7/29/23, 6:24 PM Pakistan’s Economic Blindspot – The Diplomat

Pakistan’s Economic Blindspot

thediplomat.com/2023/07/pakistans-economic-blindspot

By Kunwar Khuldune Shahid

On July 12, the International Monetary Fund (IMF) approved a bailout

package worth $3 billion for Pakistan. The first half of this year
brimmed over with apprehensions, and predictions of Pakistan
defaulting on its debt. While the IMF deal has ensured that Pakistan
avoids default, at least for the time being, it unleashed a familiar vicious
cycle, one that has been repeated a couple of dozen times throughout
the country’s history.

The IMF deal was immediately followed by Saudi Arabia depositing $2

billion in the State Bank of Pakistan (SBP), with the UAE having
already pledged $1 billion. On Thursday, China rolled over a $2.4 billion
loan in addition to the $600 million deferred last week. The playbook is
pretty much the same, with commitment to an IMF program functioning
as the guarantee that lending states require, this time salvaging
Pakistan from a record-high 38 percent inflation, and a decade-low $3
billion in foreign reserves covering hardly a month’s worth of imports.

This time around, however, the magnitude of the political variables

engulfing the oft-regurgitated fiscal cycle is in stark contrast to what
has transpired in the recent past. The usual five-year circle begins with
a newly elected government agreeing to an IMF plan, completing it in
the first three years, and then derailing it with populist measures in the
lead-up to the next election. The latest IMF program, instead, will be
implemented by possibly three different regimes across a period of
nine months.

The current regime spearheaded by the Pakistan Democratic

Movement (PDM) alliance, led by the Pakistan Muslim League-Nawaz
(PML-N), which has agreed on the IMF deal, will soon make way for a

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caretaker setup that will supervise the upcoming general elections that
will take place sometime toward the end of 2023. The IMF negotiations
this year overlapped with an electoral limbo in Pakistan as the state
dillydallied over scheduled polls until a military-led crackdown against
the Pakistan Tehreek-e-Insaf (PTI), the overwhelming favorite,
reassured the ruling coalition of the army’s customary political
engineering. It will be that engineered government that will see the
current bailout through and, inevitably, negotiate a longer-term follow-
up IMF plan.

Clearly, the incumbent government isn’t even bothering with a pretense

of electoral freedom and fairness, and is pushing for a caretaker setup
that is an extension of the current regime, with Finance Minister Ishaq
Dar’s name being floated this week as the potential caretaker prime
minister. The fact that Pakistan even needs a caretaker setup to
transition between governments is a reaffirmation of the distrust
surrounding all governance matters, hampered by the weakening of all
institutions – barring, of course, the omnipotent military. That no
number of IMF packages or foreign bailouts will suffice in keeping the
economy afloat without the country undergoing a multifaceted
structural revamp, remains Pakistan’s fiscal blindspot.

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The military hegemony ensures that successive governments refuse to

take ownership of Pakistan’s economy, using it instead as a theater for
political gimmicks. In its staff report on the failure of the Extended Fund
Facility (EFF), which in turn necessitated the latest bailout, the IMF
blamed recent finance ministers Dar and Shaukat Tari. As has been the
custom, Tari passed an expansionary budget just as the PTI’s regime
was drawing to an end, while Dar’s long-held fixation with artificially

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controlling the exchange rate caused significant damage to multiple

sectors within the economy as multiple currency rates were allowed to
flourish, spearheaded by an Af-Pak dollar cartel.

“We had three effective exchange rates, white, gray, and black. In
many cases, a single currency exchange was dealing with all rates in
different domains, creating shortages in the open market to further
increase the black market rates,” said Ahmad Akbar*, a dealer at one of
Karachi’s prominent currency exchanges, while talking to The
Diplomat.

“The banks too had a ball, especially earlier this year, when the gap
between the interbank and open market rates grew beyond 25
Pakistani rupees per U.S. dollar. The banks were offering remittances
at less than the interbank rate and charging foreign transactions more
than the open bank rate, in addition to the charges and taxes already in
place for payments in foreign currencies,” added Akbar, who also works
with a digital marketing firm that has overseas clients.

The maintenance of an artificial exchange rate and the banking gaps

also dented the foreign remittances, which constitute 10 percent of
Pakistan’s GDP.

The state’s interference in forex rates is a corollary of the politicization

of the SBP. The central bank not only allows already depleting reserves
to be consumed in order to fabricate an artificial value for the rupee,
but also lets the government dictate monetary policy to manage
inflation, which should be the prerogative of an independent central
bank.

“Announcing the monetary policy and the changes in the policy rates is
merely a formality on the part of the committee. These things are
already pre-decided and they are told what to announce,” Jamshed

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Ali*, an SBP employee privy to the Monetary Policy Committee, told

The Diplomat.

While amendments were made in January 2022 to the State Bank of

Pakistan Act, 1956, to make the central bank more autonomous, it
continues to function as per unofficial diktats. The exchange rate too
hasn’t been allowed to become intervention-proof, despite
commitments made to the IMF in that vein. Another factor that
facilitates these arbitrary interventions, and hinders the functioning of a
well-oiled self-sustaining economy, is the lack of official
documentation.

Over a third of Pakistan’s economy is undocumented. This allows

parallel economies to function within and hence render macroeconomic
indicators inadequate. It also shrinks the state’s exchequer, only a
fraction of which is spent on much-needed developmental work. The
sustenance of the informal economy is also in the vested interests of
the self-serving ruling elite, pulling the fiscal strings to maximize
personal benefits.

“The government virtually stole our maize at a rate of 18,000 rupees

per maund, and those spearheading this mafia will now sell it at a rate
of 3,500 rupees, exploiting the farmer. The government is absolutely
slaughtering us. They’ll eat the IMF package as well,” said Pakistan
Kissan Ittehad [Pakistan Farmers Union] President Zulfiqar Awan, while
talking to The Diplomat.

Successive governments have facilitated cartels including those

hoarding staple food products such as sugar and wheat. These cartels
are often linked to government and military leadership. And while the
corruption of politicians continues to be a part of popular discourse, the

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all-powerful army ensures that its unparalleled misappropriation of

Pakistan, which it runs as a private business venture, doesn’t come
under the spotlight.

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“Whether it is the government, the intelligence, or [military] institutions

they are all involved in the loot and plunder. We are an agricultural
country, improve the agriculture and you improve the country – it’s a
no-brainer. But instead, we have to deal with agricultural secretaries
who dress up in clothes worth hundreds of thousands of rupees, and
don’t even know if cotton is produced on a plant or grows on a tree,”
added Awan.

The record-breaking inflation has seen persistent hikes in fuel, gas,

and electricity prices, with further raises to follow in the coming months.
Traders and businesspersons say that the already unfeasible
commercial conditions have been rendered impossible by the
skyrocketing increase in the price of raw materials, especially those
that are imported, which are also hit by the turbulence in the currency
exchange rate.

“The steep price increases ensure that we just cannot produce export
quality products. If we do, they would not be economically feasible for
us. We cannot match our competitors either way,” Pak-Afghan
Chamber of Commerce President Daro Khan Achakzai told The
Diplomat.

Pakistan’s exports have dropped for the past 10 successive months. To

address the worsening balance of payment crisis, the government has
decided to curb imports instead of working toward making Pakistan a
more export-oriented economy. That revamp, and the uplift of the

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overall investment climate in the country can only be ensured by

righting the most ominous wrong for Pakistan: the volatile security
situation.

Despite the reduction in terror attacks over the past eight years,
significant turbulence remains in the country — and it wards investors
away. Even Beijing has been rethinking its highest-ever overseas
investment, the $62 billion China Pakistan Economic Corridor (CPEC),
owing to violent attacks targeting its projects. This volatility is rooted in
the Pakistani military’s own decades-old security strategy of propping
up jihadists regionally and domestically. This policy, in turn, is hinged
on the state’s perpetual anti-India alignment, which continues to hit
Pakistan’s economy hard.

“There should be no two opinions about how much Pakistan would

benefit from improved trade with India. We should have better
commerce ties with all neighboring countries, and states around the
world. In fact, we should work on improving our barter trade
agreements through land routes from South Asia, to Central Asia, to
Russia. The economy should not be held hostage to politics,” added
Achakzai.

And yet, that’s precisely what has happened to Pakistan’s economy

over the past seven decades, as it has been continuously decimated
by a combination of masochistic internal and regional power plays. The
military establishment needs to wake up to the reality that Pakistan can
no longer function as an economy for hire, or a business empire, and
requires a model that sustains itself over a bedrock of grassroots
democratization. This in turn requires stability in both the security and
political realms, along with an integration of all stakeholders within the
framework of a common national interest defined by empiricism and
not hollow ideological rhetoric.

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*names changed to protect identity.

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