Pakistan’s toxic twin instabilities

To say that Pakistan is right now in a royal economic bind is an understatement. Inflation is above 12 percent, unemployment over four percent, the growth rate is anaemic after touching nearly zero percent two years ago, and tax collection is a major struggle – barely two-thirds of what it was four years ago. The government is starting to default on pension payments to thousands of teachers and railway employees.

Energy and power prices are the highest in the country’s history. Even the rich military is appealing for 50 percent subsidy in monthly home power bills for its soldiers. The incumbent government has massed up more expensive foreign loans in three years than in the previous seven decades put together and the value of the rupee has nearly halved in three years.

This is why Islamabad’s current economic support programme with the International Monetary Fund is both critical to barely keeping Pakistan economically afloat and creditable enough to seek additional supplementary lifeline financing from other sources such as Saudi Arabia and China. But while Pakistan’s relationships between Riyadh and Beijing are in decent health, the Fund is having difficulty with Islamabad’s stuttering ability to remain in compliance with agreed terms.

The incumbent Imran Khan government signed a four-year $6 billion loan in 2019 to support economic recovery from the Covid pandemic, to ensure macroeconomic and debt sustainability, and advance structural reforms to lay the foundations for strong, job-rich, and long-lasting growth that benefits all Pakistanis.

Much of this is not going to plan and now the fund has delayed disbursement of its second last tranche of $500 million because despite a signed agreement with the Fund to not do so, Khan has just announced a third amnesty scheme for rich industrialists, thereby unravelling a carefully orchestrated plan to remove tax distortions to improve revenue coffers and capping any further increase in energy prices until the next budget is presented in June. This means the last remaining IMF payments of $1 billion is now at risk for Pakistan at a time when major bilateral loan repayments are due and forex reserves are crumbling.

Khan’s calculated reneging on the IMF conditions and risking the already wobbly economic stability to dangerous levels is tied up with his current political fortunes which are unravelling at a faster level than his economic failures. He is desperate as he calculates that he might not even be the prime minister to present the next budget as he faces a no-confidence vote in parliament in the next few days. His prospects of survival in the parliament do not look promising as his government coalition allies flirt with the opposition to abandon him amid his rapidly dwindling popularity.

Khan estimates he can’t keep both the IMF and the people happy and has chosen to betray the former to shore up support from the latter as an attempt to survive politically. This could have made sense in more favourable conditions but even his political choices have brought about a situation that ties up both economic and political stabilities – it’s difficult to have one without the other.

Irrespective of the outcome of the vote of no-confidence, any short-term recovery of political or economic stability seems difficult at best. Relentless polarization over the past three years aided by Khan’s scorched-earth politics has created general instability that is turning into a constitutional crisis that threatens to pull in the military and the judiciary into the mess that will affect the market sentiment adversely.

A lack of adequate attention to financial management and structural adjustments – including cutting down the inflated non-productive parts of the defence budget and questionable foreign policy choices that have continuously locked the country into adverse economic implications – have imposed a massive cost on Pakistan’s very political viability. Among others, this has included financing daily governance through exorbitant loans and turning governance into an economic meltdown.

What needs to be urgently done, at a minimum, is a negotiated political transition to a new broad-based government through early elections that will reduce political polarization by dissipating the built-up negative political energy and promote collaborative politics to prioritize economic growth and stability. Pakistan must step back from the brink, or it will tip over dangerously.

- Adnan Rehmat is a Pakistan-based journalist, researcher and analyst with interests in politics, media, development and science. Twitter: @adnanrehmat1