essay on economic crisis in pakistan with outline

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CARBS Business Review

Pakistan’s Economic Crisis: Unveiling the Causes, Impacts, and Remedies

Dr. ali sajjad, 30 october, 2023.

Pakistan has been grappling with an economic crisis in recent years, which is marked by high rates of inflation, a declining currency, and an increasing debt load. The country’s population has been significantly impacted by this crisis, with many people finding it challenging to meet their financial obligations. This blog will cover the reasons behind the current economic crisis, its effects on the nation, and potential solutions to the problem.

Causes of Crises

1 – external debt.

Pakistan’s current economic crisis is primarily caused by its external debt, which amounts to $126.3 billion. The country owes this debt to a wide range of creditors, including multilateral organizations, Paris Club nations, private and commercial lenders, and China. The growth of this debt load can be attributed to several factors such as excessive borrowing, slow growth, weak exports, and currency depreciation. Pakistan’s foreign exchange reserves are currently around $4 billion, which is insufficient to pay for even one month’s worth of imports.  As a result, there is a significant chance that the nation will not be able to pay its debts in full

2 – Inflation

Pakistan is currently facing a decline in the purchasing power of its populace and an increase in poverty due to a record-breaking inflation rate of over 25%. The rising costs of food, fuel, electricity, and imported goods are the primary causes of this inflation.  The government’s expansionary fiscal and monetary policies, which were implemented to boost the economy in the face of the COVID-19 pandemic, have further exacerbated the inflationary pressure.

3 – Energy Crises

Pakistan is currently dealing with a persistent energy crisis that has seriously hampered its ability to produce goods and expand its economy. The country relies heavily on imported petrol and oil, which are expensive and prone to price volatility. Unfortunately, poor management, corruption, and a lack of investment in renewable energy sources have resulted in insufficient and inefficient domestic energy production. As a result, Pakistan frequently experiences load shedding and power outages, which negatively affect millions of homes and businesses. The country’s GDP has decreased by up to 4% recently as a result of energy shortages.

4 – Political Instability

Pakistan’s financial instability is significantly impacted by its political instability. Frequent changes in government, governance, and political unrest have weakened foreign and domestic investor confidence. This has led to a decrease in foreign direct investment (FDI), causing capital flight and lowering the likelihood of economic growth. Exchange rate volatility, caused by political unrest, harms businesses that depend on stable exchange rates for international trade. Inconsistent economic policies and budgetary constraints lead to budget deficits and increased borrowing, elevating the risk of sovereign debt crises. Insecurity issues related to political instability, including terrorism and civil unrest, disrupt economic activities, deter foreign investment, and damage infrastructure, collectively contributing to economic and financial instability in Pakistan. The political uncertainty has undermined the confidence of investors, creditors, and the public in the government’s ability to address the economic challenges.

Consequences of Crises

1 – social unrest.

Due to the economic hardships the Pakistani people have experienced, there is a great deal of unhappiness and frustration, which has taken many different forms, including protests, strikes, riots, and violence. The social fabric and confidence in the government have been damaged by the rising cost of living, unemployment, inequality, and insecurity. The nation’s stability and unity are in danger as a result of the economic crisis’s escalation of ethnic, sectarian, and regional tensions.

2 – Security challenges

Pakistan’s current economic crisis has significantly weakened its capacity to address both internal and external security challenges. The country is currently grappling with a resurgence of terrorism perpetrated by various militant groups. These groups have exploited the economic crisis to further their nefarious activities, posing a significant threat to Pakistan’s stability and security.

3 – Regional implications

Significant effects of Pakistan’s economic crisis on regional stability and growth. Pakistan, a nuclear-armed nation with a population of more than 200 million, is very significant from a geopolitical standpoint. The potential collapse or instability of Pakistan’s economy could have significant repercussions for its neighbors and the global community.

Solutions to the Crisis

To address the economic crisis in Pakistan, the government and international community must act urgently and comprehensively. The following are some possible solutions:

1 – Debt relief

Pakistan may think about asking for debt relief from its creditors to lessen payback pressure and spend resources for growth. The government can negotiate a favorable debt rescheduling or restructuring with its creditors. Pakistan might also receive crucial financial aid and policy direction by asking the International Monetary Fund (IMF) for help in restarting the halted bailout program.

2 – Structural reforms

It is essential to put structural changes into place to address the underlying causes of Pakistan’s economic problems. To lower inflation, the budget deficit, and the national debt, the government should implement responsible fiscal and monetary policies. To increase revenue production and boost efficiency, it is essential to improve tax collection and expense management. Additionally, expanding export markets and encouraging the export sector can increase foreign exchange revenues. Reduced reliance on imported oil and gas can be achieved by making investments in the energy sector and the development of renewable energy.

3 – Political dialogue

Pakistan must resolve its political crisis through constructive dialogue and consensus-building. The government and the opposition should engage in a peaceful and productive dialogue to end their confrontation and find a mutually acceptable solution to their differences. The government and the opposition should also work together to address the economic challenges and implement the necessary reforms. Both parties must respect the rule of law, the constitution, and the democratic process to ensure the legitimacy and stability of the political system.

4 – International collaboration

By enlisting the aid of its allies and partners, including China, Saudi Arabia, Turkey, Iran, and the United States, Pakistan can improve its international collaboration. This may result in financial support, business opportunities, easier commerce, and technological breakthroughs. The government should also improve ties with its neighbors, especially with India and Afghanistan, to promote regional peace and cooperation. By taking part in regional initiatives, Pakistan can gain from regional connection and integration.

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Dr. Ali Sajjad is currently working as an Assistant Professor at Chaudhary Abdul Rehman Business School, Superior University. From the University of Utara Malaysia, he obtained a PhD in Banking and Finance. Moreover, he is a researcher having years of teaching and research experience. He has several publications and his area of research is accounting, finance, entrepreneurship and Islamic finance.

Please note that all opinions, views, statements, and facts conveyed in the article are solely those of the author and do not necessarily represent the official policy or position of Chaudhry Abdul Rehman Business School (CARBS). CARBS assumes no liability or responsibility for any errors or omissions in the content. When interpreting and applying the information provided in the article, readers are advised to use their own discretion and judgement.

If you are interested to write for CARBS Business Review Contact us !

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An Economic Crisis in Pakistan Again: What’s Different This Time?

Photo: AAMIR QURESHI/AFP/Getty Images

Critical Questions by Daniel F. Runde and Ambassador Richard Olson

Published October 31, 2018

Pakistan’s newly-elected government is already dealing with a balance of payments crisis, which has been a consistent theme for the nation’s newly elected officials. Pakistan’s structural problems are homegrown, but what is different this time around is an added component of Chinese debt. Pakistan is the largest Belt and Road (BRI) partner adding another creditor to its already complicated economic situation.

Pakistan’s system is ill-equipped to make changes which would avoid future excessive debt. A bailout from the International Monetary Fund (IMF) is probably the safest bet for the country although it is unclear whether the United States will support the program. How Pakistan decides to handle its debt crisis could provide insight into how the U.S., IMF, and China will resolve development issues in the future. Beijing is a relatively new player in the development finance world so much is to be learned from how it deals with Pakistan and how it could possibly maneuver in other developing countries in Asia, Africa, and Latin America.

Q1: What is Pakistan’s current financial and economic situation?

A1: Pakistan held its most recent elections in July 2018. The Pakistan Tehreek-e-Insaf party gained over 100 seats in the parliament, and its founder Imran Khan , a famous cricket team captain, was installed as prime minister. Prime Minister Khan has inherited a balance of payments crisis , the third one in the last 10 years. By the end of June 2018, Pakistan had a current account deficit of $18 billion , nearly a 45 percent increase from an account deficit of $12.4 billion in 2017. Exorbitant imports (including those related to the China-Pakistan Economic Corridor (CPEC)) and less-than-projected inflows (export revenues and remittances) have led to a current account deficit widening, with foreign currency reserves levels covering less than two months of imports—pushing Pakistan towards a difficult economic situation .

Part of Pakistan’s financial crisis stems from the fact that 2018 was a poor year for emerging markets. Global monetary tightening, increased oil prices, and reduced investor confidence have negatively impacted the country’s already precarious economic situation. But the country’s deep structural problems and weak macroeconomic policies have further exposed the economy to an array of debt vulnerabilities.

Pakistan has had an overvalued exchange rate, low interest rates, and subdued inflation over the last few years. This loose monetary policy has led to high domestic demand, with two-thirds of Pakistan’s economic growth stemming from domestic consumption. An overvalued exchange rate has led to a very high level of imports and low level of exports. Pakistan’s high fiscal deficit was accelerated even further in 2017 and 2018 because elections have historically caused spending to rise (both of the most recent fiscal crises followed elections). Perhaps the greatest financial issues facing Pakistan are its pervasive tax evasion and chronically low level of domestic resource mobilization. Taxes in Pakistan comprise less than 10 percent of GDP , a far cry from the 35 percent of countries that are part of the Organisation for Economic Co-operation and Development (OECD). Pakistan also suffers from impediments in the energy sector through frequent and widespread power outages that hurt its competitiveness.

In Western media, Chinese investment is often cited as the main driver of Pakistan’s debt crisis. This is somewhat true as China’s BRI makes Pakistan a key partner through the shared CPEC. The CPEC is a $60 billion program of infrastructure, energy and communication projects that aims to improve connectivity in the region. CPEC infrastructure costs have certainly placed a greater debt burden on Pakistan, but the current structural problems are homegrown; the root cause of the energy shortages is now less a matter of power generation, and more of fiscal mismanagement of the power sector .

Q2: What are Pakistan’s options?

A2: Pakistan appears to be in perpetual crisis-mode, and for too long the Pakistani government has been overly reliant on U.S. bilateral assistance. While it may not be the first choice of the Pakistani government, an IMF bailout is the most likely outcome of this financial crisis because it is probably the only path for Pakistan to regain its macroeconomic stability. Any “bailout” from a bilateral donor (meaning China or Pakistan’s Gulf State friends, including Saudi Arabia which has recently provided Pakistan $3 billion for a period of one year as balance-of-payment support) will not get at the root issues that Pakistan faces—its loose macroeconomic, fiscal, and monetary policies. Pakistan needs to get its house in order and remedy many of its domestic economic issues. 18 out of Pakistan’s 21 IMF programs over the last 60 years have not been completed despite obtaining over $30 billion in financial support across those programs. Just like today’s current financial crisis, Pakistan’s last two IMF packages (in 2008 and 2013) were also negotiated by incoming governments.

Q3: Would the U.S. support a new IMF Pakistan program?

A3: The current U.S. administration and Congress would not be supportive of additional bilateral funding to Pakistan—meaning money coming directly from the United States. Since 2001, Pakistan has been the beneficiary of the U.S. Coalition Support Fund (CSF), which reimburses allies for costs incurred by war on terrorism. The CSF is used to reimburse Pakistan for U.S. military use of its network infrastructure (e.g., ports, railways, roads, airspace) so that the United States can prosecute the war in neighboring Afghanistan, as well as certain Pakistani military counter-terrorism operations. The CSF for Pakistan has been as high as $1.2 billion per year, and, in recent years, $900 million per year. With nearly $1 billion in CSF distributed every year, along with $335 million in humanitarian assistance, it will be difficult to convince Congress to appropriate more funds for a Pakistan bailout yet. However, due to inaction on the part of Pakistan to expel or arrest Taliban insurgents operating from Pakistani territory, the United States has recently cut another $300 million from the CSF, bringing the total to $850 million in U.S. assistance withheld from Pakistan this year. In fact, all security assistance to Pakistan, whether it is international military education and training, foreign military financing, or the CSF, has been suspended for this year according to one State Department official.

An IMF program for Pakistan faces resistance from some members of Congress. A group of 16 senators has already signed a letter to President Trump that outlines their opposition to bailing out Pakistan because the IMF package would, in effect, be bailing out Chinese banks.

The Trump administration has also taken a hardline stance towards assisting Pakistan with its financial crisis. Secretary of State Pompeo stated this past July that he would not support an IMF bailout that went towards paying off Chinese loans. In September, Secretary Pompeo visited Pakistan, and there were indications that the United States would not block an IMF program. If an IMF program is enacted, there is no doubt that it would have stronger conditionality and a greater insistence on full transparency of Pakistan’s debt obligations.

Q4: Would an IMF package be a bailout of the Chinese?

A4: The terms of Pakistan’s loans with China are currently unclear and multiple news outlets have reported that Pakistan has refused to share CPEC information with the IMF. However, it is not unreasonable to presume that the terms in those contracts would be more demanding than terms typically asked by the IMF. Unless the terms between Pakistan and China and its state-owned enterprises (SOEs) are disclosed and made clear to the IMF, then it is unwise for the IMF to proceed with a bailout package.

The IMF’s focus is not in projecting power and influence; rather it seeks to help struggling nations get back on their feet. The same cannot be said for China. China appears to be most interested in spreading its influence and gaining valuable assets for its military and expanding economy, while at the same time exporting its surplus capacity for infrastructure building. In its annual report to Congress, the Department of Defense reiterated this concern, “countries participating in BRI [such as Pakistan] could develop economic dependence on Chinese capital, which China could leverage to achieve its interests.”

Of Pakistan’s nearly $30 billion trade deficit, 30 percent is directly attributable to China . If China were concerned about the economic crisis in Pakistan, it would make immediate concessions which Pakistan Finance Minister Asad Umar says China is working on . To help with the crisis, China could readjust its trade surplus with Pakistan in different ways. For example, China could buy Pakistani cement and other purchases in the short term to illustrate that they are aware of and swiftly responding to the economic turmoil in Pakistan. Other nations have struggled with debt obligations to China. For instance, in July 2017, Sri Lanka signed over a 99-year lease for Hambantota Port to a Chinese SOE because of Sri Lanka’s inability to pay for BRI costs. Malaysia took a different path and decided to cancel major infrastructure projects with China in August 2018 due to worries that they would increase its debt burden .

Q5: What are the consequences if there is no IMF package?

A5: It is likely that China will provide even more assistance to broaden Pakistan’s dependency. Chinese banks and SOEs have already invested heavily into Pakistan, so much so that state bank loans have not been fully disclosed to the global community. In fact, Pakistan’s Status Report for July 2017 through June 2018 shows that Chinese commercial banks hold 53 percent of Pakistan’s outstanding commercial debt. However, that percentage may be even higher than the report depicts. While China and Pakistan have agreed to make all CPEC projects readily available to the public, the information is scattered and often left blank on essential financial reports (see July-June 2017 document ), and so it is difficult to obtain a full sense of the degree of Pakistan’s indebtedness to China. Again, much of the loan information provided by the Pakistani government, especially concerning China, is not entirely transparent.

If China chooses to follow through and become the “point person” for an assistance package, the pressure will be taken off the IMF. But, if the United States does not support an IMF package, it will forego major geopolitical potential in the region to its main competitor, China.

Pakistan represents a litmus test of all future cases in which the IMF, United States, China, and any emerging market country are all involved. Depending on how Beijing chooses to navigate Pakistan’s financial crisis, China may soon find itself responsible for rectifying the debt burdens of Zambia and many other BRI countries.

Q6: What are U.S. geopolitical “equities” in Pakistan?

A6:  The United States is invested in Pakistan because of its significant geopolitical importance.

• Pakistan is an important component of the balance of power in South Asia. Both India and Pakistan have nuclear weapons capabilities. Moreover, China, India, and Pakistan have been in dispute over the Kashmir region since 1947. Regional stability is in the interest of the United States.
• Despite its ambiguous stance on militant groups, Pakistan is ostensibly an ally of the United States because of its proximity to Afghanistan. Since the War on Terror began in 2001, Pakistan has been an active partner in the elimination of core al Qaeda within Pakistan and has facilitated aspects of the U.S. military campaign in Afghanistan.
• The United States now seeks a negotiated settlement to the conflict in Afghanistan. To accomplish this, perhaps the United States will come to Pakistan with a simple offer: “deliver the Taliban, and we will give you the IMF.”
• Whereas previous administrations may have tried to “play nice” with Pakistan, under the Trump administration, there is a chance that the U.S. government will push the IMF to adopt stricter terms for a Pakistan bailout, citing the Pakistani government’s failures of the last two programs.
• Other than strategic military importance, one of the most important national security challenges to the United States is Pakistan’s demographic trends. Currently, over 64 percent of Pakistanis are under the age of 30—the largest percentage of youth in the country’s history. Over the next 30 years, Pakistan’s population will increase by over 100 million, jumping from 190 million to 300 million by 2050 . The spike in youth population presents an opportunity for the U.S. government and private sector to increase investment in Pakistan. Pakistan’s economy must generate 1 million jobs annually for the next three decades and GDP growth rates must equal 7 percent or more per year to keep up with the population boom. Were Pakistan’s economy to collapse, the world would see the first instance of a failed state with a substantial arsenal of nuclear weapons.
• An economically healthy Pakistan could be a large market for U.S. goods and services. If the U.S.-Pakistan relationship is strained as a result of this financial crisis, it will not only harm the United States militarily but will also harm U.S. businesses and Pakistani consumers.

Q7: Should the U.S. support an IMF package to Pakistan?

A7: Given the geostrategic importance of Pakistan for the United States, we should support a package but with stronger conditionality than in 2013 along with full transparency and disclosure of its debt obligations.

Daniel F. Runde is senior vice president, director of the Project on Prosperity and Development, and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Richard Olson is a non-resident senior associate at CSIS. He is the former U.S. ambassador to the United Arab Emirates and Pakistan; most recently he served as the U.S. special representative for Afghanistan and Pakistan during the Obama administration. Special thanks to CSIS Project on Prosperity and Development program coordinator Owen Murphy and intern Austin Lucas for their contributions to this analysis.

Critical Questions   is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2018 by the Center for Strategic and International Studies. All rights reserved.

Daniel F. Runde

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Pakistan’s Economic Crisis: What Went Wrong?

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The pulse  |  economy  |  south asia.

The country is currently running on foreign loans taken on high rates of interest. It will have to repay $80 billion in the coming three years.

Farmers clear out debris in an apple orchard damaged by floods ahead of the harvesting season in Quetta, Balochistan, April 10, 2023.

In March-April, the Pakistan government set up distribution sites across the country to provide s asta aur muft aata (low-cost and free flour) to people to ease their burden amid spiraling prices and the ongoing economic crisis in the country. But instead of doing good, the initiative caused trouble in several places where stampedes broke out, killing and injuring people.

Pakistanis are putting their lives at risk to collect something as basic as a sack of flour. It illustrates how the rising cost of food and other necessities is driving desperation and impacting the masses.

With inflation running at over 30 percent – a 50-year high – putting food on the table for the poorest, who comprise one-third of Pakistan’s population, has become harder than ever before.

When the recent stampedes over food flooded social media, so did the deeper questions: How did the country end up here? What does this economic crisis mean for the majority of the Pakistani people and for Pakistan’s international projects, especially those with China under the China-Pakistan Economic Corridor (CPEC), which Pakistan considers vital for its future economic growth?

Pakistan’s current GDP, per capita income, and GDP growth are the lowest in its neighborhood ; only war-torn Afghanistan’s economy is weaker.  Likewise, its unemployment and inflation rates are one of the highest in the region. The Human Development Inde x, which measures a country’s achievements through three basic dimensions – health, knowledge, and standards of living – placed Pakistan in the 161st position out of 185 countries in 2022. In other words, Pakistan is among the 25 countries with the lowest human development in the world.

The country’s current situation has multiple causes, including overall poor economic management, corruption, and excessive spending on defense and the armed forces. In a country where half the population is under the age of 22 , investing in the education and technical skills of youth can generate opportunities for a more sustainable economy.

Many also associate the current economic crisis, especially the rise in food staples, with last year’s floods, which caused extensive damage to agricultural land, livestock, thousands of kilometers of road, and other infrastructure. This is partially right, as inflation touched a record high after the floods in August last year. But the war in Ukraine also halted grain supply to a number of countries, including Pakistan, resulting in a sharp increase in prices of foodgrains.

But the situation was not stable even prior to these crises. According to a World Bank report on inflation and development in Pakistan, food-related shortages and transportation challenges caused by the floods and the war in Ukraine that impacted essential grain imports significantly contributed to the inflation, but so did a hike in fuel and oil subsidies. Pakistan heavily relies on imported oil. A constant decline in the value of the country’s currency has resulted in much higher tariffs with every import of oil.

The unceasing decline in the value of Pakistan’s currency over the months has been triggered by the country’s inability to repay its foreign debt . Pakistan is essentially running on foreign loans, an economic model that only leads to borrowing more, which eventually results in bankruptcy. Between February 2023 and June 2026, Pakistan will have to repay around $80 billion in foreign debt.

As of December 2022, Pakistan held $126.3 billion in external debt and liabilities, of which 30 percent is owed to China. As much as the Chinese government has supported Pakistan’s infrastructure development through CPEC, which Pakistan is determined to benefit economically from in the future, for now, the federal government is having to repeatedly turn to the Chinese for refinancing and a rollover of debts .

Although the Chinese government and commercial banks have helped Pakistan by deferring debt repayment or rolling over debts in the past, it is hard to predict if China will continue to do so.

So far, of the numerous projects agreed upon under CPEC, only a few have been completed. Chinese frustration over endless delays in project completion, halting of projects, and security threats to its nationals working in Pakistan has resulted in hesitation to invest in new projects. Yet Pakistan remains one of the biggest beneficiaries of Chinese loans.

Many blame China for the high interest it charges on loans that have burdened many developing countries including Pakistan. Instead of the promised economic growth through CPEC, China’s loans may have worsened Pakistan’s economic crisis. But it is still too early to conclude whether CPEC debts will drain the Pakistani economy or open up opportunities for growth in the future.

For now, transparency over government spending is the need of the hour, along with restructuring the country’s economy from one that overspends on defense institutions and excessively relies on foreign debt with high interest to a model that is sustainable.

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THE LAHORE JOURNAL OF ECONOMICS

Inayat Mangla

This paper analyzes the impact of the macroeconomic environment on Pakistan’s manufacturing sector, emphasizing in particular the role of fiscal and monetary policies in shaping incentives for industrial investment. Arguably, Pakistan’s macroeconomic fundamentals in the last two decades have remained fragile, resulting in severe macroeconomic imbalances that have contributed to macroeconomic instability and hampered private investment in aggregate as well as in the manufacturing sector. Furthermore, macroeconomic stabilization policies have often failed to produce the desired results owing to the lack of coordination between monetary and fiscal policies. Pakistan’s economy has thus lived on borrowed money and time and on rent-seeking behavior. Although some recent macroeconomic indicators have improved slightly, fundamental weaknesses remain. In particular, the recent improvement in the current account deficit was driven largely by the high inflow of remittances, coupled with financ...

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Pakistan: Political Instability and Economic Growth

• Mehwish Hakeem Shahzad
• December 24, 2022
• CSS , CSS Essays , CSS Solved Essays , Current Affairs , PMS , PMS Essays , Socio-economic problems
• 41350 Views

Can Political Instability and Economic Growth Not Move Together in Pakistan? | CSS Essays | PMS Essays | Essays by Sir Syed Kazim Ali | CSS Essays | PMS Essays | Essays by Sir Syed Kazim Ali

Mehwish Shahzad has attempted this essay on the given pattern, which Sir  Syed Kazim Ali  teaches his students, who have consistently been qualifying their CSS and PMS essays. The essay is uploaded to help other competitive aspirants learn and practice how to write a comprehensive outline; how to write bullets in an outline; how to write the introductory paragraph; how to connect sentences and paragraphs; how to write a topic sentence; how to put evidence within the paragraphs.

1- Introduction 2- Understanding the relationship between political instability and economic growth 3- Current situation of political instability in Pakistan and its impact on the economy 4- How are political instability and economic growth can never move together?

• ✓ Inconsistent Economic policies, every new government abandoning the previous government’s economic projects due to their narrow mindedness GDP rate of 6.8% in the era of Ayub’s regime due to consistency in the policies
• ✓ Increasing unemployment owing to a decline in developmental and economic projects, a significant setback to the human capital due to political turmoil Political instability, the third most significant obstacle in the way of development, Word bank report
• ✓ Skyrocketing inflation due to the mismanagement and short-term policies of the government, declining rupee value Double-digit inflation increased to 24.9%, PBS report
• ✓ The gradual decay of economic institutions in the hand of politicians impeding economic progress Tarbela Hydropower project investigation in the NAB for corruption of Rs. 753 Mn by WAPDA
• ✓ Interrupting GDP growth, business, and trade activities due to riots and strikes by the frustrating people, a result of the political fiasco Unrest events leading to a 1% reduction in GDP, Survey report

5- How to ensure political stability for economic progress?

Political level

• ✓ Proper charter of economy, a national document for the country’s salvation by the consensus of all the political parties
• ✓ Long-term vision by the top leadership to foster political and economic stability and to avoid frequent ousters 
• ✓ Encouraging public participation to hold politicians accountable for immature and self-interest policies

Economic level

• ✓ Broadening of the tax base with the help of political commitment, leading to political and economic prosperity
• ✓ Shifting from a geostrategic to the geo-economic hub, a welcome initiative for the country’s political and economic progress
• ✓ Implementing CPEC projects effectively to engender economic growth

6- Critical Analysis 7- Conclusion

The economy is a country’s backbone, helping it march towards unsurpassable social and political development. However, political instability serves as a bottleneck to a state’s socioeconomic and political lifelines. Unfortunately, Pakistan also stands among those states where political upheaval has led the economy towards shambles. The current political scenario is the nadir of the country’s economic history. Since it is a fact that both cannot go hand in hand; the existence of one is the death of the other. It is saddening that frequent ouster of government leads to inconsistent economic policies affecting the smooth functioning of the economy since its inception. Moreover, increasing unemployment, skyrocketing inflation, and declining FDI result from political chaos since investors never invest in an uncertain political environment. Riots and strikes further interrupt business activities affecting the GDP of the country. Political turmoil has paved its way in the roots of the economy, damaging the economic institutions of Pakistan. It shows that political stability and economic prosperity have a symbiotic relationship. Both can work only in the shadow of each other, benefitting from each other at every turn. Therefore, pragmatic measures at the political and economic levels can help the country cope with political instability. At the political level, introducing an ethical charter of the economy as a national document, coupled with long-term vision by the top leaders and public participation, is imperative. At the economic level, widening the tax base, shifting to a geo-economic pivot, and implementing CPEC can engender economic growth. In the contemporary world, Pakistan can only progress if the country pulls itself out of these political clinches. Thus, the essay comprehensively analyses how political instability and economic growth can never move together. Also, it highlights the way forward to ensure political stability for economic progress. 

Political instability is the propensity of a government to collapse either because of poor economic performance or rampant competition between various political parties. On the other hand, economic growth implies improvements in a country’s national income, leading to good economic conditions for the people. However, a country with a strong and stable political structure can experience steady economic growth. Indeed, a robust, safe environment where a political authority knows its duties and responsibilities eliminates the uncertainty of the economic future. In the same way, the economy in support of such a strong political environment will ensure steady growth. However, unstable structures in politics, of course, is the most critical factor affecting the economic stability of a state since political stability is the precondition to economic stability. Ray Jovanovich aptly said,  “Without political stability, there can be no economic prosperity; that’s the bottom line.”

At present, political instability has become a matter of grave sickness for Pakistan. Since the recent ouster of the prime minister through the vote of no confidence has led a country towards instability and chaos. It has pushed the country to the brink of an implosion. Political instability manifests itself in Pakistan, including blame games, institutional decay, rising inflation, economic woes, and a tussle between the judiciary and executive. It casts dire consequences on the people’s political and economic development and social life. As a result, Markets expected Pakistan to be another Sri Lanka in the making. Since Pakistan has faced an acute foreign currency shortage after political instability, things may lead to a similar crisis in Sri Lanka. It is high time Pakistan swallowed the bitter pill of hard political reforms before it is too late.

Here, it is important to discuss that political instability and economic growth can never move together. Nevertheless, its effects are too severe to be ignored. Some of them will be brought under discussion in this section. To begin with, political instability leads to the switching of economic policies. When it came to power, every new government introduced its own economic model, which created volatility and inconsistency in the smooth functioning of the economic policies. As a result, investors feel reluctant to invest in such a volatile economy, which ultimately affects a country’s economic progress.  It is evident that economic growth in military regimes was better than that of democratic regimes due to their long tenure. The GDP rate was 6.8% during Ayub’s regime since dictators had long terms leading to consistency in the economic policies.  Hence, political unrest can never let the economy function smoothly. 

Moreover, political instability reduces a country’s foreign direct investment (FDI). Since investors does not feel comfortable to invest in a country with political uncertainty.  According to the State Bank of Pakistan (SBP), due to the recent ouster of the national government, investors withdrew their investment of $30 Million in the account of FDI . Moreover, it has multiplier effects, such as low investment in a country leading to low development, increased unemployment, increased poverty, and reduced foreign exchange reserves. Hence, it is proven that political chaos in a country is a severe blow to an already fragile economy. 

Both of the above arguments lead to another significant discussion, which befalls Pakistan’s economy in the shape of unemployment. In a developing country like Pakistan, no new projects can be installed in a deteriorating political condition. Similarly, it does not create new jobs in a country since it halts the expansion of existing projects.  According to World Bank, political uncertainty is the third most significant obstacle to Pakistan’s economy . It can impact not only the productivity and expenditure of a country but also the national income of a country. Thus, it depicts clearly that political instability and economic growth cannot go hand in hand. 

With this puzzle, the issue of rising inflation during political chaos hits below the belt of Pakistan’s economy. When there is a high probability of being replaced, it becomes difficult to manage inflation. As a result, it depreciates the value of the domestic currency and, eventually, impacts the import and exports of a country.  According to the Pakistan Bureau of Statistics (PBS), the annual inflation rate increased to 24.9% in July 2022, soon after the regime change. It was even expected to grow, which has dire consequences for the economy.  Hence, frequent cabinet changes and political turmoil are directly correlated to a country’s economic woes. 

Along with the mismanagement of inflation, the economic institutions of a country are also decaying in the hands of corrupt politicians. The economic institutions, including WAPDA, finance, commerce, textile, and industry, are all decaying due to incompetence, corruption, and ineptness.  Recently, the WAPDA chairman appeared before the National Accountability Bureau’s (NAB) office where he was interrogated about corruption worth Rs753 million in the Tarbela Fourth Hydropower project.  They invest only half on the ongoing projects, and the remaining half is pocketed for their use. Hence, this poor management, corruption, and inability caused stagnation of the economic process to a devastating end.

Last but most certainly not least, the riots and strikes due to political fiasco led to the closure of business and trade activities, interrupting the GDP growth.  According to a survey title ‘The Economics of Social Unrest’, “on average, unrest events caused a 1% decline in the GDP.” For Pakistan, the long political unrest could cause a major dent in GDP growth.  Political instability is common, followed by riots and strikes by the people. As a result, it halted business and trade activities. And it generated a negative signal to the investors, who consequently stopped investing in such a risky environment and shifted their business to other countries, affecting the economic progress.  

Pakistan’s current federal and provincial governments need to go beyond firefighting and push forward essential reforms at the political and economic levels that are key to ensuring the country’s political and economic stability and long-term growth prospects.  First,  there must be a charter of the economy for economic stability. All stakeholders should be a part making of the alliance. In this regard, government and the opposition should collaborate to steer the country out of unprecedented political and economic uncertainties. The basic goals should be set in the charter of the economy. Those goals shall remain unchanged in the case of the new government.  Recently, trade unions and business leaders had a meeting with the government and political parties to insist the government for the making of the charter.  Hence, it depicts that they already realized this step’s importance.

Second, political parties should sit together and carve out a long-term vision to foster political and economic development. The leadership formulates and executes the strategy through which a leader’s vision translates into a reality.  For instance, Deng Xiaoping changed China through his visionary leadership. He changed all the policies of the previous communist leader Mao Zedong; he introduced many reforms and engagements with the international community. Within a decade, he uplifted China out of the socioeconomic crisis. As a result, the per capita income of the Chinese was 25-fold, and 700 million people lifted themselves out of poverty.  Hence, fine-tuning the policies is necessary for political and economic growth.

Third, public participation should be encouraged since it can pull the country out of the political darkness. The active role of the public in politics would hold politicians accountable. As a result, they never skip from the pro-state attitude; and they never make immature and self-interest policies.  As Abraham Lincoln aptly says, “we the people are the rightful masters of congress and the courts.”  Therefore, public participation is significant for a country’s lasting political and economic system. 

At the economic level, the government needs to broaden the tax base bringing every sector and every individual above the threshold level under the tax net. It will help the government to reduce the budget deficit by up to 3% of the GDP in the next three years. This step would relieve the government from the budget deficit issue, and they can fully focus on the other issues of the economy. R ecently, amid the global crisis, Jordon pushed the tax ratio to six per cent, Egypt by three per cent and the Philippines by two per cent.  Pakistan can also do the same with the help of strong political commitment and stringent reforms. 

Next, the strategic shift from geo-strategic to geo-economic is a welcome and sound initiative by the government to realize Pakistan’s real potential. However, the government should need to formulate a proper strategy to implement it. Since the Belt and Road Initiative (BRI) will connect Asia with Africa and Europe, Pakistan has a crucial role to play in it due to its strategic location.  As Chinese president Xi Jinping aptly says, “the BRI may be China’s idea, but its opportunities are going to benefit the entire world.”  Therefore, this project should be of prime importance to Pakistan’s government. Currently, it is the only way in the hand of Pakistan to realize its investment potential and achieve economic growth.

Last but certainly not least, China Pakistan Economic Corridor (CPEC) is the harbinger of robust economic growth, and it is only possible through its proper implementation. Therefore, the government is required to fully focus on it and make sure that political upheaval would have no impact on it.  So far, it is estimated that USD 64 billion worth of foreign investment will arrive through China’s megaproject.  Therefore, it is high time for Pakistan to avail of this opportunity for investment to achieve economic progress. For this, Pakistan should build the trust of the industrialists and investors of this project and showcase itself as a safe haven for these investors. 

In a critical diagnosis, various elements in the country have remained responsible for the worsened political scenario of the country. First and foremost is the role of military leadership in interfering in the country’s political affairs. Initially, it was directly involved in politics through martial law, and recently, it stayed backstage but still manoeuvred with the system. The successive military coups have not led a genuinely representative political culture to develop in Pakistan, thus, impacting the political stability. Moreover, the power play between the opposition party and the government has primarily affected the country’s political system. the main objective to gain power has blinded them to the country’s national interest. Therefore, their strategies to weaken each other have negatively impacted the political stability in Pakistan, hindering economic growth.

In conclusion, it is no exaggeration to say that political instability and economic growth can never move together. However, Pakistan can move towards economic development by overcoming the challenge of political instability in valid letters and spirit. For that matter, the government needs to make a plan to overcome the issue of political unrest in a country, not only at the political and economic levels. A proper charter of the economy by the consensus of all the political parties is the need of an hour. Also, special attention needs to be given to public participation in political matters, and long-term vision by the political leadership can surely bring political and economic stability. However, some more needs to be done; Pakistan has great prowess to transform itself from a crisis-ridden state to a flourished economy if the CPEC and the new narrative of geo-economics are implemented in true essence since it has trickle-down effects. Similarly, other measures like widening the tax base and other political and economic measures are vital efforts to engender political and economic progress. Indeed, by taking suggested measures, political stability can be achieved, which eventually helps the country reach the economic progress milestone. 

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