Any regime, big or small, any economy open or closed, will always be subject to the ravages of modern economics. No country’s financial pinions are unfettered and forever remain exposed to some sort of risk especially when the global financial structure is beginning to become increasingly integrated.
At times when a country is struggling, international financial institutions or other nations come around to bail them out. However, the circumstances of Pakistan are such that it is completely on its own with a negligible avenue for external aid. A terribly unpredictable political climate and lack of transparency has driven the economy into hyper-stagflation. The implications of this species of stagflation is that while there is a perniciously high degree of inflation, economic growth remains extraordinarily low. It is well known that standard levels of inflation will always be exhibited by an expanding and healthy economy, however, it is imperative that inflation be accompanied by economic growth. In the previous year Pakistan was overwhelmed by inflation, which at times reached even 40% while GPD growth had slowed to a meagre 0.5%. The situation is so exigent that the country has had to finance even its revenue expenditure through debt financing.
No financial institution would be induced to assist Pakistan and such institutions are usually the first to abandon a sinking ship since the basic return on investment in such a scenario is hardly worth the risk. The case in point is dissimilar to those of developed nations such as Greece and Iceland since their economies have been salvaged through assistance from the EU and the Paris Club. Pakistan is not a member of the EU, the Paris Club or the OECD, leaving it to fight a lone battle. While the IMF, Saudi Arabia, UAE and China have moved to provide some cover, the funds with Pakistan are not sufficient to even repay the yearly interest amount on the debt it owes.
Furthermore, the IMF is hesitant to grant loans in perpetuity and seeing that it is doubtful the Asian Development Bank would not mirror the policy of the IMF. This kind of lack of confidence portrayed by major international financial institutions would logically cause a major loss in confidence, which would, in turn, cause flight of capital throwing the economy in a further downward spiral. Even Saudi Arabia and UAE, which have historically been mighty helpful to Pakistan and Egypt have refused to provide grants. They have limited their funding to the amount, which Pakistan needs to fulfil the reserve requirements set by the IMF and World Bank so it can secure loans from those avenues.
Consequently, domestic investment as well as domestic savings had suffered. Increasing loss of faith in the country’s economic stability and potential. Even remittances from Pakistanis residing overseas had decreased significantly, leaving precious foreign exchange dwindling faster than ever.
Yearly investments, in Pakistan, by foreign companies do not even amount to a billion dollars. Even China is not keen to invest further in its flagship program CPEC, ‘China Pakistan Economic Corridor’.
With a declining economy, it is possible multinational companies would wind up their operations in the country, just as Toyota has done just a few months ago. In fact, automobile production in Pakistan has come to a complete standstill. Other multinational companies like Siemens, Procter & Gamble, IBM, Oracle, FedEx, Marriot Hotels, Aramco, KFC and 3M are planning either to relocate to other countries or simply exit.
Until high inflationary rates persist, domestic savings would also decrease since the general populace is left with hardly any money to spare. High inflation also implies out of control bank lending rates, which leaves even lesser money in circulation.
The country would not just suffer on the domestic front but also with regard to imports. The scourge of hyper-stagflation would lead to a devaluation of the domestic currency, leaving it unable to compete with other currencies, which would cause imports to suffer massively.
The most pressing article of import is oil and without oil Pakistan would be unable to produce a large portion of its electricity since it still relies primarily on oil furnaces to do so. The absence of power would immediately impact major industries and instruments of production. With no electricity, even agriculture production in rural areas would diminish greatly. Failure to import food grains, medicines and other similar essential commodities could even force a famine like situation.
Ordinarily, if any currency depreciates, it bodes well for exports in the short term at least as exports become more affordable for the consumers. However, if there is no surplus being produced in Pakistan, there remains little scope to even rely on exports to revive a faltering economy. For instance, until very recently Pakistan used to be a major exporter of high grade cotton produce and now it must import the same. Any surplus that would be produced would be usurped by those in power including the Army, politicians, elites and bureaucrats further compounding the issue for most of the population.
If both import and export were to suffer almost irreparable damage, ports would be relegated to glorified marinas simply present as a spot to dock vessels without any real exchange of good taking place. Even the Mohammad Bin Qasim port of Karachi, the vanguard of Pakistan’s foreign trade, could be rendered impotent and defunct.
Fraught by dangers on all fiscal and monetary fronts including flight of capital, even the Karachi Stock Exchange would not remain unaffected. The general trend would undoubtedly be a bearish market and equity values might plunge to negligible denominations. The bond market would collapse since there is no faith in repayment of debt from either private or public enterprises and even sovereign guarantee would be meaningless.
The list of potential adverse impacts of economic failure is almost endless, however the most concerning, arguably improbable, consequence of said failure is civil war. While improbable, it is not impossible that the upper echelons of the army and politicians in power may face open and violent rebellion by the people of the nation. Uprisings in Pakistan Occupied Kashmir and Gilgit-Baltistan, in fact, are on the rise. Attacks by the TTP, ‘Tehrik-e-Taliban Pakistan and violent separatist activities of the BLA, ‘Balochistan Liberation Army’ are becoming daily occurrences, which again attest to the undertones of potential internal unrest.
Economics and statecraft are bound to one another by the strings of fate and when times are good they serve each other exceptionally well and in times of emergency they are the worst of bedmates.
Politics has always been a slave to opportunism and will continue to remain so.
To make things worse, as is foreshadowed by the observations made earlier, the very things such as foreign aid and exports that could help the nation recover are themselves being razed by the unforgiving flames of hyper-stagflation. However, one can hope that Pakistan and its resilient people rise, like a Phoenix from the ashes, to meet this seemingly insurmountable challenge.
The writer is a Lawyer by profession. Views expressed are personal.
