On July 12, the International Monetary Fund (IMF) approved a bailout package worth $3 billion for Pakistan. The first half of this year brimmed over with apprehensions, and predictions of Pakistan defaulting on its debt. While the IMF deal has ensured that Pakistan avoids default, at least for the time being, it unleashed a familiar vicious cycle, one that has been repeated a couple of dozen times throughout the country’s history.
The IMF deal was immediately followed by Saudi Arabia depositing $2 billion in the State Bank of Pakistan (SBP), with the UAE having already pledged $1 billion. On Thursday, China rolled over a $2.4 billion loan in addition to the $600 million deferred last week. The playbook is pretty much the same, with commitment to an IMF program functioning as the guarantee that lending states require, this time salvaging Pakistan from a record-high 38 percent inflation, and a decade-low $3 billion in foreign reserves covering hardly a month’s worth of imports.
This time around, however, the magnitude of the political variables engulfing the oft-regurgitated fiscal cycle is in stark contrast to what has transpired in the recent past. The usual five-year circle begins with a newly elected government agreeing to an IMF plan, completing it in the first three years, and then derailing it with populist measures in the lead-up to the next election. The latest IMF program, instead, will be implemented by possibly three different regimes across a period of nine months.
The current regime spearheaded by the Pakistan Democratic Movement (PDM) alliance, led by the Pakistan Muslim League-Nawaz (PML-N), which has agreed on the IMF deal, will soon make way for a caretaker setup that will supervise the upcoming general elections that will take place sometime toward the end of 2023. The IMF negotiations this year overlapped with an electoral limbo in Pakistan as the state dillydallied over scheduled polls until a military-led crackdown against the Pakistan Tehreek-e-Insaf (PTI), the overwhelming favorite, reassured the ruling coalition of the army’s customary political engineering. It will be that engineered government that will see the current bailout through and, inevitably, negotiate a longer-term follow-up IMF plan.
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Clearly, the incumbent government isn’t even bothering with a pretense of electoral freedom and fairness, and is pushing for a caretaker setup that is an extension of the current regime, with Finance Minister Ishaq Dar’s name being floated this week as the potential caretaker prime minister. The fact that Pakistan even needs a caretaker setup to transition between governments is a reaffirmation of the distrust surrounding all governance matters, hampered by the weakening of all institutions – barring, of course, the omnipotent military. That no number of IMF packages or foreign bailouts will suffice in keeping the economy afloat without the country undergoing a multifaceted structural revamp, remains Pakistan’s fiscal blindspot.
The military hegemony ensures that successive governments refuse to take ownership of Pakistan’s economy, using it instead as a theater for political gimmicks. In its staff report on the failure of the Extended Fund Facility (EFF), which in turn necessitated the latest bailout, the IMF blamed recent finance ministers Dar and Shaukat Tarin. As has been the custom, Tarin passed an expansionary budget just as the PTI’s regime was drawing to an end, while Dar’s long-held fixation with artificially controlling the exchange rate caused significant damage to multiple sectors within the economy as multiple currency rates were allowed to flourish, spearheaded by an Af-Pak dollar cartel.
“We had three effective exchange rates, white, gray, and black. In many cases, a single currency exchange was dealing with all rates in different domains, creating shortages in the open market to further increase the black market rates,” said Ahmad Akbar*, a dealer at one of Karachi’s prominent currency exchanges, while talking to The Diplomat.
“The banks too had a ball, especially earlier this year, when the gap between the interbank and open market rates grew beyond 25 Pakistani rupees per U.S. dollar. The banks were offering remittances at less than the interbank rate and charging foreign transactions more than the open bank rate, in addition to the charges and taxes already in place for payments in foreign currencies,” added Akbar, who also works with a digital marketing firm that has overseas clients.
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The maintenance of an artificial exchange rate and the banking gaps also dented the foreign remittances, which constitute 10 percent of Pakistan’s GDP.
The state’s interference in forex rates is a corollary of the politicization of the SBP. The central bank not only allows already depleting reserves to be consumed in order to fabricate an artificial value for the rupee, but also lets the government dictate monetary policy to manage inflation, which should be the prerogative of an independent central bank.
“Announcing the monetary policy and the changes in the policy rates is merely a formality on the part of the committee. These things are already pre-decided and they are told what to announce,” Jamshed Ali*, an SBP employee privy to the Monetary Policy Committee, told The Diplomat.
While amendments were made in January 2022 to the State Bank of Pakistan Act, 1956, to make the central bank more autonomous, it continues to function as per unofficial diktats. The exchange rate too hasn’t been allowed to become intervention-proof, despite commitments made to the IMF in that vein. Another factor that facilitates these arbitrary interventions, and hinders the functioning of a well-oiled self-sustaining economy, is the lack of official documentation.
Over a third of Pakistan’s economy is undocumented. This allows parallel economies to function within and hence render macroeconomic indicators inadequate. It also shrinks the state’s exchequer, only a fraction of which is spent on much-needed developmental work. The sustenance of the informal economy is also in the vested interests of the self-serving ruling elite, pulling the fiscal strings to maximize personal benefits.
“The government virtually stole our maize at a rate of 18,000 rupees per maund, and those spearheading this mafia will now sell it at a rate of 3,500 rupees, exploiting the farmer. The government is absolutely slaughtering us. They’ll eat the IMF package as well,” said Pakistan Kissan Ittehad [Pakistan Farmers Union] President Zulfiqar Awan, while talking to The Diplomat.
Successive governments have facilitated cartels including those hoarding staple food products such as sugar and wheat. These cartels are often linked to government and military leadership. And while the corruption of politicians continues to be a part of popular discourse, the all-powerful army ensures that its unparalleled misappropriation of Pakistan, which it runs as a private business venture, doesn’t come under the spotlight.
“Whether it is the government, the intelligence, or [military] institutions they are all involved in the loot and plunder. We are an agricultural country, improve the agriculture and you improve the country – it’s a no-brainer. But instead, we have to deal with agricultural secretaries who dress up in clothes worth hundreds of thousands of rupees, and don’t even know if cotton is produced on a plant or grows on a tree,” added Awan.
The record-breaking inflation has seen persistent hikes in fuel, gas, and electricity prices, with further raises to follow in the coming months. Traders and businesspersons say that the already unfeasible commercial conditions have been rendered impossible by the skyrocketing increase in the price of raw materials, especially those that are imported, which are also hit by the turbulence in the currency exchange rate.
“The steep price increases ensure that we just cannot produce export quality products. If we do, they would not be economically feasible for us. We cannot match our competitors either way,” Pak-Afghan Chamber of Commerce President Daro Khan Achakzai told The Diplomat.
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Pakistan’s exports have dropped for the past 10 successive months. To address the worsening balance of payment crisis, the government has decided to curb imports instead of working toward making Pakistan a more export-oriented economy. That revamp, and the uplift of the overall investment climate in the country can only be ensured by righting the most ominous wrong for Pakistan: the volatile security situation.
Despite the reduction in terror attacks over the past eight years, significant turbulence remains in the country — and it wards investors away. Even Beijing has been rethinking its highest-ever overseas investment, the $62 billion China Pakistan Economic Corridor (CPEC), owing to violent attacks targeting its projects. This volatility is rooted in the Pakistani military’s own decades-old security strategy of propping up jihadists regionally and domestically. This policy, in turn, is hinged on the state’s perpetual anti-India alignment, which continues to hit Pakistan’s economy hard.
“There should be no two opinions about how much Pakistan would benefit from improved trade with India. We should have better commerce ties with all neighboring countries, and states around the world. In fact, we should work on improving our barter trade agreements through land routes from South Asia, to Central Asia, to Russia. The economy should not be held hostage to politics,” added Achakzai.
And yet, that’s precisely what has happened to Pakistan’s economy over the past seven decades, as it has been continuously decimated by a combination of masochistic internal and regional power plays. The military establishment needs to wake up to the reality that Pakistan can no longer function as an economy for hire, or a business empire, and requires a model that sustains itself over a bedrock of grassroots democratization. This in turn requires stability in both the security and political realms, along with an integration of all stakeholders within the framework of a common national interest defined by empiricism and not hollow ideological rhetoric.
*names changed to protect identity.