No-confidence: Will Pakistan's economy survive the latest political onslaught?

What Pakistanis should be clear about is that this wave of political uncertainty is only going to make their lives more difficult.
Published March 15, 2022

And just like that, history is rhyming, if not repeating itself. Pakistan’s flawed democracy, captured and co-opted by civilian and non-civilian elites, is facing another inflection point.

The most recent wave of uncertainty is driven by an agitating opposition, united under the umbrella of the Pakistan Democratic Movement (PDM) with a singular goal of ousting Imran Khan from the Prime Minister’s Office.

What is driving this push at this moment, which is ostensibly democratic and constitutional as the voting will occur in parliament under parliamentary rules, is an argument for another day.

What Pakistanis should be clear about is the fact that this most recent wave of political uncertainty is only going to make their lives that much more difficult in the weeks and months to follow.

A major driver of this near-term uncertainty is the economic crisis Pakistan has found itself in from 2018 onwards.

While Khan’s detractors would argue that it is his government that is responsible for all that has gone wrong since 2018, the reality is a little more complex. When he came to power, Khan inherited an economy facing a twin deficit crisis.

Writing in October 2016, I argued that the coming crisis would lead to a situation where “the rupee will come under profound pressure, leading to a remarkable depreciation in a short period of time. The general population will be burdened with rising prices, a stagnant economy, and a decline in real wages.”

The original sin

Khan and his team’s failure was that they were unable to make quick decisions that stabilised the economy and set a foundation for robust growth towards the end of his tenure. This was why Asad Umar was in and out of the finance ministry in a hot second, following which an outsider in the form of Abdul Hafeez Sheikh was brought in to manage the economy.

As the economy was stabilising, a once-in-a-century pandemic struck, dealing it a body blow at a time when it was already on its knees. The Khan government rolled out a stimulus and developed a robust public health strategy executed by the NCOC, ensuring that millions of households were saved from experiencing the trauma that countries like India, for example, went through.

However, the Khan government let this crisis go to waste in the sense that it did not leverage the opportunity to pursue underlying structural reforms to address longstanding weaknesses in Pakistan’s economy. This meant that while government largesse in the form of fiscal spending and the country’s longest-ever real estate amnesty scheme boosted growth, the economy began to show signs of overheating, raising concerns over near-term external sector instability.

It was for this reason that the government engaged in negotiations with the IMF and agreed to resume the programme by following through on the commitments it had made to the lender. Such an agreement would unlock access to dollars from the Fund and the international bond market, which were critical to maintain economic stability. In return, the government passed a mini budget that withdrew tax exemptions across a variety of goods and agreed to raise the petroleum development levy.

It was at this point that global energy prices began to rebound sharply, creating a perfect storm for Khan’s government that was already facing an opposition alliance gunning for his removal. Inflation was eroding popularity and Khan decided that he had to give relief to the public, which is why fuel and electricity prices were cut.

This populist decision made political sense: from January 2020 to January 2022, food inflation in Pakistan increased by 20 per cent compared to just 7pc in India. This divergence occurred even though it was India that experienced a catastrophic pandemic and had farmers agitating against the Modi government's proposed agricultural reforms.

Decades-old saga

Pakistan’s economy has been plagued with structural issues that have only mutated and metastasised since at least the 1990s. After the turn of the century, Pakistan has had the second-highest average rate of inflation and the lowest average rate of growth among its peer economies, which include the likes of Nigeria, Vietnam, Morocco, India, and Bangladesh. What this basically means is that Pakistani households have been falling behind their peers around the world. In addition, crises in the agriculture and energy sectors are worsening, leading to a continued increase in commodity and energy circular debt.

Khan’s most recent populist decisions must be viewed within the historical context of Pakistan’s economic decline, the continuous crises his government has experienced, and the ongoing agitation by the PDM. With a no-confidence vote coming up, the last thing Khan needed was a dramatic spike in fuel prices to provide further momentum to the opposition.

However, Pakistan’s economic crises are a feature, not a bug of its political economy. The economy cannot bear the burden of Khan’s populist choices for much longer, which means that when this current saga is over, with or without Khan as prime minister, the government of the day will have to make unpopular decisions to clean up the mess and then some.

Meanwhile, Pakistani households will continue to be burdened by foreign and domestic debts that are taken out to provide them with “relief”, including the recent cut to petroleum prices. Eventually these debts will have to be paid back, plus interest and currency depreciation.

In addition, more taxes will have to be imposed to improve the fiscal outlook. These taxes are likely to be regressive, meaning that even more resources will be extracted by the elite from underprivileged citizens. In short, the medium-term pain for ordinary citizens will override the near-term gains, if the cut to petroleum prices can be called that.

Moreover, the ongoing political instability is unlikely to ease in the near-term, meaning that the risk premium on doing business in Pakistan is going to increase, making foreign investors cautious.

Reneging on agreements with the IMF — cutting taxes when in fact the agreement was to increase them — means that the Fund will place even more onerous preconditions on Pakistan the next time it needs a bailout, which may not be that far away.

Like the past, political uncertainty is breeding economic uncertainty in Pakistan. All of this will cause even more pain for millions of households across the country in the coming months.

In the meantime, elites will remain engaged in their political machinations, seeking a greater share of a stagnant and rotting pie. None of this should come as a surprise to anyone, given that scarce intellectual capital has and is being leveraged for political machinations rather than solving actual problems that are causing Pakistan’s rapid socio-economic decline.

Header image: Adapted from northallertonman/ Shutterstock