Political rifts disastrous for economy

The decisions made by Pakistan’s politicians to maintain popularity during times of political uncertainty have contributed to the country’s current economic devastation, according to businessmen and economists.

Pakistan is currently facing a severe economic crisis marked by a budget deficit, a weak currency, stagflation, and historically high-interest rates. The rapid depletion of foreign reserves and the depreciation of the rupee are driving up the prices of essential commodities.

Sustainable Development Policy Institute (SDPI), Executive Director, Dr Abid Qaiyum Suleri expressed concern over the worsening economic situation, stating, “Despite the urgent need for economic reform, Pakistan’s politicians and constitutional institutions are embroiled in internal conflicts, neglecting the worsening economic situation.”

Pakistan Business Forum (PBF) Vice President, Ahmad Jawad highlighted the lack of continuity in economic policies, saying, “Our economic indicators have declined after every certain year, resulting in the suffering of the people and the country.” He emphasised that political stability is crucial, but economic mismanagement cannot be ignored. Jawad criticised the decision to adopt a market-based exchange rate, which he believes inserted a wrong move into the International Monetary Fund (IMF) package and led to the collapse of the economy. He lamented that the Pakistani rupee has become a joke in the international community.

The reliance on external financing, particularly from the IMF, has become essential for Pakistan due to its economic woes, said Suleri. However, disagreements over financing targets have caused delays in the disbursement of remaining IMF funds, further eroding Pakistan’s economic resilience.

While Pakistan seeks financial assistance from China, Saudi Arabia, and the UAE, China has linked any bailout to political stability within the country. Ongoing political infighting and conflicts among politicians have reduced Pakistan’s creditworthiness, making multilateral lenders like the World Bank (WB) and Asian Infrastructure Investment Bank (AIIB) hesitant to provide assistance.

The SDPI Director highlighted that Pakistan’s prospects of receiving funds from the WB and AIIB under the “Resilient Institutions for Sustainable Economy (RISE-II) program” depend on signing the IMF’s staff-level agreement (SLA). However, the WB has made signing the SLA a precondition for releasing the RISE funds, leaving Pakistan in a precarious situation. Failure to complete the required actions under the RISE-II program may result in Pakistan losing funds from the International Development Association (IDA), further exacerbating the economic crisis.

As Pakistan struggles to meet the IMF’s requirements, the Ministry of Finance is preparing a budget for the next fiscal year independently. However, Suleri warned that such a budget would be unrealistic and fail to address the underlying economic challenges. If Pakistan decides to quit the IMF program, it would face difficulties accessing external funding and servicing its substantial foreign debt. The absence of IMF support would deplete foreign currency reserves, leading to further devaluation of the rupee and negatively impacting imports.

The intertwining of political uncertainty and economic vulnerability was evident on May 9th when violent protests and arson attacks caused a significant devaluation of the rupee. This incident highlighted the instability and volatility of Pakistan’s domestic currency, emphasising how political unrest can exacerbate exchange rate risks. The ongoing power struggle between political parties and key institutions not only worsens the economic situation but also damages Pakistan’s reputation as an investment destination, reliable trade partner, and trustworthy borrower.

Jawad, representing the PBF, also pointed out the shortcomings in the agriculture sector and the need to establish mechanisms to attract foreign direct investment (FDI). He compared Pakistan to India, stating that despite India’s political problems, their strong institutions and effective presentation to the world have helped attract investment.

Suleri urged all stakeholders, including the government, opposition, and key institutions, to prioritise Pakistan’s economic stability, social development, and the well-being of its people. He emphasised that urgent measures are needed to prevent a catastrophic economic meltdown. Focusing on economic reform and setting aside personal and partisan agendas is crucial. Failure to address the economic crisis and political turmoil will lead to a lose-lose situation where the people of Pakistan will suffer the most.

“Pakistan stands at the edge of an economic abyss. The time has come for all stakeholders to wake up and steer Pakistan towards a path of economic recovery and growth,” he said.

Published in The Express Tribune, May 28^th, 2023.

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