FeaturedNationalVOLUME 18 ISSUE # 43

Pakistan’s economic revival: Opportunities and obstacles

Pakistan has embarked on a bold economic reform journey, establishing the Special Investment Facilitation Council (SIFC) to oversee major projects and seeking substantial investments from Gulf nations, particularly Saudi Arabia and the UAE. These initiatives hold the promise of economic recovery, but they are not without their hurdles.

The IMF programme and financial assistance provided by Saudi Arabia, the UAE, and China have paved the way for Pakistan’s economic recovery. However, the economic situation remains precarious, and it faces several challenges that, if not managed effectively, could plunge the country into deeper economic turmoil. Pakistani policymakers must confront three major challenges: implementing politically sensitive measures that may lead to inflation in order to fulfill the current short-term IMF programme, negotiating a new IMF deal in the coming year, and finalizing investment agreements with Arab Gulf nations.

Pakistan’s existing $3 billion IMF bailout is a short-term arrangement that necessitates unpopular yet unavoidable economic policy changes. For instance, the IMF requires Pakistan to adjust its exchange rate system to reduce the gap between the interbank and open market exchange rates. This adjustment has led to significant depreciation of the Pakistani rupee against the US dollar and has contributed to inflation. Additionally, Pakistan must address the financial losses incurred by its struggling energy sector by raising power tariffs, resulting in increased electricity costs for many citizens. These measures will exacerbate the impact of Pakistan’s fiscal indiscipline, as the government continues to run substantial deficits and finances them through excessive printing of the Pakistani rupee, further fueling inflation.

The combination of necessary IMF-mandated adjustments and Pakistan’s policy missteps is likely to trigger another wave of inflation in the country. Reports indicate growing discontent and protests across the nation due to rising prices, which could compel the government to reconsider these adjustments. To secure a new IMF deal, Pakistan must commit to economic reforms, but political factors are equally crucial. Originally, the country was scheduled to hold elections no later than November of this year. However, due to delays in the decision-making process by the previous government and the Election Commission of Pakistan’s efforts to redraw electoral boundaries based on a recent census, there is considerable uncertainty regarding the election’s timing. Pakistan currently has an interim government that lacks the legal authority to negotiate a new IMF deal. Moreover, the IMF is unlikely to engage in discussions with an interim government. The current IMF bailout for Pakistan is set to conclude in early April. Therefore, if the election is not held by February or March 2024, negotiations for a new IMF deal may reach an impasse. A prolonged standoff with the IMF could once again push Pakistan toward a situation resembling a default.

Recognizing the pressing financing needs for the next few years, Pakistan understands that relying solely on the IMF will not suffice to overcome the economic crisis. In light of this challenge, Pakistani leaders are actively seeking investment from Gulf countries to infuse cash into the economy and stimulate economic activity. They claim that Saudi Arabia and the UAE are prepared to invest tens of billions of dollars.

Pakistan has established the Special Investment Facilitation Council (SIFC) aimed at overseeing major economic projects in the country. This council, consisting of the prime minister and the army chief, has been created to enhance investor confidence and accelerate the implementation of various projects. The SIFC has already given the green light to 28 investment projects, valued at billions of dollars, which will be presented to Gulf nations. Pakistan is also in talks to sell a stake in the Reko Diq mines, a site boasting one of the world’s largest reserves of gold and copper, to Saudi Arabia. Additionally, Pakistan plans to outsource the management of airports to the UAE, hasten the privatization of the national airline, and expedite a free trade agreement with the UAE, known as the Comprehensive Economic Partnership Act.

However, these ambitious initiatives may face obstacles due to persistent challenges that investors have encountered in Pakistan over the years. These challenges include bureaucratic inefficiencies, concerns about shifting economic policies, an unfavorable business environment, and ongoing political instability. There are also concerns about potential long-term liabilities, such as outbound dividend flows, associated with certain investment schemes that could strain the country’s balance of payments. Past hasty trade agreements, like the China-Pakistan Free Trade Agreement, have resulted in unfavorable trade balances and eroded the manufacturing sector, raising the possibility of objections to the proposed free trade agreement with the UAE.

Pakistan’s economic recovery not only hinges on sound economic decisions but also on maintaining strong political relations with various external powers with competing interests. The UAE and Saudi Arabia, for instance, may invest in Pakistan not solely for economic returns but also to exert influence, necessitating Pakistan to be attentive to their concerns and interests. Both countries have considerable leverage over Pakistan, which is likely to increase. Furthermore, Pakistan must continue to nurture a positive relationship with China. While efforts to secure financing from Saudi Arabia and the UAE may potentially overshadow Chinese economic influence, Pakistan still needs to maintain good relations with China, especially given its significant commercial debt owed to Chinese institutions. Lastly, Pakistan must also maintain a favorable relationship with the United States, as it plays a crucial role in getting the next IMF deal approved through the IMF board, where the United States holds the largest share of votes.

How Pakistan plans to navigate these cross-cutting and sometimes conflicting imperatives in its dealings with these countries remains unclear. Pakistani authorities seem to downplay the potential for regional stakeholders to pull them in different directions. They assume that Gulf investments will complement the China-Pakistan Economic Corridor rather than compete with it and believe they can continue to strike a balance between Chinese expectations and those of the United States. Nonetheless, Pakistan’s efforts to achieve economic recovery remain a formidable challenge.

As Pakistan strives for economic recovery through the SIFC and Gulf investments, it must tread carefully through the challenges of bureaucracy, shifting policies, and political instability. Balancing the competing interests of the UAE, Saudi Arabia, China, and the United States will be a delicate dance. The success of Pakistan’s economic revival hinges on its ability to navigate these intricate dynamics, a task that remains daunting but essential for the nation’s prosperity.