Finance: No room for error

Pakistan’s economy appears to be on a path to recovery, but growing political instability threatens to derail this progress. To ensure the recovery stays on course, urgent measures are needed to address the escalating political discord.

The hybrid government and the main opposition party, PTI, have seemingly exhausted all opportunities to mitigate their differences. Last week’s PTI protests in Islamabad tragically resulted in casualties among both law enforcement personnel and PTI workers, in addition to causing billions of rupees in losses to the national exchequer due to stalled economic activities. The government is now determined to take an even harsher stance against PTI, while PTI leader Imran Khan has put his party on a high-stakes “do or die” trajectory.

It is imperative that sanity prevails and immediate steps are taken to restore at least a semblance of political stability. Without this, the process of building lasting stability, essential for supporting Pakistan’s fragile economic recovery, will remain elusive.

The recent economic achievements — such as a surplus in the current account deficit, increased tax and non-tax revenue generation, and a decline in the inflation rate — have been realised under a stringent International Monetary Fund (IMF) programme, largely supported by foreign inflows from friendly nations, including China, Saudi Arabia, and the United Arab Emirates.

Political instability threatens to derail ongoing economic recovery, hindering efforts for sustainable growth and stability

However, these gains have come at a significant cost. The impressive growth in tax revenues and the reduction in inflation are underpinned by countless stories of hardship faced by ordinary people. Millions lost their jobs in the last fiscal year and have yet to find employment this year.

Similarly, many Pakistani households and businesses endured the burden of high inflation and soaring interest rates before these indicators began to ease. These achievements are the result of immense sacrifices and efforts and must be safeguarded at all costs.

Pakistan’s political system is plagued by several deep-rooted structural issues that undermine its stability, governance, and development.

These challenges include the imbalance of power between civilian institutions and the military, which hampers democratic governance, reliance on foreign aid and loans that compromise economic sovereignty, and lack of internal democracy, ideological clarity, and grassroots engagement within political parties.

Until Pakistan’s higher-ups address systemic issues, no regime will be able to place the economy on a stable growth trajectory

The over-concentration of power in the federal government, corruption and, a culture of patronage, and flawed electoral processes undermine the economy. Inefficient courts and outdated laws, deep social fractures, lack of strength in the civil society, and rapid population growth of over two per cent strain resources, infrastructure, and services. Until Pakistan’s politicians and its powerful establishment address these systemic issues, no regime — whether democratic, military, or hybrid — will be able to implement sustainable economic reforms or place the economy on a stable growth trajectory. History bears witness to this reality.

Since 2017, Pakistan’s hybrid regimes — beginning with the PTI, followed by the Pakistan Democratic Movement, and now the PML-N-led coalition — have relied on short-term strategies to address economic challenges. These measures, aimed primarily at securing political survival, have failed to convincingly address the country’s deep-rooted structural economic issues.

As a result, doubts persist about the ability of hybrid regimes to manage these challenges effectively, raising serious concerns among stakeholders, particularly the business community, which is increasingly losing faith in the sustainability of this governance model.

The question arises: Shouldn’t efforts be directed toward creating a political system that accommodates all forces equitably within parliamentary politics? Anything less, regardless of the intentions, is unlikely to provide sustainable results. However, the critical question remains: will the hybrid regime be willing to alter its composition to allow greater participation of genuine political forces? If so, how soon and through what mechanisms? This remains uncertain. Only time will reveal how Pakistan’s political system evolves to ensure sustainable economic growth and political stability.

Currently, some economic indicators, particularly those related to the external economy, appear promising. Exports and remittances have shown growth, the current account is in surplus, and the rupee has remained relatively stable despite mounting pressure from rising imports.

However, prolonged political instability or continued use of state power by the hybrid regime against legitimate political opposition could have severe repercussions.

Foreign and local investment, already at low levels, may remain elusive for an extended period, increasing Pakistan’s reliance on exports and remittances. Moreover, internal strife could adversely impact both exports and remittance inflows, potentially reversing the current account surplus into a deficit.

In such a scenario, the importance of securing the next tranche of the $7bn IMF loan and promised financial assistance from friendly countries will escalate, further compounding the nation’s economic challenges.

Pakistan needs an average of $3bn for external debt payments between November 2024 and July 2025. That is not possible without the continued support of the IMF, generous foreign funding by friendly states and rollovers of their previous debts, plus massive foreign investment from all sources.

Published in Dawn, The Business and Finance Weekly, December 2nd, 2024