Written by Tarini Sathe
Ever since becoming a country in 1947, Pakistan has dealt with political instability, cycling through periods of democracy and military rule. Of the country’s 29 Prime Ministers, not a single one has completed their five year term, all either being dismissed or overthrown. As a result, the Pakistani economy has also had its ups and downs, and the COVID-19 pandemic, trade disruptions, and the removal of Prime Minister Imran Khan have not helped. The crisis is all the more important because Pakistan held its general elections on February 8th—resulting in a hung parliament—and the new government will begin its term with significant challenges. Currently, the Pakistani economy is plagued with high inflation rates, trade deficits, and debt. There are already some policies in place to rectify these problems, as well as proposed solutions; they will determine the trends and future predictions of the economy.
The pandemic, the Russia-Ukraine conflict, serious floods, and political instability all had a hand in creating the current crisis at hand. The inflation rate reached a record high of 38% in May 2023, and was approximately 30% as of January 2024 (Romei & Smith, 2024); this was partly a result of the State Bank of Pakistan dropping its cap on the Pakistani Rupee—as directed by the IMF—subsequently causing rapid devaluation of the PKR. Consumer prices have risen by 28% since January 2023, which has made it hard for many Pakistanis, especially poorer households, to make ends meet (Mangi & Koswanage, 2024).
Pakistan also imports a lot of its food and fuel, meaning they constantly record trade deficits; coupled with high prices, foreign currency reserves dwindled to just about $4 billion in June—not enough to support even a month’s worth of imports (Hussain, 2023). The government managed to get a $2 billion loan from Saudi Arabia, as well as a $3 billion bailout from the IMF—its 23rd since independence—which comes with strict conditions to begin rectifying the crisis (Hussain, 2023). Currently, Pakistan has an absolute external debt of $125.7 billion, and faces $24.6 billion in debt repayments by the end of June (Kozul-Wright, 2024). The bulk of this debt is owed to China, who already agreed to roll over over $2 billion because of Pakistan’s lack of ability to repay on time; economists also expect that the new government might appeal to the IMF for long-term funding since its current deal expires in April.
Pakistan’s massive debt and ability to repay loans stems from its tax collection abilities. According to Professor Tariq Banuri at the University of Utah, “‘Pakistan is one of the world’s worst performers on tax collection,’” (Kozul-Wright, 2024) with the government allowing the exemption of taxes on agricultural income and real estate. The government has also avoided aggressive tax policies out of fear of upsetting powerful businesses and the military. Among the IMF’s biggest debtors, Pakistan has the lowest tax revenue as a percentage of GDP, at ~10% (Kozul-Wright, 2024). Essentially, the lack of tax revenue ensures that there are not enough funds to modernise state-owned enterprises and improve public goods, or repay loans on time, which has led to increased borrowing and debt. This vicious cycle has only been exacerbated by high inflation and currency depreciation.
May-June 2023 was when the crisis seemed to have been the worst, with 38% inflation and the government narrowly securing IMF funding in order to keep importing essential goods. The IMF bailout, however, came with stipulations for the government to adhere to that are aimed at economic recovery. They began with the State Bank having to drop its exchange rate controls in early 2023, causing the PKR to plummet by 9.6% in a single day (Shahid & Shahzad, 2023). Despite being beneficial for exporters, this depreciation was largely the cause of inflation rates increasing to record highs in 2023. Additionally, because Pakistan pays for a majority of its essential imports in dollars (Shahid & Shahzad, 2023) the much weaker currency suddenly made these goods more expensive—both to import and for consumers—and ultimately led to Pakistan’s foreign exchange reserve depletion and most recent IMF bailout. The SBP also raised interest rates to 22% (Shahid) in order to counter inflation.
The government is also required to lower subsidies for the energy and utilities sector and instead increase taxation for the same (Kozul-Wright, 2024). As a result, government spending—an inflationary factor— will reduce and potential revenue will increase, although both energy/ utility providers and consumers will be affected negatively, consumers more so. Reducing subsidies means that suppliers’ production costs will increase significantly, and because so many industries—including the energy and utilities sector—lack quality infrastructure, consumers are likely to face more frequent power outages. In addition to outage-related inefficiencies, the increased costs for utilities will be pushed onto consumers and, being essential to daily life, many poorer consumers will be hit harder than the rest. While considered anti-populist, these solutions will need to be kept in place for the government to make progress with reducing its spending and current account deficit, as well as remain in a negotiating position with the IMF to continue getting much-needed loans (Hussain, 2024).
Additionally, the government will have to implement more aggressive taxes—perhaps beginning with taxing agricultural income and capital gains—in order to significantly increase tax revenue. While those being taxed will be dissatisfied, especially since they were never taxed on these income streams before, not only can debt/ loan payments be made on time, but government spending in the long run can be directed towards infrastructure, public goods, education, etc., that would result in structural improvements in the economy.
Overall, while the Pakistani economy is still in bad shape, it seems to be on the path to recovery. Inflation is starting to slow down; each month, the inflation rate is lower than the previous month. There is hope that the solutions currently in place will be successful in aiding economic recovery. Furthermore, with the rupee’s value being determined on the open market now and its expectation to continue “trending down slightly” (Kozul-Wright, 2024), Pakistan’s current account deficit is also expected to reduce. A review conducted by the IMF of the country’s economy showed that confidence in the economy, while still low, is improving and is in the nascent stages of recovery (Hussain, 2023). However, the economy is still in a delicate position, according to Karachi-based economist Asad Sayeed (Hussain, 2023), and there are many factors—both domestic and international—that could derail this recovery. The most important factor currently is the formation of the Pakistani government. The February 8th general elections resulted in a hung parliament—no party won a majority of the seats in Parliament to form a government—and there is still a ‘caretaker’ government in place. It is likely that a coalition government will be formed and any policies they implement will be critical to the recovery of the economy. The new government needs to prioritise economic recovery regardless of political affiliations and aspirations so as to not create another, potentially worse, crisis. Ultimately, while the economy is beginning to recover, this trajectory will only continue if aggressive solutions remain in place and the political landscape is relatively stable.
Works Cited
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