In 2022, it seems Murphy’s law found a comfortable home in Pakistan.

Everything became much more expensive amid decades-high inflation, the rupee plummeted, there were fears the country may default as the central bank’s reserves remain critically low, and all the while, industry struggled to operate — with many large companies partially suspending operations.

The already-fragile situation worsened when floods ravaged nearly a third of the country, destroying almost half the country’s agricultural land and sweeping away entire villages. Some estimates put damages from floods at $30 billion.

But why is this happening all at once? There is no set starting point for this tale, so let’s start with the dollar.

Lowering taxes may help ease food inflation in the short run, but experts believe that long-overdue structural reforms are necessary to cure our ‘IMF addiction’

The Dar-onomic fallacy

Throughout its history, Pakistan has almost always opted for a fixed exchange rate regime. For years on end, the dollar oscillated between the Rs90-100 band by design when the actual rate — had it been left to market forces — would have been much higher.

Often referred to as ‘Dar-onomics’, taking its name from our incumbent finance minister, this policy was akin to a drug for our country. That’s because it incentivised imports by making them cheaper, while at the same time it hurt our exports by making our goods expensive in the international market.

Today, there is hardly any industry in Pakistan that can continue operations uninterrupted without importing key components.

Shahrukh Wani, economist at the Blavatnik School of Government, University of Oxford, thinks Pakistan is going through an “unmistakably significant economic crisis” which hasn’t translated into a recession yet, but has led to a significant reduction in economic growth both because of government measures to stabilise the macro outlook and the reduced confidence of investors.

He says the administrative measures taken by the government to curtail imports had particularly dragged down economic activity.

When the country does not have enough dollars to meet its external obligations, i.e., make payments for debts and essential imports, it is staring at default. To avoid this, Pakistan has been scrambling to the International Monetary Fund (IMF) to bail it out every few years over the past six decades.

During its latest programme that began in 2019, the international lender strong-armed Pakistan into making the changes it should have made decades ago: a market-based exchange rate, an autonomous central bank free from government pressure, higher tax revenues and so on and so forth.

As Pakistan’s forex reserves kept falling, the political chaos in the country certainly did not help the economy as it threatened to derail the IMF programme.

Facing an inevitable ouster, the previous government put in place a petrol subsidy, even though it violated the international lender’s conditions for the release of funds. When the new government came to power in April, much to everyone’s surprise, it continued with the subsidy for another two months, causing losses to the national exchequer and giving rise to fears of default.

Prime Minister Shehbaz Sharif toured Saudi Arabia and the UAE in a bid to secure funds for the country but was asked to first put things in order with the IMF. Eventually, the government took the difficult decision to do away with the subsidy in phases and increase the price of petrol at a time when inflation was already soaring.

After critical talks with the IMF on the seventh and eighth review of the programme, led by then finance minister Miftah Ismail, Pakistan was able to secure $1.1 billion from the lender in August, averting the threat of default for the time being.

But that victory was short lived because in less than two months, finance minister Ismail was sent packing and in came Ishaq Dar, who promised to bring the dollar back to 180 from the mid 200s.

It did not take long for the default mantra to make its way back into the mainstream because despite the IMF’s money and Saudi Arabia rolling over its deposits, Pakistan’s obligations remained much more than its inflows.

Global recession

“We’re very much in a recession,” says Dr Hafiz Pasha, former UN assistant secretary-general and federal minister.

In his view, it was both domestic and global factors that induced this. He notes that there’s a slowdown in economic activity globally. In Pakistan’s case, he says, the already adverse situation has been exacerbated by floods.

“Industrial production fell 7pc in October while agriculture is also expected to see a plunge of around 6pc this year,” he says.

“We’d be lucky if we see even 1.5pc GDP growth this year.”

The situation, however, continues to remain precarious.

As of Dec 23, reserves with the State Bank stood at $5.8 billion, lowest in eight years and barely enough to cover a month’s imports.

Structural issues mean that our forex reserves perpetually remain under pressure because our current account deficit keeps spiralling out of control and therefore, any economic growth that comes with it is unsustainable because it comes at the cost of our reserves. With imports overshadowing exports, Pakistan is always on the qui vive for dollars.

This year, even the inflation problem has been exacerbated because of international factors as well as an unprecedented natural disaster.

Prices have gone up globally after supply chain disruptions in the aftermath of the coronavirus pandemic and the fallout of the Russia-Ukraine war. In particular, oil prices shot through the roof, surpassing $100 per barrel, after Russia’s invasion of Ukraine on supply concerns since Russia is a major supplier.

This not only caused petrol prices to surge in the country but also had a significant impact on electricity prices since Pakistan’s energy mix is heavily skewed towards fossil fuels.

And the floods that damaged around 45pc of our cultivable land also caused shortages of essential food items, which had to be imported to meet domestic needs.

Maha Rehman, a research fellow at the Mahbub ul Haq Research Centre at Lums and a former faculty member there, says the global slowdown along with our fiscal fundamentals is leading the economy into a recession.

“The political uncertainty will not make it any easier since the political parties in power will be extremely wary of making the tough economic decisions required in this climate.”

With all these factors combining, Pakistan saw five-decade high CPI inflation of 27.3pc in August.

Sajid Amin Javed, a macroeconomist with the Sustainable Development Policy Institute, thinks Pakistan is going through a period of “stagflation”, a phenomenon when economic slowdown and high rates of inflation co-exist.

With headline inflation rate continuing to stay in the high 20s while industrial and agricultural growth was declining, he calls it “the great stagflation”.

Mr Javed says Pakistan’s best case scenario this fiscal year is a 3.5pc growth, almost half the 6pc achieved a year ago, while the inflation outlook remains around 23pc.

Is there a way out?

After this rollercoaster ride, where does Pakistan stand at the end of the year? And what’s the way forward?

According to Mr Javed, it takes a long time to come out of stagflation since there are not many policy options at disposal, which is why there are long-term social and economic costs associated with it.

Among his key recommendations, Mr Javed suggests that the government will have to convince the IMF to lower tax revenue targets in light of floods and in return reduce or remove taxes from some key items.

To check food inflation, he says, the government needs to remove taxes, especially sales tax, on essential food items as well as do away with import duties on them.

He also recommends the formation of price control committees at the district level to ensure there was no hoarding and profiteering. In his view, social protection cash flows for lower-income groups through BISP needed to be revised upwards by 25pc to protect people’s purchasing power.

Mr Wani believes Pakistan needs an explicit short-term roadmap for the next year that includes a clear commitment to implementing the IMF programme, including a pledge to the market-based exchange rate and a strategy to service its debt.

“If debt restructuring is needed, it is better to do so sooner than later.”

He goes on to say there will likely be a significant contraction in economic activity and an increase in the cost of living over the coming year, and so the government needs to direct its spending to effectively target lower-income groups.

In his view, it is critical to recognise that the current crisis is a symptom of long-run structural challenges in Pakistan’s economy that include low levels of productivity and domestic savings.

“These challenges have made Pakistan’s growth fundamentally constrained by its balance of payments, leading to repeated macroeconomic crises.”

A credible break from the current crisis requires undertaking long-overdue reforms that target these structural impediments to economic growth, he notes.

Ms Rehman thinks the government needs to start incentivising increased productivity investment and increased production in export sectors in order to cushion the impact on export slowdown and potential job losses.

“The policy focus will also need to shift away from sectors that lock capital in unproductive areas. The fuel mix will need active policy intervention and the government will need to proactively change policy focus to mitigate impact,” she holds.

A detailed version of this article can be accessed on

Published in Dawn, January 1st, 2023



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