Deepening crises

Published November 7, 2022

How bad will things get? What happens next? It is the question everyone is asking in the country following the assassination attempt on Imran Khan in Wazirabad last week as the former prime minister was leading his protest march on Islamabad to force early elections in the country. He and his party quickly blamed the shooting on an alleged conspiracy between the government and the military.

Sporadic protests broke out across the country as he and his party demanded the resignation of the prime minister, interior minister and a military officer currently posted in a senior position in ISI. Imran Khan, who was shot in his legs, appeared on television from his hospital room the next evening to instruct his party to continue their protest till the resignation demand was met.

He also promised to return to the streets once he is recovered to lead the march to the federal capital. It looks like Pakistan has been ushered into yet another stage of instability with an increased likelihood of political violence after the attempted assassination of Imran Khan.

The PTI’s anti-government protests and attempt on its founder’s life come at a time when the economy is facing one of the worst balance of payment crises in its history, exacerbated by devastating floods that have caused losses of $40 billion.

Any intensification in political instability or violent protests will make sure that Pakistan’s economy does not recover quickly

Recently, the International Monetary Fund has asked Pakistan to impose new taxes of Rs600bn to achieve the tax-to-GDP ratio target of 9.5 per cent. Pakistan’s tax collection is falling short of the target due to a slowing economy and shrinking imports as Pakistan manages to cut the trade deficit by nearly 27pc in the July-October period of FY23 by blocking imports. The trade deficit shrank to $11.5bn solely because of the steep fall in imports.

Pakistan is no stranger to political violence and has survived its share of assassinations and attempts on the life of its serving and former prime ministers. But political and economic analysts feel the nation’s economy blighted by super floods, deepening external sector troubles and runaway monthly inflation of over 26.50pc has little strength left in it to survive further escalation of political instability and violence this time around.

Investors were spooked, and share prices dropped the day after the shooting of Imran Khan, showing how the markets would react if political instability increased in the wake of the attack.

“The near-term economic outlook depends on whether political polarisation intensifies from here on or if sense prevails and tempers are cooled down,” says a businessman who considers the events of last week will likely deepen economic uncertainty in the country.

“The politics in Pakistan have become extremely nasty, personal and vindictive. No one is thinking about the economy and how the average Pakistanis are being impacted by deteriorating economic conditions, floods and inflation,” he added on the condition of anonymity.

A textile exporter from Faisalabad said the businessmen were not sure what was going to happen in the next few days after the Wazirabad incident. “The businesses and economy require clarity. And there’s been no clarity for the last six months. I see this continuing even beyond the next elections. I think economic instability will increase with intensification in political uncertainty.”

Imran Khan has been pushing for snap elections ever since he was ousted from power in April. He has recently said he was prepared to continue his protest for months beyond his long march if needed. The coalition government led by the PML-N says elections will take place in October next year as scheduled.

However, there are many who think that the businesses have already factored in possible escalation in political instability ahead of the next elections. “There is a silver lining in the dark clouds of political uncertainty in the country. China and Saudi Arabia have agreed to provide financial assistance of nearly $13bn — $8.75bn from China and over $4bn from Saudi Arabia — in financial support on top of assurances for about $20bn investments as announced by Ishaq Dar. This underlines that we are finally moving away from the brink and getting closer to economic recovery,” he says.

Dar had also said another $1.4bn worth of inflows were almost mature, including $500 million from the Asian Infrastructure Investment Bank and two World Bank loans of $900m. Will that be enough? Not everyone concurs with foreign currency reserves dropping to $8.9bn and home remittances declining by 6pc in the first quarter of this fiscal year. Pakistan requires massive foreign financing to meet its payment requirements.

Hence, political developments can be crucial to the economy in the next few weeks. “We are going through a very difficult balance of payment situation. A reduction in current account deficit is good but not be enough to address our economic troubles,” a financial analyst argues.

“The economy is facing two issues right now. Pakistan’s access to the international debt market and commercial borrowing has become extremely challenging and costly, and bilateral and multilateral assistance is also slow to come — and that too with stringent conditions. The second issue pertains to growing political uncertainty in the country. That is also affecting our ability to secure foreign commercial, bilateral and multilateral funds,” he insisted.

Therefore, it is fair to assume that any intensification in political instability or violent protests will make sure that Pakistan’s economy does not recover quickly.

Published in Dawn, The Business and Finance Weekly, November 7th, 2022

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