5/3/23, 5:15 PM Pakistan’s political crisis and the imperatives of economic reform | Middle East Institute

Pakistan’s political crisis and the

imperatives of economic reform
June 10, 2022
Arif Rafiq

Pakistan continues to reel from uncertainty as its political

transition — ill-timed during a period of domestic and
global economic tumult — has yet to consolidate.

Political volatility during the new governing coalition’s first

two months in power has led to policy paralysis. But this
paralysis has begun to ease as the army has signaled
support for the government and the International
Monetary Fund (IMF) continues to press for austerity
measures.

The IMF has made clear that it will only release the next $1 billion tranche from Pakistan’s $6 billion
Extended Fund Facility if Islamabad raises fuel and electricity prices and takes aggressive measures
to reduce the fiscal deficit. And the resumption of the IMF program is essential to unlocking assistance

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from other bilateral and multilateral partners and staving off a balance of payments crisis. As a result,
the coalition led by the Pakistan Muslim League (Nawaz) (PML-N) has finally started raising energy
prices.

These measures will ease Pakistan’s twin deficit challenge, involving both fiscal and current account
deficits, but they will also take a heavy toll on the average Pakistani. Inflation, which hit 13.8% in May,
could rise to around 20% and remain in the double digits into next year. This will be a painful summer
for Pakistanis as they're hit with a one-two punch of rising energy prices and electricity supply cuts.

Understandably, the PML-N would like other power brokers, including the army, to share the political
burden of economic reform. Prime Minister Shehbaz Sharif has called for the adoption of a Charter of
the Economy— a national consensus on economic reform.

The idea is sound, but politically infeasible right now. What is more important is for Pakistan’s current
federal and provincial governments to go beyond firefighting and push forward essential reforms —
including in agriculture, energy, and local governance — that are key to ensuring the country’s political
and economic stability and long-term growth prospects. Indeed, it is in their political interest to do so.

Pakistan’s angry middle class

Pakistan’s power elite must recognize that this is an exceptional moment in the country’s history — an
inflection point both politically and economically.

Former Pakistani Prime Minister Imran Khan, once backed by the powerful army and Inter-Services
Intelligence agency, is taking on the new government and the army leadership. Khan is not just
backed by what one might call the “anti-elite elite,” but also by much of the middle class.

Sixty-two percent of those with a full secondary education or higher said they were “angry” about
Khan’s ouster in an April survey conducted by Gallup Pakistan. Given widespread anti-U.S. sentiment,
Khan’s claims of being deposed by an American "regime change” campaign have resonated with this
demographic. But it’s not the only reason why they support him. Khan is also tapping into their
resentment of the status quo.

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In recent years, Pakistan’s middle class has been hit hard by unemployment and inflation. According
to the Pakistan Human Development Report 2020 from the United Nations Development Program
(UNDP), the real growth rate of per capita income for Pakistan’s middle class from the 2013-14 and
2018-19 fiscal years trailed that of the rest of the population (1.2% versus 1.8%). The unemployment
rate of those with a college degree or higher surged from less than 5% in 2007-08 to over 16% in
2018-19. Pakistan has a seen an expansion of higher education, but there remains a mismatch
between the skill sets and preferences of college graduates and the demands of employers. As the
current government reduces blanket subsidies, replacing them with targeted cash transfers for the
very poor, macroeconomic stabilization may largely come at the middle class’s expense. And that
could have political as well as geopolitical ramifications.

Khan has fused the issues of inflation and national sovereignty by alleging that the Sharif government
is afraid of incurring Washington’s wrath by following through on an agreement he claims to have
made with Moscow for importing discounted Russian oil. He notes that New Delhi has ramped up
imports of Russian oil and, as a result, has been able to avoid fuel price hikes.

A focused reform agenda

The big picture is this: Pakistan’s economy is working, but only for its elite. Sustained, rapid, and
equitable economic growth has remained elusive due to policy distortions that serve its civilian and
military elite.

The aforementioned UNDP report, produced by a team of Pakistani researchers led by Dr. Hafiz
Pasha, offers an exceptional deconstruction of Pakistan’s political economy. It assesses that in the
2017-18 fiscal year alone, Pakistan’s corporate, feudal, and military elite received the equivalent of
$13 billion in current dollar terms in “benefits and privileges” — roughly 7% of the country's GDP.

Reform is a long-term process. But Pakistan must make use of this “shock” period to redistribute
allocations toward social protection and incentivize greater productivity. Delay is not an option. In the
coming years, Pakistan’s challenges will only deepen due to climate change and rapid population
growth. Pakistan is already one of the world’s 10 most populous countries and it will remain among
those ranks as its population surges over the coming decades.

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Pakistan needs a path toward sustained, rapid, and equitable economic growth that incorporates its
fast-growing population into the labor market. But Pakistan is a net energy importer with a narrow
export base. Periods of economic expansion have been consumption-driven and import-dependent.
As a result, Pakistan’s economy overheats once growth passes the 5-6% range. It is vital that the
current government devote its energy and reallocate resources toward facilitating export growth,
improving agricultural productivity, and addressing the domestic fuel production deficit.

Pakistan’s agricultural sector has grown at an average rate of less than 2% since the 2014-15 fiscal
year. Declining agricultural productivity, a rapidly growing population, increasing water stress, and the
worsening effects of climate change are all exacerbating an already-serious food security challenge.
The agricultural industry also contributes to the massive electric power industry arrears. Pakistan
provides hundreds of millions of dollars in annual electric power subsidies for agricultural tube wells.
And edible oils are among Pakistan’s top imports.

Policy experiments in Pakistan in recent years have identified solutions to these challenges. For
example, conditioning the provision of low-interest loans for solar tube well installation on the use of
high-efficiency irrigation systems or allowing net-metering can promote water conservation, lower input
costs, and help curtail power sector debt.

Pakistan’s federal and provincial governments should also incentivize innovation in the private sector
seed development industry and the local production of edible oils.

With domestic gas and oil reserves in decline, Pakistan’s vulnerability to surges in global fuel prices
will grow. It needs to ramp up domestic energy exploration, promote renewables, and assess the
feasibility of green hydrogen and ammonia production, especially in southern Balochistan.

Finally, Pakistan must strengthen the “last mile” of governance. Pakistani politicians often hail China’s
model of governance, but few recognize the role of decentralization of power and empowerment of
local governments in China’s growth story.

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To their credit, Pakistan’s politicians banded together to devolve power to the provinces under the 18th
Amendment. Yet most have been averse to devolving power down to elected local bodies, with some
provincial governments repeatedly delaying local elections. That has left large metropolises like
Karachi orphaned when it comes to local governance and stunts their ability to grow and develop
independent sources of revenue, including through the issuance of bonds.

Political stability in Pakistan cannot be ensured simply through intra-elite deals made in Islamabad. It
also requires improving the last mile of governance and the responsiveness of the state to the needs
of the public.

Arif Rafiq is the president of Vizier Consulting LLC, a political risk advisory company focused on the
Middle East and South Asia, and a non-resident scholar at the Middle East Institute (MEI).

Photo by AAMIR QURESHI/AFP via Getty Images

The Middle East Institute (MEI) is an independent, non-partisan, non-for-profit, educational

organization. It does not engage in advocacy and its scholars’ opinions are their own. MEI
welcomes financial donations, but retains sole editorial control over its work and its
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