Home Finance Political Woes Could Prove Decisive for Pakistan’s Economic Future

Political Woes Could Prove Decisive for Pakistan’s Economic Future

by internationalbanker

By Joseph Moss, International Banker


On June 29, the International Monetary Fund (IMF) announced that it had reached a staff-level agreement to provide Pakistan with a nine-month Stand-by Arrangement (SBA) of around $3 billion (or 111 percent of the country’s official IMF quota). The arrangement effectively prolongs the South Asian nation’s 2019 Extended Fund Facility (EFF) programme, which expired at the end of June and has been described by Prime Minister (Mian Muhammad) Shehbaz Sharif as “a much-needed breather” that will help the country achieve economic stability. But amidst a distinctly fragile political landscape within the country, one in which Sharif is far from guaranteed another term in office when elections (due to be held within 60 days of the dissolution of the National Assembly on August 13) take place, the Pakistani economy could well suffer as a consequence well into 2024.

The country has endured a torrid time stretching back to at least 2019, prior to the outbreak of the COVID-19 pandemic. Since then, annual inflation has frequently—and comfortably—entered double-digit territory, while consumer prices have markedly surged since early 2022. This year has seen conditions deteriorate further, with the inflation rate peaking in May at an enormous 38 percent before easing to 29.4 percent in June. A series of external shocks have only worsened the situation. Among them are the devastating floods that engulfed large swathes of the country last year, inflicting immense damage on the livelihoods of some 33 million people and incurring losses of more than $30 billion. A commodity-price surge last year also inflated the economic woes of a nation heavily reliant on fuel imports.

As the IMF has observed, the result of these shocks, along with some policy missteps, has caused Pakistan’s economic growth to stall while inflation continues to erode the purchasing power of ordinary citizens. Three major credit-rating agencies—S&P Global Ratings, Moody’s and Fitch Group—have all cut Pakistan’s sovereign rating in recent months, largely due to the hefty $22 billion that is needed to service its external debt, make interest payments and finance its current account for the coming fiscal year. And with figures published on June 23 showing that foreign-exchange reserves had dipped by 11.9 percent from the previous week to just $3.5 billion—enough to cover just slightly more than one month of controlled imports—the need for creditor support has become critical.

“Despite the authorities’ efforts to reduce imports and the trade deficit, reserves have declined to very low levels. Liquidity conditions in the power sector also remain acute, with further buildup of arrears (circular debt) and frequent loadshedding,” the IMF noted in December, adding that should final approval from the IMF’s Executive Board be granted, the new SBA will provide “a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead”. The terms of the Fund’s package also require a series of drastic and painful reforms to be undertaken by Pakistan. Indeed, the central bank hiked the key rate by 100 basis points to 22 percent in an emergency meeting on June 26, just a couple of weeks after deciding to keep rates on hold during a scheduled meeting, further underscoring the IMF’s insistence that authorities be “proactive” in their attempts to reduce inflation.

That said, Sharif has also expressed caution over Pakistan’s reliance on such multilateral support facilities, warning recently that nations “are not built through loans”, adding that he hopes this latest package will “be the last one”. As such, the ruling administration is determined to leverage this financial support to generate as much meaningful growth for Pakistan as possible. The prime minister will certainly feel a modicum of relief with June’s inflation cooling for the first time in seven months.

Sharif’s government also looks set to launch an initiative to persuade global crude-oil suppliers to invest in Pakistani storage facilities, holding oil inventories for domestic use and also re-exporting to other countries as a way to not only inject adequate oil supply into the economy but also potentially ease its foreign-exchange woes. A recent Ministry of Petroleum and Natural Resources Division document that S&P Global Commodity Insights viewed in early June noted that since domestic refinery supplies were limited and Pakistan was heavily dependent on imported petroleum products, the storage facilities could boost access for Pakistan to local oil-marketing companies, diversify supply sources and provide freight economies of scale. The overseas oil supplier would establish a consignee or subsidiary company within Pakistan for such a purpose.

“Foreign suppliers will be allowed to maintain inventories of crude oil and petroleum products in bulk form in their own customs public bonded warehouses located around Pakistani ports, pending its sale to local purchasers or its re-export to other foreign countries,” the document explained. “The consignee shall be bound to develop their own dedicated storage infrastructure located around port premises only for storing crude oil and petroleum products, duly licensed by the Oil and Gas Regulatory Authority, under the country’s refining, blending, transportation, storage and marketing rules of 2016.”

But given the sheer extent of the damage Pakistan’s economy has suffered, as well as the nature with which Sharif assumed the leadership in the first place—coming off the back of the ouster of predecessor Imran (Ahmad) Khan (Niazi), which, in turn, triggered deep resentment and nationwide protests—it is unclear whether Sharif will still be in office by the end of the year. Indeed, the upcoming elections could prove vital in determining the ultimate economic future of a nation frequently mired in political crises.

The three parties most likely to feature prominently are Khan’s Pakistan Tehreek-e-Insaf party, the Pakistan Muslim League (Nawaz) led by Sharif and the Pakistan People’s Party spearheaded by Minister of Foreign Affairs Bilawal Bhutto Zardari. Imran Khan, one of Pakistan’s former prime ministers and a world cricket superstar during the 1980s (he even captained the Pakistan team to a memorable World Cup victory), is the most popular politician in Pakistan and the clear favourite amongst the potential candidates to secure the presidency—that is, if he and his party are deemed eligible to contest the elections.

Having been removed from office after a no-confidence vote passed in April 2022, the former prime minister believed at the time that he was the subject of nothing less than a coup d’état organised by the Pakistan Army and US officials. Khan’s relationship with the United States whilst he was in office, beginning in 2018, had become increasingly acrimonious before his ouster. But according to Peter A. Oborne, journalist, author and former chief political commentator for The Daily Telegraph, Khan had long been in the crosshairs of the US after he campaigned against the American drone programme that focused on Pakistan’s tribal areas. This resistance gained him considerable domestic popularity as an opposition politician during the 2000s/2010s but also reportedly stoked the ire of President George W. Bush’s and President Barack H. Obama’s White Houses.

“Unlike many political leaders, Khan, a man of principle, fell out with the US after the fall of Kabul to the Taliban nearly two years ago. They were at odds over Afghan state assets frozen by Washington, and more so about US flights over Pakistan,” Oborne wrote in an article for the London-based news outlet Middle East Eye. “Khan and his allies have alleged that the US worked hard to undermine his mandate and place his political opponents in power. I cannot say whether this is true. Yet such claims are not absurd, since the US has treated Pakistan as a vassal state ever since independence in 1947.”

And in a country where not a single president has managed to complete his or her allocated term in office—the nation’s first prime minister, Liaquat Ali Khan, was assassinated; the hugely popular leader of the 1970s, President and then Prime Minister Zulfikar Ali Bhutto, was judicially executed following his removal from power by a coup; and Bhutto’s prime minister daughter, Benazir, was also assassinated (to name just a few of the high-profile casualties)—the likelihood of foul play being involved in Khan’s removal is far from remote. Indeed, with Khan being arrested in May before being released on bail and then being promptly lumbered with scores of additional charges, all signs point toward a concerted effort to prevent him from standing as a presidential candidate whilst authorities escalate their crackdowns on his Pakistan Tehreek-e-Insaf party. “Right now, it’s a question of survival,” Khan recently lamented in an interview with the Financial Times. “To put it in cricketing terms, when you lose early wickets, you just put your head down and stay on the crease. You don’t play any flamboyant shots rights now. All we can do is survive this unprecedented crackdown.”


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