A problem can also be a chance
I hope that the position Pakistan is in right now will be as bad as it gets and won’t get any worse. We were already facing a crushing economic crisis, a political crisis that had never happened before, a constitutional crisis, growing terrorism, and a crisis of trust, all while the country was recovering from the worst flood in its history.
The organizations of the country are split. Parliament and the executive are publicly arguing about what the Supreme Court can and can’t do. In Pakistan’s parliamentary system, the idea of separation of powers and the freedom of the judiciary are being questioned by overruling clauses in hastily passed laws. There are reports of disagreements in institutions that are seen as important to the state.
In such a dangerous situation, Pakistan’s most popular leader, former Prime Minister Imran Khan, was illegally arrested because of his political views. After the arrest, more people than ever before went out into the streets. The rupee lost more than 3.5% of its value in 48 hours, and the stock market crashed. Bloomberg said that this will make the IMF bailout plan take even longer, which will increase the chance of a sovereign default.
Let’s remember that Pakistan’s economy has never been in such bad shape. The situation is bad for everyone, but especially for the poor and the middle class. The forecast for Pakistan’s GDP growth rate has already been cut from 4% to 0.4%, and it may even be negative by the end of the fiscal year, which would severely limit economic and job possibilities.
The government doesn’t even have enough money to pay its own debt. It is thought that the number of poor people has risen to 40%, which may only be the tip of the iceberg. The current CPI of 36.4% is the highest in 59 years, and the weekly Sensitive Price Indicator shows a year-over-year rise of 48.35%. In April, food inflation was 46.8% in urban areas and 52.2% in rural areas.
Since April 2022, the rupee has lost 57% of its value, raw material import restrictions have been put in place, and production costs have gone up by a lot. All of these things have been terrible for businesses. Every industry is in a crisis. There is a crisis in the auto industry, the cement industry, the digital industry, the airline industry, the steel industry, the pharmaceutical industry, the cloth industry, and so on. In the first eight months of this fiscal year, large-scale production has shrunk by 5.56 percent. Just in the textile business, 45 million families have been affected by the loss of 7 million jobs. A recent Gallup poll found that one in five people said they or someone in their household had lost their job.
Businesses have also had a harder time getting credit because local businesses’ loans from commercial banks have been pushed out by government borrowing. This is because foreign borrowing has been slowed down since Moody’s credit rating dropped from Caa1 to Caa3. The bad things that happen to an industry always hurt low-income workers much more quickly than they hurt profits, and more job losses may be on the way.
Pakistan is still close to going bankrupt, and there is no IMF deal in sight. Moody’s says that Pakistan could go bankrupt without a bailout from the IMF. This is because Pakistan’s financing choices after June are unclear, and the State Bank of Pakistan only has $4.46 billion in reserves, which is only enough to cover a month’s worth of imports.
Even though these worries have been around for months, there isn’t much talk about this possible disaster in the mainstream media. People in the country who used to step in when the economy did poorly are now doing nothing about it for unknown reasons.
If Pakistan didn’t pay its debts, it would have terrible effects on the economy and on everyone, but the poor would be hurt the most. If the government went into sovereign default, it would be harder for it to get new commercial loans. There would be a high chance of bank runs and stock market crashes. The rupee would lose a lot more value, and less money coming in from the U.S. would mean that imports would have to be cut back. This would hurt local manufacturing, which relies heavily on foreign materials, even more. Pakistan would have hyperinflation, and the loss of factory jobs would cause the economy to shrink, which would lead to a lot of people losing their jobs. This means that the poor and middle class would be buried alive.
Sri Lanka, which is not too far away, is still dealing with the effects of its sovereign failure from last year. After putting off paying back $7 billion in foreign loans, the country’s economy went into a free fall. Fuel, cooking gas, drugs, and other important things were hard to come by. This led to a problem in Sri Lanka’s government. When a sovereign failure happens during a political crisis, it can make things a lot worse.
Experiences from other countries show that the effects of a sovereign default can be felt even decades later. Economic output is known to drop by about 20% compared to the counterfactual, the number of people living in poverty is 30% higher than it was before the crisis, health outcomes are much worse, and life expectancy drops by 1.5%.
The things that happened in the last 72 hours after Imran Khan was arrested did not just happen out of nowhere. They are the result of years of corruption and taking over of the government by Pakistan’s elite organizations, which are now at odds with the country’s people. If things got worse, it would be terrible. Even though there was a wheat bumper crop, the situation could get worse if there is a wheat crisis because of bad government, which is shown by the desire to hoard. People are already out on the streets in a country that is very split down the middle. Adding hunger to this mix could be like putting fuel on a fire that can’t be put out.
In this bad situation, we need to be told that every cloud has a silver lining. So, this problem could also be a chance to do something.
Even though I can name a number of plans for economic change, none of them will work in the current situation of extreme polarization, conflict, and uncertainty unless the problems that led to this situation are fixed. So, the most important thing is to stop all this chaos. Some state institutions do have the power to fix the problem, and they need to do the right thing. The will of the people must be honored, which is why there must be fair and open elections.
Along with elections, we need deep-seated changes to institutions to make democracy work in its truest form. Democracy is not just about the vote of the people. It is a set of institutional processes and constitutional tools that make sure there are checks and balances and that everyone can see what is going on. In the meantime, there are some things that need to be taken care of right away. One of them is the IMF program that is stuck and the budgeting that comes after it. The other is the pressing need to use our diplomatic capital at the upcoming G7 meeting in Japan to make a case for debt relief, since Pakistan’s debt is now too high for the country to pay back.
If the goal is to turn this problem into a chance, every second counts. This will require a lot of honest hard work. There is no room in this scenario for the constant use of rhetoric that makes people angry.