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Pakistan’s Economic Crisis Worsens With No End in Sight

[Islamabad] Pakistan has been stuck in an economic vortex for the last several months, caught between the depreciating rupee, rising energy prices, and the highest inflation rate in its history.

On Sunday, the price of the US dollar (USD) approached the high of 240 Pakistani rupees (PKR) last September. Pakistan’s largest currency rates portal, forex.pk, on Sunday morning placed the USD purchase rate at PKR 236.5.

Monthly USD to PKR fluctuation during the last 30 days shows an increase of PKR 4.5 or 1.94%. The yearly performance of the USD to PKR difference shows an increase by PKR 57.3 and a resulting 31.98% decrease in value.

With the massive increases in gas and electricity bills, the prices of daily necessities have also increased. The rise in fuel prices, combined with overall inflation, has become uncontrollable, and life has become miserable for common citizens. The market price of a kilo of onions has reached 240 rupees, or around $1.

On the other hand, in an attempt to avoid an energy crisis, the government has decided on the early closure of markets, malls, and wedding halls, in hopes this will revive the economy. Pakistan’s Defense Minister Khawaja Muhammad Asif announced to the told the media last Tuesday: “The markets and malls will now close at 8:30 pm, while the wedding halls in Pakistan will close by 10 pm. The measure will save us 60 billion rupees.”

Pakistan is dealing with what is considered the worst phase of political and economic chaos since former Prime Minister Imran Khan was removed from power in April 2022 by a legislative vote on a no-confidence motion.

According to the annual index of the Heritage Foundation, a Washington-based leading think tank working on policy impact, “Pakistan is ranked 34th among 39 countries in the Asia-Pacific region, and its overall score is below the regional and world averages. Pakistan’s economic freedom score is 48.8, making its economy the 153rd freest in the 2022 index.”

Experts say that the current government, which came to power with the slogan of defeating inflation, has not been able to provide some relief to the common people. They also believe that the economic and political crises are interrelated.

The economic crisis weakens the government politically and raises the political costs of pushing forward with austerity measures and other economic necessities. On the other hand, foreign currency dealers say that one of the main reasons for the depreciation of the Pakistani rupee is the smuggling of US dollars to Afghanistan.

Last month, Malik Bostan, the chairman of the Exchange Companies Association of Pakistan, revealed during a press conference in Karachi that “every month, about $2 billion goes to Afghanistan from Pakistan in the form of official and unofficial trade, the misuse of Afghan transit trade, and smuggling through all the borders, all of which are troubling Pakistan’s foreign exchange reserves.”

The Afghan Transit Trade Agreement was signed in 1965 between Pakistan and Afghanistan to facilitate the transit of goods exported from and imported to Afghanistan using the Pakistani port of Karachi.

Meanwhile, Finance Minister Ishaq Dar said during a televised interview on Saturday that “Pakistan has $10 billion in foreign exchange reserves. We are paying the debt due to Pakistan on time, while the $6 billion in commercial banks also belong to Pakistan.”

The finance minister also said, “Pakistan’s foreign exchange reserves will stabilize again. Funds from friendly countries, including Saudi Arabia, will be transferred to Pakistan soon.”

Uzair Younus, director of the Pakistan Initiative at the Atlantic Council’s South Asia Center in Washington and a leading expert in political and economic development assessment, told The Media Line: “The current situation is dire and Pakistan is likely to experience another round of inflation in the coming weeks, as soon as Dar’s peg breaks.”

“With reserves running out,” Younus asserted, “Pakistan will have to ultimately abandon this peg, at which point the price of the dollar, and prices of goods across the economy, including energy, will shoot upwards. The government’s policy of setting aside rational economics and following a disastrous policy to rationalize imports via administrative actions and freeze the price of the dollar has distorted prices across the economy.”

He stressed: “It is imperative for the government (most importantly the finance minister) to abandon this irrational policy and quickly adopt prudent macroeconomic policies, bring the IMF program back on track, and stop equating the price of the dollar with its economic success. In fact, these policies are continuously pursued in the hope of different results, with the determination that Pakistan today is the sick man of South Asia.”

Younus said, “Pakistan is suffering from the virus of idiocy among its ruling class. This craziness is reflected in public policies that consistently fail to address the plight of the country’s 230 million citizens.”

He said that “in appointing Dar as finance minister, Shehbaz Sharif’s coalition regime has made a disastrous mistake. They have imposed an irrational actor on Pakistan, whose actions are wreaking havoc on Pakistan’s battered economy.”

The Media Line spoke with Saddam Hussein, a research economist at The Pakistan Institute of Development Economics (PIDE) Islamabad, a premier economic/research think tank and degree-awarding institute. Hussein noted that “due to the politicization of the economy and poor governance, Pakistan’s economy is rapidly declining. Despite undergoing extreme economic and political experimentation, the country fails to get on the road to development.

“Politics and economics must be delinked if we are to take on the path of economic growth and development in the real sense of the word.” Hussein added that “politics is messy everywhere, but in most countries, politics and the economy are separated into mutually exclusive domains to the extent possible.”

He noted that “the country’s economic indicators for the past many decades have fluctuated widely without a clear and sustainable growth passage. Even though experiencing extreme economic and political testing, the country has still been unable to break with the enigma of its unstable development.

“The problem at the core is that the state machinery is not fit for purpose, with each one encroaching on the other’s domain and not focusing on what they are responsible for, so this has affected the governance structure badly. Local governments are nonfunctional, although local government is supposed to be the most significant part of the governance structure. Local governments are responsible for most of the development, oversight, and law and order.”

Hussein argued that the only way to defeat inflation is by sustained and accelerated growth. “The Pakistan Institute of Development Economics (PIDE), in its Charter of the Economy, has charted a detailed blueprint for long-term policy direction. This includes setting the fundamental rights in the context of both the economy and politics. It proposes establishing an independent planning commission, growth commission, and autonomous debt management agency with strict oversight of the parliament.”

The Institute of Business Administration Karachi (IBA) is the prestigious and oldest business school in Pakistan. It was established in 1955, with initial technical and teaching support provided by the Wharton School of Finance of the University of Pennsylvania.

Sara Nizamani is a development economist, working as a research fellow at the IBA. She told The Media Line: “Pakistan has chronic structural issues and the unstable political environment does not help the [current economic] situation. Unfortunately, apart from its inability to create an enabling environment for business and attract foreign investment, last year the country also witnessed devastating floods.

“With political instability, production losses, and trade imbalances, there is less money for basics such as feeding people, buying fuel, running factories, and even lighting up homes. The choice for the current government is either burning their political capital or following the economic fundamentals, and it is clear the choices they’re making. However, in my opinion, working on short-term stability is a political strategy to survive until the general elections.

“Unfortunately, the country did not prioritize economic growth, despite its large population and other production factors. Tales of shrinking productivity and poor exports are not new, nor are those of wasteful subsidies and elite capture,” she added.

Nizamani noted that “Pakistan has experienced periodic financial crises in the past, including currency devaluations and defaults on its sovereign debt. This can create uncertainty and instability in the economy, which can make it more difficult for businesses to operate and for consumers to plan for the future.”

She stressed: “For economic growth to happen, the country will not need out-of-the-box solutions but basic economic fundamentals and a consensus to improve basic human development indicators. In the medium to long term, working on literacy, fertility, and electricity would automatically put the country on the right path.”