Pakistan sleepwalks deeper into an economic crisis, testing families’ and businesses’ endurance, while the government and the opposition continue to indulge recklessly in power games, risking the country’s future with anarchy and systemic collapse.

“How can they not hear the shrill sound of ringing alarm bells? I see no problem with street mobilisation in a democracy but inciting violence, spreading intolerance, insulting the Constitution and victimising opponents in an already fractured society, divided along all conceivable divides, is a perfect recipe for a disaster. Politicians on either side of the fence need to halt the current frenzy at once if they care for the country, its people and progress,” a top well-connected business leader shared his anguish.

The commodity, money and capital markets in Pakistan are reeling. If depleting foreign exchange (FX) reserves, eroding rupee worth and runaway inflation are not dealt with immediately, economy watchers dread, Pakistan can drift towards the Sri Lankan path. Weeks of violent clashes recently forced the exit of prime minister Rajapaksa and the return of Ranil Wickremesinghe to the prime minister’s office as the island nation starts defaulting on debts. President Gotabaya finally intends to relinquish excessive controls. As Sri Lankans suffer, the world powers, preoccupied dealing with the fallouts of the Russia-Ukraine war on the top of the pandemic induced recession, opted to watch and ignore.

A few pro PML-N businessmen have been putting on a brave face understating the current economic meltdown. They argue that the current crisis is ‘something regular’. They are pinning hopes on the generosity of donors. “You will see China will roll over debts at better terms, the International Monetary Fund (IMF) has signalled more flexibility and a bigger package, and Saudi Arabia and UAE will help liberally in the current difficult patch because of the goodwill of Sharif’s command”.

The dependence on external debt has increased the foreign exchange annual requirement in the range of $35 to 40 billion — this is unprecedented

Dr Ali Cheema, the co-founder of the Centre for Economic Research in Pakistan, who also teaches at the Lahore University of Management Sciences, was worried. “The current situation is not ordinary. The dependence on external debt has increased the foreign exchange annual requirement in the range of $35 to 40 billion. This is unprecedented.

“This problem is a consequence of structural current account and fiscal deficits. The government’s economic team knows the immediate adjustment measures that need to be taken. Multilateral support will be conditional on the successful renewal of the IMF programme.

“The government is perhaps trying to avoid a radical adjustment by raising foreign exchange from friendly countries. The PTI government pursued a similar approach in its first year, which wasn’t successful and ended up putting the country on the path of a much worse external account situation. In both cases, governments were understandably reluctant to absorb the political costs of the adjustment. However, the financial space available today is much narrower than it was in 2018. And this increases the risk of delaying the adjustment. Inaction will adversely impact PML-N’s narrative of a party of competence. And the economic consequences of a worsening external account will cost it votes in the forthcoming election”.

Ehsan Malik, Pakistan Business Council CEO made a case for going ahead with painful adjustments. “All roads to restoring economic stability currently lead to the IMF. Without the revival of the programme, no further help from friendly countries is likely to be forthcoming. Indeed the deposits presently lodged with the State Bank of Pakistan (SBP) to prop up reserves are also vulnerable to withdrawal.

“The government is caught between a rock and a hard place. The right thing to do would be to replace general with a targeted subsidy. The government must find ways to limit consumption and import of fuel to preserve the dwindling FX reserves to buy wheat and edible oil. The inaction will entail serious consequences bordering those in Sri Lanka.

“Higher rate of inflation is inevitable even with the subsidies given the direction of the rupee. Unless the SBP takes a differentiated approach to cost-push inflation, a higher policy rate will further impact the formal sector and raise the cost of borrowing for the government. Fiscal prudence should be given a chance to match the monetary tightening already in place. Time will tell if the government has the courage and stamina to do the right thing. In the meantime, it would be wise to brace for further economic turbulence”.

He advised curbing the imports of non-essentials, shortening the workweek and encouraging work from home.

Dr Nadeem Javed, the former chief economist of the Planning Commission defended Prime Minister Shehbaz Sharif’s government which he said is making concerted efforts on many fronts to stabilise the economy. “It would take time as there are lots of teething issues of the coalition government as well.”

He believes that the London meetings last week may lead to clarity on the longevity of the current set up which he said is crucial to finalise the strategy to deal with the turmoil.

“The situation is very complicated but defaulting is unlikely,” he asserted.

Multiple senior leaders of the coalition were approached for sharing their views on the economy but their responses did not reach till the filing of the report.

Published in Dawn, The Business and Finance Weekly, May 16th, 2022