Introduction

As the new year dawns upon the South Asian nation of Pakistan, the nation finds itself caught in the throes of a precarious situation. The economic condition of Pakistan is currently in a state of flux, oscillating from one crisis to another. The latest and most common representation of Pakistan’s financial distress is the frequent blackouts faced by the country. A snowballing debt crisis could spiral Pakistan into a whirlwind of financial chaos. The coalition government, which ascended to power in April 2022, is grappling with the monumental task of assuaging domestic politics, resuscitating the floundering economy, fortifying national security and fashioning a robust foreign policy strategy for a nation of 231 million people, armed with nuclear capabilities.

Despite a new army chief assuming the mantle of command after six years, it remains nebulous as to how his appointment will impact the future course of events. The incendiary oratory of the populist former Prime Minister Imran Khan, who was barred from holding elected office for five years due to alleged campaign finance violations, has subsided somewhat. However, his efforts to disband two provincial assemblies, where his party wields power, are instigating political instability, exacerbating the already precarious political climate.

The IMF bailout loan of $1.1 billion, which was disbursed in August 2022, failed to engender economic stability in Pakistan. The next tranche of the $7 billion agreement has been put on hold, owing to concerns that yet another bailout may be required in the near future, resulting in further financial instability. However, the cash-strapped nation and the IMF have yet to reach a staff-level agreement on a much-needed $1.1 billion bailout package. Pakistan's already unimpressive and erratic reputation has been further exacerbated. Another unmistakable point on the international front is that its relationship with China and the USA is hanging in the balance.

It is worth noting, however, that in the 1980s, Pakistan had experienced remarkable growth rates while its neighbor India languished in the doldrums of what was then dubbed the "Hindu rate of growth." Per capita income in Pakistan was about 25% higher than India's in the early 1990s, with an average Pakistani enjoying better sustenance and apparel than his Indian counterpart. Moreover, while over half of India's population in 1992 lived below the poverty line of $1 a day, only 11% of Pakistan's did. Pakistan also boasted a sizable population of migrant workers, numbering around two million, which was comparable to India's migrant workforce in the Middle East. These conditions were about to unfold the other way round since the break of the late 20th century.

Socio-Political Tension

Former Prime Minister Imran Khan's political machinations have engendered more volatility in the Pakistani political landscape. The past year was marked by a bitter power struggle featuring the erstwhile cricketer-turned-politician, who has been embroiled in a tug of war with other political parties, the judiciary and the military-intelligence establishment, which was involved in covert maneuvers to sideline him. Faced with the prospect of losing a vote of no confidence in parliament in April 2022, Mr. Khan spent the subsequent months inciting his supporters with unfounded allegations of a U.S.-backed conspiracy against him, involving the upper echelons of the Pakistan army.

Mr. Khan's ultimate goal is to force early general elections and leverage his growing popularity to gain a parliamentary majority for his party, thereby securing the ability to nominate the next army chief. However, his actions have only served to damage Pakistan's relations with the United States, exacerbate political turmoil and exacerbate the country's economic woes. So far, he has been unable to achieve his aims.

In the wake of the assassination attempt on Mr. Khan's life during one of his rallies on November 3, 2022, his rhetoric has softened somewhat, and he is now seeking early elections in two provinces where his party commands a majority- Punjab, Pakistan's largest province, and Khyber Pakhtunkhwa. However, the chief ministers of both provinces are reluctant to dissolve the provincial assemblies, and Mr. Khan's political maneuvers are likely to continue to exacerbate political chaos, with moves and counter-moves in the provincial assembly and the court. The coalition government, helmed by the Pakistan Muslim League Nawaz (PMLN), is struggling to govern effectively or revive the beleaguered economy, plagued by a persistent balance-of-payments crisis.

Talibani Invasion

The return of the Taliban in Afghanistan has added to the already precarious situation in Pakistan. The Taliban's resurgence has emboldened the Pakistani Taliban, who have launched attacks across the country, including a suicide bombing in the capital, Islamabad. The Pakistani government has been unable to stem the tide of violence, which has left many Pakistanis living in fear.

One of the most prominent impacts of the Taliban invasion on Pakistan's economy has been the security risks posed by the conflict. The ongoing conflict has led to increased security costs for Pakistan, as well as disruptions to trade and investment, particularly in the border regions. The resulting security risks have discouraged foreign investors, reducing investment inflows and limiting economic growth. In addition to security risks, the Taliban invasion has also increased Pakistan's expenditure on border management, including increased military spending and border security measures. These expenditures have put pressure on the country's fiscal position, increasing the budget deficit and reducing the government's ability to invest in critical infrastructure and social services. Moreover, the Taliban invasion has disrupted trade and investment flows between Pakistan and Afghanistan, limiting economic growth and development in both countries. The closure of border crossings has led to a decline in trade, particularly in the areas of agriculture and textiles, which are significant sources of revenue for Pakistan. Furthermore, the Taliban invasion has also had a negative impact on Pakistan's tourism industry, with many foreign tourists avoiding the country due to security concerns. This has reduced the revenue generated by the industry, limiting its potential to contribute to economic growth. Finally, the Taliban invasion has also had a broader impact on Pakistan's regional and global reputation, which can affect the country's ability to attract foreign investment and participate in global trade. The perception of Pakistan as an unstable and insecure country can limit its ability to integrate with global markets and participate in international trade and investment.

Moreover, Pakistan's relations with its neighbor India remain frozen in time. The two countries have been locked in a long-standing dispute over the Kashmir region, and tensions often escalate in the event of a terrorist attack. The danger of a major military conflict breaking out between the two nuclear-armed nations is ever-present, and the situation is made even more complex by Pakistan's strategic alliance with China. Pakistan's relations with India continue to remain stagnant, with the constant fear of heightened hostilities in the wake of a terrorist attack. Pakistan's strategic alliance with China, at a time when the United States is viewing Beijing as a competitor, has further complicated Islamabad's policy of seeking a balance between these two global powers.

Pakistan's Economic Challenges

Pakistan possesses a range of economic assets, including its geographical location, natural resources, and a large population with a young demographic profile. However, despite these assets, the country has faced a persistent economic crisis.

One factor contributing to this crisis is the country's poor governance and weak institutions. This has led to a lack of effective policy implementation, corruption, and political instability, which in turn have deterred foreign investment and hindered economic growth. Additionally, Pakistan's overreliance on a few key sectors, such as agriculture and textiles, has made its economy vulnerable to external shocks, such as changes in global commodity prices or supply chain disruptions. This has limited the diversification of the economy and slowed down its overall growth potential. Moreover, Pakistan's energy sector has been a major drag on the economy, with chronic power shortages and a poorly managed distribution system leading to high costs for businesses and households alike. This has undermined the country's competitiveness and hindered its ability to attract investment.

Pakistan is facing a severe economic crisis with rising debt, a sluggish economy, and a growing dependence on foreign aid. The country has struggled to fulfill the strict conditions set by the International Monetary Fund (IMF) to receive financial assistance. Despite the IMF's tough stance, the country has failed to implement the promised reforms, resulting in the IMF withholding the next tranche of the loan. Furthermore, the $13 billion loan pledged by China and Saudi Arabia has yet to materialize, creating an additional setback for the country's struggling economy.

The country's $130 billion debt is a growing concern, with only a $376 billion economy in 2022. This translates to just over $5,000 of debt per person, even when purchasing power parity is taken into account. The situation is exacerbated by the country's weak export performance, which is further worsened by the COVID-19 pandemic's impact. As a result, the government is left with few options to address the country's economic challenges. Despite these daunting challenges, Pakistan is still making efforts to invest in upgrading its infrastructure, with a planned $10 billion upgrade of the national railway.

Pakistan has a long history of seeking IMF assistance, with 22 loan programs since 1959. However, unlike the previous occasions, the IMF is less willing to make concessions and is now more reluctant to release the next tranche unless the government meets its conditions. The IMF's strict conditions include implementing fiscal discipline, reducing the budget deficit, and improving tax collection. These policies are challenging for a country where the economy is predominantly informal, and the tax base is narrow.

Furthermore, the IMF has been pressing Pakistan to reduce its reliance on expensive power plants fueled by imported fuel oil, which is a significant drain on the country's foreign exchange reserves. However, implementing this policy would lead to higher electricity prices and consequently create social unrest, making it a difficult policy to implement for the government. The IMF's conditionalities for Pakistan's financial assistance comprise a multifaceted set of structural adjustments and policy measures aimed at achieving macroeconomic stability and sustainable growth. These conditions are designed to address Pakistan's persistent economic challenges and bolster its capacity to sustainably manage its financial resources.

One of the most prominent conditions imposed by the IMF is fiscal consolidation, which involves reducing government expenditure and increasing revenue generation to address the country's fiscal deficit. This measure typically entails cutting public sector expenditures, including salaries, pensions, and other benefits, as well as increasing tax revenue through measures such as tax reform and enforcement. Another key condition is monetary tightening, which involves increasing interest rates to curb inflation and stabilize the currency. This measure aims to bring down inflation to a sustainable level while simultaneously strengthening the country's foreign exchange reserves. In addition to fiscal and monetary measures, the IMF has also mandated trade liberalization, which involves removing barriers to trade and investment to promote growth and enhance competitiveness. This measure entails reducing tariffs and other trade barriers, facilitating foreign investment, and promoting export-led growth. The IMF has also emphasized the need for public sector reforms, which aim to enhance the efficiency and transparency of government institutions. This measure includes streamlining bureaucratic processes, reducing corruption and inefficiency, and increasing public accountability. Furthermore, the IMF has emphasized the importance of strengthening the country's institutional capacity and governance, including strengthening regulatory frameworks and improving the legal and judicial systems. This measure aims to create a conducive environment for investment and sustainable economic growth.

Finally, the IMF has demanded a high degree of transparency and accountability in the implementation of these reforms, with regular monitoring and reporting mechanisms in place to ensure compliance. This measure aims to ensure that the funds provided by the IMF are used effectively and efficiently to achieve the desired outcomes. But, Pakistan has faced significant challenges in meeting the conditionalities imposed by the International Monetary Fund (IMF) due to a range of factors, including domestic political instability, structural economic issues, and external shocks.

One major obstacle that Pakistan has faced is political instability and governance issues, which have made it difficult to implement the required economic reforms. Frequent changes in leadership, coupled with weak institutional capacity and corruption, have led to delays and disruptions in the implementation of critical reforms, particularly in the areas of tax reform and public sector governance.

Geopolitical Conflicts

Geopolitical conflicts, even those that do not directly involve Pakistan, can have a significant negative impact on the country's economic and social well-being due to its strategic location, economic interdependence, and regional security concerns.

Firstly, Pakistan's strategic location as a gateway to Asia and the Middle East makes it vulnerable to external political and security risks, such as border disputes, terrorism, and regional power rivalries. These conflicts can disrupt trade, investment, and tourism, leading to a decline in economic growth and employment opportunities. Secondly, Pakistan's economic interdependence with other countries and regions, such as China, the United States, and the Gulf states, means that geopolitical conflicts in these areas can have ripple effects on Pakistan's economy. For instance, tensions between China and the US could lead to reduced investment in Pakistan's China-Pakistan Economic Corridor (CPEC), a flagship infrastructure project aimed at promoting economic growth and regional connectivity. Thirdly, geopolitical conflicts can exacerbate existing domestic challenges in Pakistan, such as poverty, inequality, and governance issues, by diverting resources and attention away from critical social and economic priorities. For example, government spending on defense and security may increase at the expense of social welfare programs, leading to a decline in human development outcomes. Furthermore, geopolitical conflicts can impact Pakistan's foreign policy options, as it seeks to balance its relationships with various regional and global powers. This is a delicate situation, and can end up in a stalemate, in spite of efficient diplomacy. For instance, recently, Pakistan was obliged to supply military tanks to Ukraine (at the behest of the West, aka IMF), while it also eyes cheap crude from Russia. Conflicts can force Pakistan to take sides or make difficult choices about its foreign policy priorities, which can create tensions with key partners and limit its diplomatic flexibility. Finally, geopolitical conflicts can undermine regional cooperation and stability, leading to a cycle of conflict and instability that affects all countries in the region, including Pakistan. This can lead to increased security risks, displacement, and humanitarian crises, which can have significant economic and social costs.

In addition to governance challenges, Pakistan has struggled with persistent structural economic issues that have hindered its ability to meet IMF conditions. These issues include a low tax-to-GDP ratio, a large informal economy, weak export competitiveness, and an underdeveloped financial sector. Addressing these challenges requires sustained efforts over the long term, which can be difficult to achieve amidst political instability. Finally, external shocks, such as natural disasters, global economic downturns, and regional security threats, have also impacted Pakistan's ability to meet IMF conditionalities. These shocks have often necessitated increased government spending on relief and reconstruction efforts, putting pressure on the country's fiscal and monetary positions.

Economic Breakdown

Several reports have stated that a series of compounding factors have shaken Pakistan’s economy: double-digit inflation has skyrocketed the prices of essential commodities, and interest rate hikes by the U.S. Federal Reserve and other central banks have resulted in a rapid devaluation of Pakistan’s currency, the rupee. Pakistan’s imports have significantly risen, and exports have remained largely stagnant, widening the trade deficit in recent years.

Pakistan's inflation can be attributed to a confluence of factors, including but not limited to structural and cyclical issues, fiscal and monetary policies, global economic trends, and geopolitical tensions. The inflationary pressure has been exacerbated by persistent supply chain disruptions, rising input costs, currency depreciation, and energy shortages. The resultant price hikes have eroded the purchasing power of the populace and contributed to social unrest. Rising inflationary pressure has increased the prices of crucial commodities like wheat, onions, gas cylinders, etc. The average cost of a 20 kg wheat flour bag in January 2022 was Pakistani Rupee (PKR) 1,164.8. This shot up to PKR 1,736.5 in January 2023, a 50 per cent rise. This has made a mockery out of Pakistan! To further belittle this, there have been anecdotal reports of stampedes during free flour distribution by the government, resulting in shameful deaths.

China: Boon or Bane

Pakistan's strategic relationship with China is also contributing to its economic challenges. Pakistan has entered into multiple agreements with China, including the China-Pakistan Economic Corridor (CPEC), which is expected to boost infrastructure development in the country. However, the government has been criticized for its lack of transparency in these agreements and its growing debt to China. Moreover, the growing dependence on China has put Pakistan in a difficult situation when it comes to its foreign policy. As China is viewed as a competitor by the United States, Pakistan's strategic embrace of China has complicated its efforts to balance its relations with the two global powers.

Pakistan's deficiency in effective governance has engendered a situation of quasi-autonomy, characterized by a paucity of institutional authority and an excessive reliance on informal power structures. This governance deficit can be attributed to a multiplicity of factors, including endemic corruption, bureaucratic inefficiency, and a persistent disregard for the rule of law. Such circumstances have led to a systemic breakdown of accountability mechanisms and a dearth of transparency in the decision-making process, resulting in a climate of political instability and social unrest. Consequently, Pakistan's governance has become increasingly precarious, with power being concentrated in the hands of a few powerful actors who exert their influence with little regard for the public interest. This state of affairs has had far-reaching consequences, impeding economic development, perpetuating social inequality, and eroding the legitimacy of the state.

From 1947 to 2023: Tracing the Roots of the national failure

The roots of Pakistan's current economic crisis can be traced back to its history, which is marked by a complex interplay of factors, ranging from colonialism and partition to political instability and regional conflicts. These historical causes have left a lasting impact on Pakistan's economy and its ability to achieve sustained growth.

Firstly, the legacy of colonialism has left Pakistan with a distorted economic structure, marked by a heavy reliance on primary commodities and low value-added manufacturing. This legacy has hindered the development of a more diversified and resilient economy, leaving Pakistan vulnerable to global economic shocks and commodity price fluctuations. Next, the partition of India and Pakistan in 1947 created significant challenges for both economies, including the loss of key economic assets and infrastructure. The resulting refugee crisis and social unrest also disrupted economic activity, leading to long-term economic stagnation on both sides of the border. However, political instability and authoritarianism have plagued Pakistan throughout its history, creating a challenging environment for sustainable economic development. Frequent changes in leadership, military coups, and weak institutional capacity have led to policy inconsistency and disruption, hindering the implementation of critical economic reforms. Structural issues, such as a large informal economy, weak export competitiveness, and a poorly developed financial sector, have also contributed to Pakistan's economic woes. These issues have limited the country's ability to generate revenue, promote investment, and create sustainable jobs. In other words, Pakistan's structural issues have created obstacles for economic growth.

Historical Anti-Social Support

The Pakistani economy shares a striking resemblance to that of India's. Both economies have an industrial sector that contributes 27% to their respective GDPs, while their service sectors are marginally different. Furthermore, the agricultural sectors of both countries have fallen below 30%. However, in order to comprehend the high growth, the subsequent decline, and the recurring crises that plague Pakistan, it is necessary to look back to the era of Ziaul Haq, who ruled Pakistan for more than a decade and transformed both the country's economy and society. Although it is commonly known that he islamized Pakistani society and saw the rise of fundamentalist social groups, what is not as widely appreciated is how he fundamentally altered the structure of the economy by moving away from the populist policies of Bhutto.

This change led to Pakistan becoming heavily reliant on foreign aid and remittances, which created a need for continuous receipt of savings from abroad. To fully understand the causes behind the current crisis, we must revisit the growth and development strategy that Ziaul Haq implemented. During his time as ruler, the Pakistani economy grew at a rate that surpassed India's. While India's economy grew by 5.5% annually during the 1980s, the Pakistani economy grew at around 7% per annum. Additionally, its agriculture expanded at twice the rate of India, thanks to the completion of two large dams and irrigation projects.

Ziaul Haq came to power by overthrowing Zulfikar Ali Bhutto in 1977 and imposing martial law. His military intervention came after a strong public protest against Bhutto, which began after the alleged irregularities in the March 1977 election. Zia's takeover was done with the declared purpose of resolving the impasse between Bhutto's People's Party and the combined opposition by promising to hold free and fair elections within 90 days. However, Zia postponed elections due to Bhutto's continuing popularity and the fear that his return to power through free elections could unleash a vendetta against the top military leadership. Zia used the Lahore High Court's judgment finding Bhutto guilty of complicity in the murder of a political opponent in March 1978 to imprison Bhutto, and its endorsement by the Supreme Court helped Zia order his execution in April 1979. This set the stage for a long military rule, which only ended with Zia's sudden death in a mysterious air-crash in August 1988.

After Bhutto's removal, Zia's legitimacy was at a low ebb, and Western governments were pressuring him to restore parliamentary democracy. However, the Soviet invasion of Afghanistan in December 1979 gave the Zia regime a new lease on life, as it reduced internal and external pressure for broader political participation. Zia finally ordered non-party elections in March 1985 after amending the constitution, which substantially increased the President's powers. Following the elections, Zia appointed Muhammad Khan Junejo as the prime minister. However, Junejo's assertion of authority led to a conflict with Zia, and his government was dismissed in 1988.

Zia's long rule fundamentally changed the Pakistani economy and society. Firstly, he used his efforts to Islamize society to broaden his political support. Secondly, the Soviet occupation of Afghanistan and Zia's highly successful efforts to mobilize and coordinate large external assistance for the mujahedins from diverse sources, such as the USA and Saudi Arabia, increased his political standing and control after 1980. Third, Zia extended the role of the army in governance through extensive use of military intelligence, appointment of senior officers to key positions in public administration, and dispensation of patronage to the armed forces, thus creating a strong vested interest for the army in continuation of his regime. However, to continue the trajectory of economic growth and development that he initiated, there was no “parliamentary successor”. This left a vacuum that subsequent governments struggled to fill, and contributed to the eventual decline of the Pakistani economy.

Furthermore, Zia’s policies towards the private sector were inconsistent and often contradictory. While he did encourage private investment and entrepreneurship, he also imposed restrictions on foreign investment and maintained a complex system of import and export controls that hindered economic growth. This lack of consistency in economic policy, coupled with corruption and a lack of transparency in government decision-making, created an environment that was not conducive to sustained economic growth.

Additionally, the rise of fundamentalist groups and the Islamization of Pakistani society under Zia’s rule created a hostile environment for women and minorities, which in turn hindered economic development. Women were largely excluded from the workforce and denied equal access to education, limiting their potential contributions to the economy. Religious minorities faced discrimination and violence, which deterred foreign investors and damaged the country’s international reputation. However hard it may try, Pakistan, till date, hasn’t been able to erase its impression as a ‘Terrorist Nation’ on the international front.

Economic Woes: Growth Slumps and Reserves Plummet

One of the most pressing concerns for Pakistan is its economy, which has been faltering for years and is now facing a severe crisis. In 2022, the country's economic growth rate was a dismal 2 percent, far below the target of 6 percent set by the government. Moreover, its foreign reserves have plummeted to a perilously low level of less than $6 billion, barely enough to cover one month of imports. This has made the country vulnerable to external shocks, such as a sudden rise in oil prices or a global recession, which could lead to a balance-of-payments crisis and a possible default on its international loans.

One of the major factors behind Pakistan's economic woes is the extensive flooding that occurred in 2022, triggered by monsoon rains and melting glaciers. The floods caused widespread damage to infrastructure, agriculture, and livestock, as well as the displacement of millions of people. Many industries, including the textile sector, which is the country's primary export, were forced to shut down due to a lack of access to electricity and natural gas. The resulting loss of production and revenue has further weakened the economy, exacerbating the country's fiscal and trade deficits.

To address this crisis, Pakistan is seeking a $16 billion flood-relief package from international donors. However, this aid is unlikely to be enough to revive the economy, which requires a comprehensive and sustained effort to reform its energy sector, reduce corruption, and attract foreign investment. The government has agreed to implement the strict conditions set by the International Monetary Fund (IMF) for its bailout package, but it is facing stiff resistance from vested interests and opposition parties. If the economy does not improve before the next general election, scheduled for October, the incumbent government may face an uphill battle to win over the voters who are suffering from inflation, unemployment, and poverty.

Political Instability: Populism vs. Establishment

Pakistan's domestic politics have been marked by a tense rivalry between populist forces and the military-intelligence establishment, which has dominated the country's political landscape for most of its history. The former prime minister, Imran Khan, who came to power in 2018 on an anti-corruption and anti-establishment platform, has been embroiled in a bitter power struggle with his opponents, who accuse him of incompetence, nepotism, and authoritarianism. In 2022, Khan's fortunes took a sharp turn for the worse, as he was banned from holding elected office for five years on charges of campaign finance violations. This setback, however, did not deter him from seeking to undermine his rivals and promote his party's interests. He accused the military of conspiring against him and trying to manipulate the judiciary to remove him from power. He also sought to dissolve two provincial assemblies where his party had a majority, in a bid to trigger early elections and boost his chances of winning a parliamentary majority.

Conclusion

In conclusion, Pakistan is currently in a state of crisis, with a multitude of challenges threatening the stability and prosperity of the country. The political situation in this nuclear armed country is volatile, the economy is faltering, and social unrest is increasing. The country is facing a range of external and internal threats, including terrorism, regional instability, corruption, financial default and climate change.

Pakistan’s future hinges on the ability of its leaders to address these challenges effectively. It is critical that the government takes immediate and sustained action to stabilize the economy, improve governance, and promote social cohesion. This will require a collaborative effort from all stakeholders, including the government, civil society, the private sector, and international partners. It is also essential that Pakistan’s leaders prioritize the well-being and prosperity of the country’s citizens above all else. By focusing on the needs of the people and working together to address the challenges facing the country, Pakistan can emerge from this crisis stronger and more resilient than ever before. And if this welcome change occurs, surely it will be no less than a miracle!

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