The Economic Blindspot in Pakistan

The International Monetary Fund (IMF) adopted a $3 billion assistance package for Pakistan on July 12. The first half of this year was filled with apprehensions and forecasts of Pakistan’s debt default. While the IMF agreement has ensured that Pakistan avoids default, at least for the time being, it has triggered a vicious cycle that has been repeated dozens of times in Pakistan’s history.
Immediately after the IMF agreement, Saudi Arabia deposited $2 billion in the State Bank of Pakistan (SBP), while the UAE had already pledged $1 billion. China refinanced a $2.4 billion loan on Thursday, in addition to the $600 million deferred the previous week. Commitment to an IMF program functions as the guarantee that lending states require, in this case saving Pakistan from record-high 38 percent inflation and a decade-low $3 billion in foreign reserves covering less than one month of imports.

This time around, however, the magnitude of the political variables encompassing the frequently repeated fiscal cycle stands in stark contrast to recent events. The typical five-year cycle begins with a newly elected government consenting to an IMF plan, concluding it within three years, and then derailing it with populist measures prior to the next election. The most recent IMF program will be implemented over a period of nine months by possibly three distinct regimes.

The current government, led by the alliance of the Pakistan Democratic Movement (PDM) and the Pakistan Muslim League-Nawaz (PML-N), which has agreed to the IMF deal, will soon be replaced by a caretaker government that will oversee the upcoming general elections, which are scheduled to take place by the end of 2023. This year’s IMF negotiations coincided with Pakistan’s electoral limbo, as the state delayed scheduled elections until a military-led crackdown against Pakistan Tehreek-e-Insaf (PTI), the overwhelming favorite, reassured the ruling coalition of the army’s customary political engineering. This engineered government will see the current bailout through to completion, and The military hegemony ensures that successive administrations will not assume responsibility for Pakistan’s economy, instead using it as a stage for political stunts. In its staff report on the failure of the Extended Fund Facility (EFF), which in turn necessitated the most recent assistance, the IMF blamed Dar and Shaukat Tarin, the most recent finance ministers. As was customary, Tarin passed an expansionary budget just as the PTI’s regime was coming to a close, while Dar’s long-held fixation with artificially controlling the exchange rate caused significant harm to multiple sectors of the economy by allowing multiple currency rates to flourish, led by an Af-Pak dollar cartel.

White, gray, and black were the three effective exchange rates. During an interview with The Diplomat, Ahmad Akbar*, a prominent merchant at one of Karachi’s currency exchanges, stated that in many instances, a single currency exchange dealt with all rates in various domains, causing shortages on the open market and further increasing black market rates.

“The banks also had a great time, particularly earlier this year when the disparity between the interbank and open market rates widened to more than 25 Pakistani rupees per U.S. dollar. In addition to the fees and taxes already in place for payments in foreign currencies, the banks were offering remittances at a lower rate than the interbank rate and charging foreign transactions a higher rate than the open bank rate, said Akbar, who also works for a digital marketing firm with overseas clients.

Foreign remittances, which account for 10 percent of Pakistan’s gross domestic product, were affected by the artificial exchange rate and banking disparities.

State intervention in foreign exchange rates is a consequence of the politicization of the SBP. The central bank not only permits the consumption of dwindling reserves to fabricate an artificial value for the rupee, but it also enables the government to prescribe monetary policy to manage inflation, which should be the responsibility of an independent central bank.

“It is solely a formality for the committee to announce the monetary policy and any adjustments to the policy interest rates. Jamshed Ali*, an SBP employee privy to the Monetary Policy Committee, told The Diplomat, “These things are already predetermined, and they are told what to announce.”

While the State Bank of Pakistan Act of 1956 was amended in January 2022 to give the central bank more autonomy, it continues to operate according to unofficial directives. Despite commitments to the IMF in this regard, the exchange rate has also not been allowed to become intervention-proof. The absence of official documentation also facilitates these arbitrary interventions and hinders the functioning of a well-oiled, self-sustaining economy.

Over a third of the economy of Pakistan is undocumented. This permits for the existence of parallel economies, rendering macroeconomic indicators inadequate. It also diminishes the state’s treasury, of which only a fraction is allocated to much-needed development projects. Sustaining the informal economy is also in the self-serving interests of the governing elite, which manipulates the economy to maximize personal gains.

“The government stole our maize at a rate of 18,000 rupees per maund, and those spearheading this mafia will now exploit the farmer by selling it at a rate of 3,500 rupees.” The government is slaughtering us mercilessly. President of the Pakistan Kissan Ittehad [Pakistan Farmers Union] Zulfiqar Awan told The Diplomat that the IMF cargo will also be consumed.

Successive governments have enabled monopolies, including those that stockpile staple foods such as sugar and wheat. Frequently, these cartels have ties to government and military leadership. And while political corruption remains a popular topic of discussion, the all-powerful army ensures that its unprecedented misappropriation of Pakistan, which it operates as a private business, remains out of the spotlight. Negotiate inevitably a longer-term IMF follow-up plan.
Clearly, the incumbent government is not even sparing with a pretense of electoral freedom and fairness, and is pressing for a caretaker arrangement that is an extension of the current regime, with Finance Minister Ishaq Dar’s name being circulated as a potential interim prime minister this week. The fact that Pakistan requires an interim government to transition between governments is a reaffirmation of the distrust surrounding all matters of governance, which has been impeded by the weakening of all institutions – with the exception of the all-powerful military. That no amount of IMF programs or foreign subsidies will be sufficient to maintain the “Government, intelligence, and [military] institutions are all complicit in looting and plundering. We are an agricultural nation; therefore, if you improve agriculture, you improve the nation. Awan added, “Instead, we have to deal with agricultural secretaries who wear clothes worth hundreds of thousands of rupees and don’t even know whether cotton grows on a plant or a tree.”

The record-breaking inflation has resulted in persistent increases in the prices of petroleum, gas, and electricity, with further increases expected in the coming months. According to merchants and businesspeople, the already unsustainable commercial conditions have been rendered impossible by the soaring increase in the price of basic materials, particularly imported materials, which are also affected by the volatility of the currency exchange rate.

“The significant price increases make it impossible for us to produce export-quality goods. If we implemented them, they would not be economically viable for us. Daro Khan Achakzai, president of the Pak-Afghan Chamber of Commerce, told The Diplomat, “We cannot compete with our competitors in any way.”

The exports of Pakistan have declined for ten consecutive months. In order to resolve the deteriorating balance of payment crisis, the government has decided to restrict imports rather than work to make Pakistan’s economy more export-oriented. This revision and the improvement of the country’s overall investment climate can only be assured by rectifying Pakistan’s most ominous problem: its volatile security situation.

Despite the decline in terror attacks over the past eight years, the country continues to experience significant unrest, which deters investors. Even Beijing is reconsidering its largest overseas investment, the $62 billion China Pakistan Economic Corridor (CPEC), due to assaults on its initiatives. This instability stems from the Pakistani military’s decades-old regional and domestic security strategy of supporting jihadists. This policy, in turn, hinges on the state’s ongoing anti-India stance, which continues to severely impact Pakistan’s economy.

“There should be no doubt about the magnitude of Pakistan’s gains from enhanced trade with India. We should strengthen our commercial ties with all adjacent nations and states worldwide. In fact, we should improve our barter trade agreements along land routes connecting South Asia, Central Asia, and Russia. The economy should not be a political pawn, added Achakzai.

And yet, this is precisely what has occurred to Pakistan’s economy over the past seven decades, as a result of a combination of masochistic internal and regional power struggles. The military establishment must realize that Pakistan can no longer function as a rent-seeking economy or a business dominion, and that it requires a model that rests on a foundation of grassroots democratization. This, in turn, necessitates stability in both the security and political spheres, as well as the integration of all stakeholders within the framework of a common national interest defined by empirical evidence, as opposed to empty ideological rhetoric.

Pakistan’s fiscal blind spot is maintaining a viable economy without undergoing a comprehensive structural overhaul.

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