A VISIT to Karachi after almost two years creates both a sense of nostalgia and déjà-vu, the former caused by memories of what this city once was and the latter due to a sense of imminent danger presented by torrential rains. These feelings can be figuratively extended to the emerging situation in Pakistan, which is facing severe near-term economic challenges – capable of unleashing immense pain and suffering on a citizenry teetering on the edge — and increasing casualties from attacks carried out by the Tehreek-i-Taliban Pakistan.

The economic situation was nothing to write home about at the beginning of 2020 and the onset of the Covid-19 pandemic dealt an immediate body blow to an economy already on its knees. But credit must be given where it is due: the government, in collaboration with the State Bank of Pakistan, stepped up its game, providing a stimulus that minimised the economic shock of the pandemic. Timely and effective public health interventions meant that Pakistan did not experience the trauma that citizens in India, for example, went through. This meant that as lockdowns eased, Pakistan’s economy kicked into high gear.

Under the hood, however, many of the structural inadequacies that have plagued Pakistan’s economy for the entirety of the 21st century remain in place: the circular debt in the energy sector, a lack of diversification in exports, rent-seeking across industries, and a continued dependency on consumption-led imports, to name a few. These issues have been exacerbated by what is now the longest-ever amnesty scheme in the country’s history that has diverted scarce capital into largely unproductive and speculative real estate investments. It is also worth mentioning the irony of this amnesty given the decades-long anti-corruption rhetoric of the ruling party.

What ought to concern people is the fact that over the last 18-24 months, Pakistan’s economy has become even more exposed to external shocks, largely in the form of rising costs of essential commodities. There have now gathered in the form of dark clouds over the horizon and are threatening to wash away the little gains that have been made in recent months.

If global commodity prices remain high, Pakistani citizens are going to feel a lot more pain.

It is true that there is little Imran Khan and his advisers can do about sky-high palm oil, crude oil, coal and natural gas prices. However, the sheer inability of the Pakistani state and its bureaucratic machinery to engage in half-decent scenario planning exercises has only compounded problems. During the 2007-08 global financial crisis, countries like Pakistan found themselves helpless in front of booming commodity prices. While peer economies implemented policies to reduce their exposure to such risks, successive governments kicked the can down the road while also doubling down on hare-brained policies that kept an overvalued exchange rate and further increased dependency on imports.

Read: Inflation deserves more serious actions

There was an initial expectation that this government would engage in some sort of long-term thinking, but those hopes were quickly dashed. The most recent example of a complete lack of foresight was a report highlighting how the average of imports over the last three years was used to forecast upcoming imports, with the result being that the expected number was way off the mark. This was akin to measuring the blood pressure of a patient during sleep hours and using the data to prove that the patient had no blood pressure issues!

There is now a growing recognition that the wheels of the economy need to be slowed down. Some financial analysts believe that interest rates may go up by another 100 basis points, if not more. The 100 per cent cash margin requirement on imported goods and the change in policy to curb auto purchases are also indicative that the ground is being prepared for a soft landing to stem the slide in rupee, which is having second-order inflationary effects. Interest rate hikes, however, will do little to stem rising imports and inflation, which is currently being primarily driven by rising commodity prices.

Read: Can a small policy rate hike tame inflation?

The next few months leading up to the end of the year are going to be crucial. If global commodity prices remain high, Pakistani citizens are going to feel a lot more pain. This may create a near-term wave of unrest, angering a broad segment of society: while elites have realised significant gains through investments in “Plotistan” and purchased new vehicles, these ordinary citizens are struggling to put food on the table.

These economic issues are being compounded by a resurgent TTP in Khyber Pakhtunkhwa that is beginning to inflict casualties on Pakistani forces on a weekly basis. If left unchecked, these groups may soon begin to conduct terror attacks in urban Pakistan, threatening hard-fought gains achieved through immense sacrifices.

Detractors will argue that this time is different, and they have some merit: the central bank is letting the market determine its value, loose monetary policies across the developed world means that money is cheap and flowing, and Pakistan has a friendlier regime in Kabul that is unlikely to allow the TTP to regroup and create havoc across the border.

Successfully navigating these choppy waters requires the government’s machinery to operate with immense focus, discipline, and synergy under extreme stress, a quality that has been a long-standing weakness. It will also require external events to move in its favour in the form of declining commodity prices and a Taliban regime that can squeeze the TTP.

If the government falters in the coming weeks, things will begin to feel like déjà-vu and history may begin to rhyme. After all, a little over a decade ago, Pakistan was facing similar crises where its cities were under attack, prices of essential commodities were going through the roof, and many political leaders, including the current prime minister, were making the case for peace talks with terrorists.

The writer is a senior fellow at the US Institute of Peace and host of the podcast Pakistonomy.

Published in Dawn, October 7th, 2021