Pakistan Bulletin

An up-to-date and informed analyses of key issues of Pakistan.

Political Uncertainty and Economic Recovery

November 2023

One of the key causes for Pakistan’s economic instability is its political uncertainty.

Pakistan’s prevailing state of economic and political turmoil has been a cause of concern for not only local citizens, it has also gained attention internationally. For instance, The World Bank, in its most recent report titled “Restoring Fiscal Sustainability” highlights how overall poverty in Pakistan has drastically increased due to economic instability, and people’s livelihoods are at risk because disposable incomes have decreased while prices continue to skyrocket. The World Bank, in this report identifies some key issues that Pakistan’s economy is facing and suggests ways to approach these issues through a fiscal reform agenda which aims to propel sustainable economic growth and fortify the pace of the ongoing economic recovery.

The key recommendations of this agenda are to firstly reduce exemptions pertaining to sales tax and import duties and trim subsidies across various sectors including electricity, gas and petroleum. Secondly, the World Bank recommended the implementation of new taxation measures on property and agriculture. Thirdly, it has encouraged implementing an aggressive privatization policy to increase economic activity in sectors where the government’s involvement lacks a clear rationale. Each of these measures are claimed to be directed at fulfilling a singular goal: stimulating economic activity to reach a point of economic stability.

Almost all the economic indicators point towards decline because of prolonged political uncertainty in the country and mismanagement of the economy.

While it may appear that the obvious way to approach Pakistan’s economic descent is by increasing economic activity, it is important to take into account the needs of Pakistani citizens to address the feasibility of these fiscal reforms. It is likely that these reforms, although could benefit Pakistan’s fiscal future in the long run, will be at the expense of citizens who are already struggling financially because of Pakistan’s economic situation. For instance, the first and second recommendation of the World Bank’s fiscal agenda as outlined in the previous paragraph aims to reduce exemptions and subsidies and increase taxation against various sectors including energy. However, this would increase prices for the common citizen, consequently increasing energy poverty and reducing disposable income.
Hence, this demonstrates that a much more nuanced approach must be taken to understand Pakistan’s economic condition that will allow measures for economic recovery that takes into account the needs of the people who are most impacted by it. In order to understand Pakistan’s economic situation, we must take into account how it is intertwined with political instability in the country and use it as a lens to determine the best course of action for economic recovery.
Pakistan’s economy has been declining for the past two years, which culminated in a major shift in government in April 2022. However, despite this political change, the economic situation remained bleak. The new government took office following a vote of no confidence against the popular Pakistan Tehreek-e-Insaf Prime Minister, Imran Khan, at the federal level. This change in leadership did little to alleviate the economic woes, demonstrating that perhaps change in political leadership was not exactly the recipe needed for a radical transformation of the economic situation. Inflation rates reached an all time high, and utility costs continued to rise. Notably, the preceding coalition government led by former Prime Minister Shehbaz Sharif also fell short of achieving the economic targets outlined in the three-year Extended Fund Facility (EFF) agreement with the IMF, initiated by the PTI government in 2019. This period of economic uncertainty took a heavy toll on all sectors of the economy. The Pakistani Rupee depreciated manifold against the US Dollar, primarily due to increased demand for the greenback caused by smuggling to neighboring Afghanistan.
Almost all the economic indicators point towards decline because of prolonged political uncertainty in the country and mismanagement of the economy. Even though the caretaker government has undertaken legal and administrative measures to implement the fiscal reforms agenda suggested by the IMF, economic instability has prevailed, highlighting that perhaps the agenda alone is inadequate in aiding Pakistan’s economic recovery.
The caretaker government has also made concerted administrative measures including curbing smuggling of the foreign currency, the country’s economic stability process is still at a slower pace. Inflation is on the higher side, revenue recovery is stagnant and exports are sliding down. Despite this, due to the caretaker government’s measures, the Pakistani Rupee has improved and the US Dollar exchange rate has come down to Rs 285, from a high of Rs 320 as of November 2023. The State Bank of Pakistan’s Governor Jameel Ahmed recently claimed that inflation has reduced since peaking at 38 per cent in May 2023. However, short-term (weekly) inflation is still on an upward trajectory distressing common citizens, a large majority of which work long hours in the informal sector, receiving less than minimum wage.

In order to understand Pakistan’s economic situation, we must take into account how it is intertwined with political instability in the country and use it as a lens to determine the best course of action for economic recovery.

The hectic pace of economic decline and political instability underscores the necessity of a much more nuanced economic recovery plan which takes into account the needs of the citizens as well as the overall macro goals of economic stability in Pakistan. Political stability is a prerequisite for Pakistan to be in a position where the economy can be stabilized. The political uncertainty of Pakistan has been an issue deep-rooted in complex power dynamics considering the length of time in which elections have been delayed. However, now that elections have been announced, effective governance and wise economic decisions are crucial as the nation stands at a pivotal juncture, looking toward a more stable and secure future.

Shujauddin Qureshi

Author

The author is member staff with expertise in media.

 

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