Political instability in Pakistan has far-reaching consequences, with significant economic costs that hinder the country’s progress and development.

It is a fact that political instability has been the main cause of Pakistan not realising its true potential. Political instability creates an uncertain business climate, deterring foreign investors from committing their capital to Pakistan. Investors seek stability and predictability to safeguard their investments. When political instability prevails, potential investors become hesitant to enter the market, resulting in a decline in foreign direct investment. This hampers economic growth and limits job creation opportunities.

The Foreign Direct Investment (FDI) in the country fell by 40pc in the first eight months of current fiscal year (FY23). According to the State Bank of Pakistan (SBP), the country attracted FDI amounted to $784.4 million during July-Feb of FY23 compared to $1.315 billion in the corresponding period of last fiscal year (FY22), showing a decline of $531 million. During the period under review, overall FDI inflows were $1.297 billion as against the outflow of $512.5 million. It is clear that FDI inflows continue to decrease due to political uncertainty in the country, which has worsened in recent months.

A stable political environment is essential for sustainable economic growth. However, political instability disrupts policy implementation and decision-making processes, causing delays in crucial economic reforms and development projects. Uncertainty and frequent changes in government can lead to inconsistency in economic policies, making it challenging for businesses to plan for the future and hindering long-term investments.

In its latest report, the International Monetary Fund has slashed the growth outlook for Pakistan, forecasting its economy to grow just 0.5pc this year, down from 6 percent in 2022. In its World Economic Outlook report, the IMF also forecast 27pc inflation for this year. It warned that unemployment would continue to rise in Pakistan which is struggling to avoid a default as it recovers from the destruction caused by last summer’s floods.

Political instability erodes business confidence, both domestically and internationally. When businesses lack confidence in the government’s ability to maintain stability, they become reluctant to expand operations, make long-term investments, or undertake new ventures. This reluctance stifles entrepreneurial activity and limits job opportunities, further straining the economy. Business confidence continues to slide in Pakistan amidst political and economic crises. According to a Gallup Pakistan survey of business owners in the first quarter of 2023, pessimism about the conditions and prospects of their businesses has risen among owners and last year’s political instability has carried over to combine with various economic crises and exacerbate business insecurity. “Businesses in Pakistan are faced with multiple calamities: decades-high inflation killing consumer purchasing power, absolute lack of stability in the political system causing overall despair not just in the business community but also their consumers and lastly no end in sight with respect to the looming threat of sovereign default,” it noted. Some 66pc of businesses perceive themselves facing bad or worse conditions.

Political instability often leads to financial volatility, including currency depreciation and increased borrowing costs. Uncertainty in the political landscape raises risk perceptions among lenders and investors, resulting in higher interest rates on loans. The increased cost of borrowing affects businesses and consumers alike, reducing their spending power and constraining economic activity.

Political instability can impede infrastructure development projects. Frequent changes in government can disrupt infrastructure plans, leading to project delays or cancellations. This not only hampers economic growth but also affects the quality of life for citizens who rely on robust infrastructure for transportation, energy, and public services.

Political instability exacerbates unemployment and poverty rates. When the economy faces uncertainties, businesses may downsize or postpone hiring, leading to job losses. The lack of employment opportunities increases poverty levels and social hardships. Additionally, political instability diverts government attention away from implementing effective poverty alleviation programs, further aggravating the socioeconomic challenges faced by vulnerable populations.

Political unrest can disrupt international trade relations. Instability can lead to policy inconsistencies and strained diplomatic ties, hampering trade agreements and cooperation with other nations. Exporters and importers may face hurdles in accessing foreign markets or encounter obstacles such as trade barriers and restrictions. Reduced international trade limits economic opportunities and curtails the potential for growth and prosperity.

A political instability can trigger a brain drain, where skilled professionals and talented individuals seek opportunities abroad due to the lack of stability and limited prospects at home. This drain of human capital deprives Pakistan of valuable expertise and intellectual contributions, hindering innovation, research, and technological advancements within the country.

Rising political instability in Pakistan has severe economic consequences, impeding foreign investment, slowing economic growth, reducing business confidence, and exacerbating unemployment and poverty. It is crucial for the government to prioritize political stability and implement measures to foster a favorable business environment. By promoting stability, consistency in policies, and attracting foreign investment, Pakistan can unlock its economic potential and pave the way for sustainable development.