Pakistan has reached an inflection point

The holy festival of Eid-ul-Fitr has dawned in Pakistan, marking the end of Ramadan. Celebrations were unusually muted. The month of Ramadan has been harrowing for a large swathe of Pakistan’s populace. All through the month, through the day-long fasts, crowds thronged outside the free food distribution centres across the country, waiting for bags of flour. Sometimes they waited days. Fights were commonplace. Often, the very young or the elderly were injured or even killed in the stampedes. There are far too many of these cases to recount.

Food inflation is at a record high of 47 per cent; overall inflation hovered around the 35 per cent mark through March and April. Earlier this month the country’s central bank raised interest rates to 21 per cent. A country that not too long ago exported wheat is now an importer thanks to last year’s floods. Fuel prices have soared to unimaginable highs. Industry chiefs have expressed worry that curbs on imports and the withdrawal of subsidies on electricity – necessitated by Pakistan’s dwindling foreign exchange reserves and conditions demanded by the IMF before a rescue package can be implemented – are threatening to bring industrial production to a halt. Pakistan seems gripped by a never-ending poly-crisis across all possible dimensions: social, economic, and political.

Meanwhile, the Pakistani state is incapable of developing and delivering policies necessary for political and economic change. ‘It seems that Pakistan’s political class may not have fully grasped the fundamental changes needed to spur economic progress. A dominant government presence in the economy, a plethora of state-owned entities, and the displacement of private investment imply a possible absence of determination to execute the essential changes needed to stimulate economic growth,’ says Dr. Muhammad Zeshan, a research fellow at the Pakistan Institute of Development Economics.

Pakistan’s negotiations with the IMF over support have been continuing for months and are perennially described as ‘ongoing’. The IMF has put down conditions that have only been partially met since they’re not altogether politically palatable. These conditions mean hardship in the near term while the economy is restructured. Meanwhile, as part of the reassurance sought by the IMF, US$ 3 billion has been raised in loans from China, the UAE, and Saudi Arabia, boosting foreign exchange reserves. Yet, Pakistan’s reserves at around US$ 4.4 billion are scarcely enough to meet a month’s needs. Last April, the IMF warned of ‘de-industrialization’ and pointed out that the country’s exports could not compete in today’s global markets.

China has assured Pakistan that some of its immediately accruing loan repayments can be rolled over. But some China-run companies in Pakistan, notably the independent power plants (IPPs) built as a part of the China-Pakistan Economic Corridor (CPEC) have begun to complain. Last month, China’s Charge d’ Affaires, Pang Chunxue, raised her concerns about overdue payments of US$ 1.5 billion to the plants.

In the nation’s capital, Islamabad, the shenanigans of the political class have continued. Imran Khan, former Prime Minister and the chief of the Pakistan Tehreek-e-Insaaf (PTI) party, argues that the ruling Shehbaz Sharif-led Pakistan Muslim League (PML) and Pakistan People’s Party (PPP) coalition have no clue about how the economic crisis can be resolved. The coalition overthrew Khan’s government last year with some tacit help from the army, which stands constantly accused of ‘political engineering’ and has ruled the country for nearly half its existence. Khan had been threatened with arrest earlier this year – an episode that led to a dramatic standoff between him and the police.

When Sharif postponed elections to the provincial assemblies in Pakistan’s Punjab province last month, Khan went to the country’s Supreme Court calling for early elections. His PTI had dissolved assemblies in Punjab and Khyber Pakhtunkhwa earlier this year, in the hope that it would pressure the Sharif government into holding early elections across the country.

The ruling politicians’ response to Khan’s lawsuit was quite predictable. The defence ministry submitted a report to the Supreme Court stating that it feared that terrorism in Punjab and Khyber Pakhtunkhwa could spike if polls were held there before other states. The report argued that terrorism would aggravate the chaos and worsen the country’s polarisation. 

The defence ministry’s report pointed out that attacks against the country’s security forces by militant organisations in Baluchistan could worsen. The report highlighted that terrorist sleeper cells are active in Punjab, and especially in Islamabad. It also feared that militants from the Islamic State and other terrorist outfits were coming into Pakistan from Syria and Yemen.

The threat of terrorism is indeed severe in Pakistan. Terrorist groups like the Tehreek-e-Taliban Pakistan (TTP), and the Islamic State-Khorasan (IS-K) which sought to bring about a Sharia-run state in Pakistan, have been causing mayhem. Attacks on the army and the police in Khyber Pakhtunkhwa, the Federally Administered Tribal Areas, and even Lahore, in Punjab, are now frequent. Security forces are regularly killed in bomb blasts. The Baluchistan province is a hotbed of both terrorism and an independence movement. China’s installations in Baluchistan are frequently targeted by those crying out for Baluchistan’s independence from Pakistan.

The defence ministry’s report also highlighted constant challenges along Pakistan’s border with Iran, stating that there were eight cross-border incidents this year where nine Pakistani soldiers were killed. The report also argued that elections in Punjab could worsen social and ethnic fault lines and could encourage India to take advantage of the situation. The threat of an all-out war with India was raised repeatedly by the report.

Ironically, the report exposed the state’s incapacity to manage the poly-crisis.

The state is meant to deliver human security and economic growth, maintain institutions, extract natural resources, deliver the spoils equitably and deliver welfare. In Pakistan, the state has reached a point where it can’t do this anymore – not within the framework of the ensuing chaos and the political system as it stands. An indication of this is the state’s inability to garner tax revenues. Pakistan’s tax revenue as a percentage of GDP was just 5.6 per cent last December, according to CEIC data. Its all-time peak was six per cent in 2015.

Pervez Hoodbhoy, a Pakistani nuclear physicist and national security analyst, argues, ‘So far one sees just business as usual; sovereign default has taken so long in coming that the sense of urgency is dissipating. The phrase ‘elite capture’ is all over the place but thanks to unplugged loopholes the super-rich and the rich still don’t pay their taxes, real estate is where savings continue to be parked, and wasteful luxury products are plentifully available although devaluation has driven up prices.’

The IMF would like to see the economy completely restructured with the state allowing greater private sector participation, the Pakistani rupee decontrolled, and a major overhaul of industry. But that looks hard to do. ‘The government footprint is 67 per cent of  the total economy, including 200 State-Owned Entities (SOEs), some listed publicly, influencing markets through tax regime changes, regulations, and permissions. The government is substantially involved in agriculture, construction, finance and banking, electricity and gas, wholesale, and retail markets. General government expenditure in Pakistan is 22 per cent of total GDP,’ Zeshan points out, arguing that the massive size of the state crowds out private economic incentives and investment.

It also creates groups that have strong vested interests in the status quo. ‘The country’s elites are primarily interested in prolonging their reign or sticking to power using legal or illegal means. They lack the political will to take painful and unpopular decisions. They have their vested interests,’ points out Professor Murad Ali, Head of the Department of Political Science at the University of Malakand. The elites he refers to are the ruling class and the country’s army.

The army has an inordinate stake in Pakistan’s industry. It controls nearly a quarter of the country’s industrial output through various foundations, ostensibly created for charitable purposes, which means they pay little or no tax. ‘A playing field tilted to suit powerful interest groups has reduced Pakistan’s industrial growth to a fraction of what it could have been. Which other country has military brands of fertiliser, cement, goods transport, gated housing schemes, airlines, and banks? These tax-dodging enterprises benefit from subsidies, grab key infrastructural assets, and drive out competitors,’ says Hoodbhoy.

Pakistan has reached an inflection point. Its direction as a nation-state, and its ability to withstand as a nation lies in the hands of its political class. Based on history, there’s little ground for much optimism.