP), told Asia Times.
Reserves and fuel subsidies
The biggest worry for the unity government, which came to power last month, is how to stop the erosion of the reserves and how to finance the non-funded fuel subsidies given by the previous government days before the no-confidence vote.
The SBP net reserves excluding private bank deposits were only $10.3 billion for the week ended on May 6, 2022, hardly enough to foot the bill for four weeks of imports.
Sensing the economic emergency and the bad shape of the economy, PML-N supremo Nawaz Sharif on May 10 summoned top party brass including Prime Minister Shehbaz Sharif and the party’s federal ministers to London for consultations.
The PML-N is caught between a rock and a hard place when it comes to making unpopular economic decisions.
Insiders claim the PML-N high command would prefer to dissolve the assemblies and call fresh elections instead of paying the political cost of Khan’s ruinous years in power.
The country’s current account deficit almost doubled in March, taking the total gap during the first nine months (July-March) of the current fiscal year to more than $13 billion. Data compiled by the SBP revealed that import growth was 41.3 % during the nine months compared with 11.5% in the same period last year.
The imports cost a total of $62.137 billion during July-March, compared with exports of $28.855 billion.
The rising imports widened the trade deficit and destroyed the exchange rate, as the demand for dollars remained abnormally high during the current fiscal year. The total trade deficit escalated to $35.52 billion in the first nine months (July-March) period of the current fiscal year against $20.8 billion in the same period last fiscal year.
In absolute terms, the trade deficit surged by more than $15 billion, indicating the worsening external account position. With this much deficit, Pakistan is likely to plunge into a balance of payments crisis in the coming months.
“Pakistan economy, which was in the intensive care unit, has shifted to a ventilator due to the absurd economic policies of the Imran Khan government,” Pakistan Muslim League-Nawaz (PML-N) Vice-President Maryam Nawaz said during a public meeting in Mardan.
“I would like to recommend to my party and coalition partners that we should not carry the stinking baggage of Khan’s failures. He should face the music on his performance during his three and a half year rule.”
A long haul ahead
She claimed it would not be a matter of months but take years to fix the political and economic mess created by former prime minister Khan. Nawaz said Khan had divided the nation, weakened the economy, smeared the state institutions and took dictation from monetary agencies to burden the masses with exorbitant taxes.
On the internal front, whopping food inflation of 17% has played havoc with the lives of the poor and middle classes, who are stuck in a difficult situation trying to make ends meet. Analysts claim a new wave of inflation would hit when the government went ahead and withdrew fuel subsidies.
The new government under Prime Minister Shehbaz Sharif, who went on whirlwind visits to Saudi Arabia and UAE just as he assumed power, has failed to get any relief. China has still not made good on a pledge to re-issue loans totaling $4 billion that Pakistan repaid in late March.
Chinese authorities are also reluctant to make further disbursements after requests from the Pakistan government, which is seeking $20 billion in cash deposits and rescheduling existing commercial loans by Chinese banks.
Yousuf Nazar, a former head of Citigroup’s Emerging Market investments, said in a series of tweets that the IMF and other friendly countries would not provide much-needed financial support unless the government increased petroleum prices.
The step, he claimed, would fuel inflation and hurt the working classes even more.
Regarding a cut on federal expenses of Rs5.2 trillion ($27 billion), he said it was easier said than done because 40% of expenses go into debt servicing, 25% in defense including pensions, 6% to the civil administration, 11% in subsidies and another 5% is for the social support program.
“Pakistan needs $15 billion to stabilize the forex reserves position and strengthen the rupee. The SBP Foreign Exchange reserves are negative, excluding loans from the friends. There is no way Pakistan can do without an immediate bailout by the IMF. There should be no doubt about it,” he tweeted.