27 March 2023

Politics Are Holding Pakistan’s Economy Hostage

Lynne O’Donnell

Mayhem and martyrdom have become the hallmarks of politics in Pakistan, where there appears to be no better practitioner than former Prime Minister Imran Khan. But the political fireworks that are tearing Pakistan apart are also distracting it from tackling its real challenge: a deeply dysfunctional and ailing economy.

Khan said at least 85 charges have been filed against him in courts across the country, all purportedly attempts by the government to ensure he doesn’t stand in elections due to take place later this year—elections that could return him to power after his ouster in a no-confidence vote almost a year ago. For days, Pakistan has been a scene of chaos, rallies, tear gas, and heated rhetoric, with Khan himself alleging during a court appearance that there is a plot to kill him and with hundreds of his party’s followers reportedly rounded up by the police.

By Monday morning, more than 100 of Khan’s associates had been detained “without arrest warrants,” said Raoof Hasan, a spokesperson for Khan, who added that they had been “kidnapped and picked up in the dark of the night. They’ve tried to take many more, but they have fled. It is hell here; you never know when there will be a knock on the door. Imran and everything that he stands for is under brutal state terrorist assault, making a mockery of the constitution, law, and morality,” he said. In a tweet, Khan called the government’s actions “[f]ascism at unprecedented levels.”

Parliament has been recalled for a special session on Wednesday, media reported, to “take important decisions” following the chaos of recent days. The recall followed a cabinet meeting at which Khan’s party, Pakistan Tehreek-e-Insaf (PTI), was called “a gang of militants.”

Since his premiership was cut short in April 2022 by a no-confidence vote in Parliament, Khan has been demanding new elections and has dissolved assemblies in two regions where the PTI held power. In by-elections across the country, the PTI has prevailed. So far, the government of Prime Minister Shehbaz Sharif, scion of a political dynasty and brother of a former prime minister, has refused to hold elections despite orders from the Supreme Court, and he appears to have done all he can to make sure Khan is not a contender when Pakistan does go to a vote. Many analysts believe that he’d be the most popular candidate, but if Khan is convicted on any of the charges he faces, then he’ll be barred from running. Elections are expected in the fall.

The political drama is serious enough, but it masks systemic problems for Pakistan that have not been addressed, including an economic crisis that the government is failing to manage. The government’s mismanagement has been compounded by the war in Ukraine, which has pushed up the cost of food and fuel even as the value of Pakistan’s currency is in free-fall, dropping about 65 percent in the last year. Last year’s devastating floods swamped vast areas of agricultural land, forcing more farmers into unemployment. This just compounded problems created by the floods of 2010 and the earthquake of 2005.

The figures are alarming. Total public debt is put at $270 billion, equivalent to around 78 percent of GDP. China is Pakistan’s biggest bilateral creditor, owed around $30 billion, with another $1.1 billion owed for electricity purchases to Chinese firms. Agriculture and industrial production was hit hard by last year’s floods, which caused more than $30 billion in damage—and could push GDP growth down to 1.5 percent this year, according to economist Hafiz Pasha. He also predicted unemployment to reach 10 percent, or as many as 8 million people out of work, by the end of the current fiscal year in June. Central bank interest rates are the highest in Asia at 20 percent.

Last month, Dawn newspaper reported an annual inflation rate for a basket of goods—including onions, eggs, rice, and fuel—of more than 40 percent; the country’s foreign reserves are said to be as low as $3 billion, which would cover less than a month of imports. Corruption, meanwhile, is among the worst in the world: Transparency International ranks Pakistan at 140 out of 180 countries it surveys.

“Imran Khan came to power promising to tackle rampant corruption and promote social and economic reforms, but little has been accomplished on any of these fronts since he took the reins in 2018,” the organization said in a report this year. Rather, it noted a “statistically significant downward trend” and urged the government to come up with “a holistic and effective anti-corruption plan that addresses illicit financial flows and introduces safeguards for civic space.”

There are no easy fixes for Sharif’s government. The International Monetary Fund (IMF) would like to see improved tax collection and lower energy subsidies in exchange for any bailout, but Sharif has so far resisted such measures, which would be politically suicidal—and perhaps literally. Exacerbating growing poverty could boost recruitment for terrorist groups like the Tehrik-i-Taliban Pakistan, an affiliate of the Taliban in neighboring Afghanistan whose increasing strength in the country’s northwest is threatening the survival of the state.

As the problems intensify amid government intransigence, even old friends are reevaluating past largesse. “The biggest allies are all saying you have to help yourself. China, Saudi Arabia, the United Arab Emirates, they are sick of the elites,” said Kamal Alam, a senior fellow at the Atlantic Council’s South Asia Center. “They get Saudi money to pay off China, then get UAE money to pay off the Saudis—people have woken up to that.”

Saudi Arabia, which once could be relied on to open the cash spigot, has made it clear that there will be no more handouts. Speaking at the World Economic Forum in Davos, Switzerland, this year, Saudi Finance Minister Mohammed al-Jadaan laid out the new approach, saying “direct grants and deposits without strings” are a thing of the past. “We are working with multilateral institutions to actually say we need to see reforms. We are taxing our people. We are expecting also others to do the same, to do their efforts. We want to help, but we want you also to do your part.”

Those tighter fists are becoming a problem. A $1.1 billion bailout from the IMF—part of a $6.5 billion package approved in 2019—has been delayed since November 2022. Pakistani Finance Minister Ishaq Dar told Parliament last week that release of the IMF funds now hinges on agreements from “friendly countries” to act on bilateral commitments to fund this year’s balance of payments gap. (Pakistan imports a lot more—food, fuel, and the like—than it exports, consisting of textiles and chemicals mostly.)

Reuters reported that the IMF is seeking commitments of up $7 billion, whereas Dar has been arguing for $5 billion. China has extended some loans that, while helpful in the short term, only add to the country’s debt burden. Dar and Sharif further muddied the waters with comments last week that appeared to link the IMF deal to the security of Pakistan’s nuclear arsenal, raising questions about its inclusion in the bailout conditions. The link, made repeatedly in recent months by Pakistani pundits, was denied in a statement on Monday by the IMF’s Pakistan representative, Esther Perez Luiz.

But all of the urgent economic issues are taking a back seat to warrants, arrests, and vitriol.

“Even in the context of Pakistan’s calamitous political and economic instability, what is happening now is extreme. It has never been this bad,” Alam said. “From all the evidence, the Army and the government are trying to delay the elections because a free and fair election, if that is even possible, means that Imran sweeps.”

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