At the turn of the century, Pakistan had the highest GDP per capita when

compared with India, Bangladesh, and Vietnam. Twenty years later, it is

at the bottom of the group. Political upheaval, a violent insurgency fed by
the war in Afghanistan, and the inability of successive governments to
carry out reforms are to blame for this decline. Today, a polarized
political environment and elite intrigue among civilian, judicial, and
military institutions has made sustainable economic growth and reforms
that much more unlikely. The COVID-19 pandemic has further
sharpened the challenge. Groceries are delivered ahead of Ramadan in Islamabad,
Pakistan, by Rizq, a charity organization, on April 24, 2020. The COVID-19 pandemic has
exacerbated Pakistan’s economic challenges. (Saiyna Bashir/The New York Times)

Two Years of Crises for Khan

When Pakistani Prime Minister Imran Khan entered
office in August 2018, Pakistan’s economy was
facing twin deficits—the country’s foreign exchange
reserve was running low and its fiscal deficit had
reached breaking point. A return to the International
Monetary Fund (IMF), along with bilateral support
from countries like China and Saudi Arabia, was
necessary to stabilize the economy. Within a few
months of coming to power, Khan, a charismatic
populist who had derided Pakistan’s addiction to debt,
famously saying that he would rather commit suicide
than beg for money, had to reverse course and seek
international help.
The economic upheaval in those early months of
Khan’s government led to declining economic
growth, devaluation of the currency, double-digit
inflation, and sky-high interest rates. The
government’s initial attempts to fend off an IMF
bailout did not help. Asad Umar resigned from the job
of finance minister in April 2019 after losing Khan’s
trust. His replacement, the technocrat Abdul Hafeez
Sheikh, who also served as finance minister in the
Pakistan People’s Party (PPP)-led government from
2010 to 2013, was brought in to negotiate and execute
the IMF bailout.
Less than a year later, the COVID-19 pandemic dealt
a body blow to Pakistan’s economy. Lockdowns in
response to the health crisis turned economic growth
negative, a first in decades. The Khan
government sought debt relief and secured an
additional $1.3 billion from the IMF. The government
rolled out a Rs. 1.2 trillion stimulus package. Cash
transfer programs were expanded to protect the most
vulnerable segments of society. While a significant
portion of the total stimulus included already-
budgeted spending, and more than Rs. 500 billion
remained unutilized, the government’s prompt
response eased the pain, particularly for the most
vulnerable. Additionally, the State Bank of
Pakistan sharply cut interest rates and provided
monetary stimulus to businesses.
The biggest relief, however, was provided by the
state’s ability to effectively slow down the spread of
the coronavirus. Doomsday scenarios did not
materialize and despite the political bickering,
particularly between Khan’s Pakistan Tehreek-e-Insaf
(PTI) party-led federal government and the opposition
PPP-led Sindh government, effective cooperation and
collaboration through the National Command and
Operations Centre flattened the curve, slowing the
spread of the coronavirus. As a result, business
confidence has returned and economic activity is
slowly picking up.
These, however, are only early signs of recovery for
an economy that grew by 1.9 percent in 2019 and
shrank by 0.4 percent in 2020. While some would like
to argue that a V-shaped recovery is taking hold in
Pakistan, the reality is that while the economy has
stabilized, it has a long and tortuous path toward
achieving sustainable growth.
Economy Continues to Face
Headwinds
Inflation is still the biggest issue facing the
government today. Headline inflation climbed to
9 percent in September 2020 and double-digit food
inflation continues to erode citizens’ purchasing
power. This has worsened the situation for millions of
households who have seen a decline in their
purchasing power since 2016, according to data from
the Pakistan Bureau of Statistics. In its most
recent monetary policy statement, the State Bank of
Pakistan raised its concerns as well, warning that
while “core inflation has been relatively stable,” food
inflation remains a risk, “especially in the wake of
recent flood-related damages and potential locust
attacks.” With households spending a larger share of
their incomes on food—an emerging wheat crisis is
compounding problems—consumption spending on
other items will remain subdued, leading to a lack of
economic growth in a country where consumption
spending drives more than 80 percent of the economy.
At the same time, a weak economic recovery around
the world, particularly in the European Union and the
United States, will subdue demand for Pakistan’s
exports. After declining by 20 percent on a year-on-
year basis in August, exports grew by 6 percent in
September. The outlook, however, remains bleak due
to a weak global economic recovery. The issue has
been further exacerbated by chronic structural
inefficiencies — exporters who received additional
orders in recent weeks are facing gas and cotton
shortages. This means export growth is unlikely to
drive a significant uptick in economic activity and
employment. As a result, the structural issue with
Pakistan’s economy, i.e., its inability to earn
sufficient foreign income to pay for its import and
debt servicing needs, remains its Achilles’ heel.
The government has argued that these issues have
abated as the economy has run a current account
surplus in the last few months. While this surplus
most definitely eases balance of payments pressures,
the fact is that this decline has been achieved largely
due to a drop in machinery imports and energy prices.
Additionally, remittance flows have increased, but
experts argue that this uptick will be short-lived due
to diaspora job losses, particularly in countries like
Saudi Arabia and the United Arab Emirates. The State
Bank of Pakistan, however, is less pessimistic in its
outlook, arguing that Pakistan’s external sector will
remain stable during the current fiscal year.
While external sector stability is critical for a country
like Pakistan, which is no stranger to balance of
payments crises, the fact remains that sustainable
growth requires more than a stable current account
balance. One measure to better predict the economic
outlook is private sector credit growth. If businesses
start borrowing more money this would indicate an
expanding economy, particularly if the credit is not
being used to meet rising inventory costs due to
inflation. Data shows that private sector credit
remains subdued, with total credit hovering around
June 2019 levels. The State Bank of Pakistan is also
warning that “the economic recovery remains
uneven” and that “growth will recover to slightly over
2 percent” in the current fiscal year. For a country that
needs to generate more than 1.3 million jobs a year,
an economy that grows at 2 percent a year is no cause
for celebration.
Another major issue that continues to plague Pakistan
is its yawning fiscal deficit. Despite an uptick in
economic activity, tax collection in the first two
months of this fiscal year have shown a meager
growth of 1.8 percent. The State Bank of Pakistan has
been cautious, noting that “risks remain around
achieving the revenue target” and “that the pre-
pandemic path of fiscal consolidation” is expected to
resume soon. This means that the government must
keep its spending in check and raise revenue during a
period in which real incomes are declining and
business activity remains subdued. In this scenario, it
is likely that Khan’s finance team decides to continue
borrowing at an aggressive rate to plug its fiscal holes
and pay for its growing debt servicing, defense, and
pension spending needs.
Reforms Are the Only Path
Forward
Like in many other parts of the world, Pakistan, too,
has become an increasingly polarized country. The
government and its supporters are sure to point to a
current account surplus and positive growth as
evidence that the economy is on the right track. Its
critics will point to double-digit food inflation and
rising debt as evidence that Khan has failed to deliver.
But beyond the political rhetoric, the fact remains that
Pakistan’s economy is hamstrung by the same issues
that led to the crisis Khan inherited in 2018. Without
meaningful reforms that boost economic
competitiveness, direct investment toward productive
sectors that promote exports and a sustained effort to
end the regulatory quagmire that incentivizes rent-
seeking, Pakistan’s economy will continue to grow at
an anemic rate.
The journey must begin with energy sector
reforms. Burgeoning energy sector debt and market
inefficiencies are causing frequent interruptions in
electricity and gas supplies to businesses and
households. In September, Khan warned of
“imminent” gas shortages. No country can grow
sustainably and meet its full potential with an energy
sector plagued by debt, lack of investments and a
growing dependency on imports. The end result is
that the economy suffers due to an unreliable and
expensive supply of power.
There is broad consensus among economic experts
that these reforms need to be pushed through with
urgency. However, both civilian and military rulers
have failed to usher them in. Successive governments
in Pakistan have spent the majority of their term
trying to consolidate power, which means that they do
not have the will to shake things up. Leaders fear that
if they try to change the status quo, then the
beneficiaries of the existing rent-seeking economy,
both within and outside the government, will weaken
their hold on power. As Mosharraf Zaidi argued in a
recent article, political leaders in Pakistan “do not
have the will or capability to change even the little
things to solve the little problems.”
The ultimate goal for Pakistan’s policymakers must
be to meet the ambitions and aspirations of its youth.
To do that, the country must generate millions of
well-paying jobs that expand citizens’ purchasing
power. The way things stand, Pakistanis are facing a
sustained decline in their purchasing power, chronic
power shortages, and a dearth of well-paying jobs.
Successive governments’ borrowing has burdened
these households with more debt that is being used
not to add to the productive capacity of the economy,
but to just make ends meet. This is no longer
sustainable and without serious reforms, Pakistan
risks turning its demographic dividend into a
demographic disaster.
Weak economic growth and a lack of jobs create
conditions that are ripe for instability. It is, therefore,
important for Khan’s government to focus its efforts
on restoring growth and setting Pakistan on the path
to sustainable economic development.