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In recent months, I have engaged with leading economists, political analysts, and security experts on my program "Talking Politics," on Federal Post. The outcome of these discussions is bleak, with little hope for improvement if the status quo persists. Let us outline some indisputable facts before analyzing the potential outcomes.
Fact 1: Pakistan faces a severe economic crisis. One of the salient reasons for the perennial crisis are energy tariffs linked to the independent power producers (IPPs). The initial contracts with these companies were signed by Benazir Bhutto's government in 1994, followed by similar agreements under the PML-N government. These companies are registered abroad, and their contracts are protected by sovereign guarantees from the state of Pakistan.
According to these contracts, the government is obliged to pay 60% of their respective capacity charges, which consumers cover in their monthly bills, regardless of actual consumption. This results in escalating circular debt and ever-increasing electricity tariffs for domestic and commercial users. Consequently, the cost of production rises, making it difficult for Pakistani products to compete with those from other countries in the region, particularly China, in both domestic and foreign markets. This is straightforward economics, which everyone can comprehend.
Fact 2: The first thing to acknowledge is that the IMF does not come to us; we approach the IMF. This occurs when the gap between our national expenditure, particularly government spending, and our income widens significantly. Sources of national income include taxes, foreign remittances, and exports. When these sources fail to meet the expenditure, the government inevitably resorts to borrowing from domestic and foreign sources. This is where the IMF enters the picture. Loans are not inherently problematic; the inability to repay them is.
The money borrowed from the IMF and other sources is consumed without any repayment capacity. The donors know this and have demanded curtailing the size and extravagance of the government.
All businesses borrow money to enhance their capacity and repay the loans as planned. Therefore, in the context of Pakistan’s economic affairs, it is crucial to consider whether the borrowed money is spent in productive sectors or non-productive areas. Statistics indicate that Pakistan is currently borrowing to pay salaries and pensions. It becomes even more problematic when this borrowed money is spent on personal entertainment, buying new cars, bungalows, and furnishing them, among other expenses. In other words, the money borrowed from the IMF and other sources is consumed without any repayment capacity. The donors know this and have demanded curtailing the size and extravagance of the government.
Fact 3: The size of the government includes the number of ministries and state-owned enterprises (SOEs). The government’s footprint pertains to the areas under its regulatory jurisdiction. For example, starting a business requires navigating numerous departments for NOCs, permissions, and various clearances. This discourages businesses and the free flow of capital in the country. However, it benefits those in government and bureaucracy, enabling them to take kickbacks and bribes.
Estimates suggest that government control and influence over business ranges from 67% to 80% in Pakistan. One can imagine the actual state of affairs regarding the “ease of doing business” in this country – no Special Investment Facilitation Council (SIFC) can remedy this. The result is poor growth rate of the economy and unemployment.
Presently, the establishment faces a quandary—its favored political entities have faltered in revitalizing the economy, eroding public support while opposition parties gain traction.
Fact 4: Political instability remains another indisputable reality. One does not need profound wisdom to understand that politics is deeply intertwined with the economy. When the economy falters, political stability becomes an elusive dream. When people are put under immense pressure due to the economic situation, they start yearning for political change with a hope for betterment in their economic matters. There are reports of ordinary people selling their possessions to pay their electricity bills for June – and it is uncertain how they will manage to pay for July after another tariff increase. In such circumstances, political stability will remain a distant prospect.
Fact 5: Political parties are considered a national asset in any form of governance, be it a democracy, autocracy, or even in the unique hybrid system found in Pakistan. The military leadership, often referred to as "the establishment," holds significant influence over the country's affairs, whether overtly or covertly. It is acknowledged that Pakistan operates as a security state, a reality stemming from intricate reasons that warrant a separate discussion.
Despite the establishment's lack of affinity towards political parties, it unavoidably relies on them to uphold the functioning of the system. Critically, aligning with an unpopular party proves disadvantageous for the establishment, especially if it falters in managing the economy and overall administration. Presently, the establishment faces a quandary—its favored political entities have faltered in revitalizing the economy, eroding public support while opposition parties gain traction. The unresolved independent power producers (IPPs) issue exacerbates economic instability, with reports suggesting that the government intends to extend unfavorable contracts, prolonging financial turmoil for the foreseeable future. Consequently, political stability remains a distant dream.
Fact 6: Pakistan's ambiguous stance regarding the US and China underlies a complex diplomatic challenge. The country's foreign policy lacks a coherent strategy in balancing relations between these global powers, hindering its capacity to leverage opportunities presented by projects like the China-Pakistan Economic Corridor (CPEC) and access US-Western markets for exports.
Divisions within Islamabad, split between favoring either the US or China, perpetuate uncertainties. The detrimental repercussions of choosing one over the other are palpable; the US opposes Pakistan's deepening alliance with China through CPEC, aiming to constrain Chinese influence within Pakistan. Notably, the US and European markets serve as crucial trade partners for Pakistani exports and house a significant diaspora contributing remittances to Pakistan. Conversely, proponents of closer ties with China emphasize the enduring geographical proximity and existing economic engagements, signaling a reluctance to reverse course.
There is also the option of addressing electoral irregularities linked to forms 45-47, potentially bolstering PTI's position and reinstating Imran Khan, a move that could ease political tensions and sway public sentiment in the establishment's favor.
Considering the prevailing circumstances, what avenues are available to the establishment for course correction?
The establishment could sustain the incumbent government, prolonging economic challenges until public tolerance reaches a breaking point. Or, it could navigate an internal transition through a vote of no confidence, a prospect hinted by political figures like PTI’s Latif Khosa and President Zardari. While potentially deflecting blame onto other parties, this maneuver risks adverse repercussions for ordinary citizens and the establishment alike.
There is also the option of addressing electoral irregularities linked to forms 45-47, potentially bolstering PTI's position and reinstating Imran Khan, a move that could ease political tensions and sway public sentiment in the establishment's favor. However, this option is of a time-sensitive nature, contingent on preventing further economic deterioration post the renewal of IPP contracts under the government's current plan. So, if it has to be done, it should be by September. Anything after that will be too little too late!
The road ahead remains uncertain, with the possibility of escalating economic distress triggering public unrest, potentially compelling the establishment to intervene decisively, perhaps through imposing a state of emergency, or worse, martial law. Ensuing developments remain unpredictable, leaving the future shrouded in ambiguity. There is no real end game to this convoluted mess.