It’s a coincidence from hell that Pakistan’s economy and politics are regressing simultaneously, and at an increasing pace, threatening financial viability of the country. The macroeconomic crisis and the political crisis are increasingly feeding off (nay, turbo-charging) each other, with every new day bringing fresh dose of dismay for the public at large and the politically-impartial economic observers.
Listening to the central bank chief’s latest podcast, one couldn’t agree more with the suggestion that the ongoing macroeconomic crisis – which seems more like a crisis of confidence than fundamentals at this stage – has hit the country at the worst possible time. Indeed, there are both internal and external factors that have piled on to the pre-existing macroeconomic vulnerabilities and made them worse.
Externally, a war going on at the edge of Europe has hit the oil and non-oil commodity markets hard (thus draining Pakistan’s forex reserves through higher imports). The inflationary pressures across the world and ensuing policy rate hikes have tightened financial markets abroad (thus affecting commercial debt and bond flows). And at a time when Pakistan needed steadfast support from its friends and IFIs, its careful geopolitical balance went off-kilter, thanks to previous government’s political expediency.
The external situation may become less worrisome, considering that the IMF staff-level agreement has been reached and the IMF Board is expected to sign off on EFF restoration and extension next month. Besides, international commodity prices may ease due to Biden’s indulgence of the Saudis to pump more oil and global recession fears amidst the demand-side impact of rate hikes by central banks. Besides, recent Ukraine-Russia deal to allow grain shipments from southern Ukraine may ease food prices.
But with an increasingly unstable political landscape here at home, it is unclear how much of a breather the potentially-ameliorating external factors can provide to the local economy. Log it also under ‘poor timing,’ but the intensity with which the country’s political parties are at loggerheads, the way in which the top judiciary’s decisions are under public scrutiny, and the manner in which the powerful ‘establishment’ has been rendered indecisive and lacking good options, are all exacerbating the economic uncertainty.
What the economy desperately needs is to have political heat brought down to a level that is tolerable for the Fund, development partners and foreign commercial lenders. Continuation of the Shehbaz-led government appears to have higher likelihood of reviving external-financing support, as IMF won’t be eager to deal with a PTI government just yet (as the latter repeatedly reneged on its commitments). There is still time for the government and the opposition to put economy in focus learns to co-exist in Islamabad and Punjab, and agree on a political-transition roadmap for early 2023.It may not seem realistic, but it is perhaps about the only pathway left to bring the economy back to some semblance of stability.