FeaturedNationalVOLUME 18 ISSUE # 22

Political instability compounds economic challenges

Political instability is the biggest reason behind the country’s failure to achieve its objectives. All recent governments in Pakistan were too weak to look beyond their survival. They spent most of their time appeasing their coalition partners instead of taking measures to resolve public issues. The result is that the challenges have grown much bigger than the capacity of any elected government.

The present situation is even worse. The government, besides facing a most popular opposition leader in the country’s history, is also hell-bent upon taking on the judiciary. In the situation, it is futile to expect anything positive from it. Pakistan has faced a number of economic challenges, including high levels of debt, a weak currency, and high inflation. These challenges have made it difficult for governments to address the needs of their citizens and have contributed to public discontent and political instability.

The country has experienced political instability throughout its history, with several periods of military rule and frequent changes in government. This has led to a lack of stability and continuity in government, as well as a weakened democratic system. Pakistan is a diverse country with many different ethnic and religious groups, and there have been tensions between these groups throughout its history. This has led to political instability, as different groups compete for power and influence. Corruption is also a major problem in the country, and has contributed to political instability by undermining public trust in governments and creating a system in which those with money and power can easily manipulate the political process.

Pakistan’s economic challenges have been persistent for several years. The country has been facing high levels of inflation, with prices of essential commodities increasing rapidly, making it difficult for people with low incomes to make ends meet. In February, inflation in Pakistan skyrocketed to 50-year highest level of 31.5pc — becoming the 17th most expensive country in the world –after the government massively raised energy and fuel prices coupled with the adverse impacts of currency devaluation and imports at a halt. According to the Pakistan Bureau of Statistics (PBS), the Consumer Price Index (CPI), the inflation monitor, rose to 31.5pc in February against the same period last year.

Pakistan also has a significant debt burden, which limits the government’s ability to invest in infrastructure and social programmes. The country’s debt-to-GDP ratio has been consistently above 70pc for several years. According to the United States Institute of Peace (USIP), as of December 2022, Pakistan holds external debt and liabilities of $126.3 billion. Nearly 77pc of this debt, amounting to $97.5 billion is directly owed by the government of Pakistan to various creditors; an additional $7.9 billion is owed by government-controlled public sector enterprises to multilateral creditors. Pakistan faces near-term debt repayment pressure. From April to June 2023, the external debt servicing burden is $4.5 billion. The major repayments are due in June when a $1 billion Chinese SAFE deposit and a roughly $1.4 billion Chinese commercial loan would mature. Even if Pakistan manages to meet these obligations, the next fiscal year will be more challenging, as the debt servicing will rise to nearly $25 billion, according to the US think tank.

Pakistan has struggled to attract foreign investment due to security concerns and a difficult business environment. The overall FDI inflows for the first eight months of the fiscal year fell by over 40pc. However, it increased by 10pc compared to the same month last year in February. According to the State Bank of Pakistan (SBP), FDI has been declining since the beginning of the financial year, primarily due to economic vulnerability and political uncertainties. During the first eight months of the current fiscal year (8MFY23), total FDI inflows were $784.4 million, compared to $1.315 billion in the same period last year, representing a 40.4pc decrease. The Pakistani rupee has been struggling to stay within the current range of Rs280 against the US dollar due to rising demand and poor foreign exchange reserves, leading to its depreciation.

Pakistan has faced an energy crisis in recent years, with frequent power outages and shortages, which negatively impacted the economy and people’s daily lives. Its economic growth has been slow, averaging around 3pc in recent years, which is insufficient to create enough jobs and improve the standard of living for the population. Recently, the International Monetary Fund (IMF) lowered its forecast for Pakistan’s economic growth rate for the current fiscal year to just 0.5pc, with inflation going beyond 27pc and the unemployment rate increasing to 7pc. It showed an unambiguous deterioration of economic fundamentals over the last six months since October when the Fund forecast the country’s gross domestic product to grow by 3.5pc against 6pc for 2022 ago and inflation at 20pc against 12.1pc last year amid a slowdown in the global economy and devastating effects of floods.

In its flagship World Economic Outlook (WEO), the IMF also estimated the unemployment rate in Pakistan to rise to 7pc against 6.2pc last year. For fiscal 2024, however, the IMF expected the economic growth to improve to 3.5pc, inflation to stay elevated at 22pc and the unemployment rate to slightly decline to 6.8pc. Pakistan’s tax system is weak and has a low tax-to-GDP ratio, which limits the government’s ability to collect revenue and invest in social programs. The country’s infrastructure is outdated and insufficient, which hinders economic growth and development.

Addressing these economic challenges will require concerted efforts from the government, private sector, and civil society, and will likely involve a combination of policy reforms, increased investment, and improved governance.