Law students and law graduates in Pakistan are reporting for JURIST on events in that country impacting its legal system. Rabia Shuja holds an LLM in International Human Rights Law from Griffith College, Dublin and is Chief Correspondent for JURIST in Pakistan. She reports from Islamabad.
Every few years, Pakistan is hit with an economic crisis. As it lies on the brink, it manages to narrowly escape, only for it to teeter closer to the edge the next time. However, years of simply surviving without any meaningful attempt at growth and stability have resulted in what is perhaps Pakistan’s biggest economic challenge yet.
The country has faced its highest inflation rate in history, its forex reserves have plummeted to a dangerously low level of $2.9 billion for the first time in nine years, and the rupee has begun to depreciate – with the US dollar reaching a record high of 275 rupees in the first week of February. The economic maelstrom has caused mass unemployment, severe food inflation, exorbitant utility bills, and fuel price hikes. With fewer jobs and extreme inflation – the people of Pakistan are hanging on by a thread. The dire circumstances are a result of years of poor governance and the politicization of the economy. International factors such as the Russian invasion of Ukraine have only deepened the country’s economic turmoil.
To avert default, it is crucial for Pakistan to secure the stalled $1.1 billion International Monetary Fund (IMF) tranche, which was part of a $6.5 billion bailout agreed to in 2019. The programme was initially suspended due to the covid pandemic and restarted in November of 2020. In March of 2021, upon Pakistan meeting the conditions put forth by the IMF, a tranche of $500 million was released. However, the moment the funds arrived, Imran Khan’s government reneged on its commitments to the IMF, with Shaukat Tarin, who was Finance Minister at the time, claiming that the Fund’s conditions were incredibly rigid.
Attempts were made to renegotiate the programme, with Tarin claiming that he could meet the revenue target put forth by the IMF by taxing retailers through point-of-sale machines. However by November of 2021, Tarin’s measures were failing. With Forex reserves rapidly depleting and economic pressures mounting, the government acknowledged that its attempt at renegotiation had failed. In January of 2022, the government amended the State Bank Act, and granted the central bank a more autonomous role – one of the key conditions of the IMF. In response, Pakistan’s case was brought forth to the Executive Board for consideration. However once the IMF released a $1 billion tranche the next month, the government reneged on its commitments again, announcing a substantial subsidy on petrol and diesel, and an amnesty scheme, despite categorically stating that they would refrain from doing so.
In 2022, following the vote of no confidence that ousted Imran Khan, the new coalition government appointed Miftah Ismail as Finance Minister. In April of that year, when the IMF team met with Ismail, they asserted that Pakistan must reverse unfunded subsidies ahead of their talks to resume their 7th review. The new government complied with the terms, and imposed the sharpest fuel price hike in the country’s history. By May, the unfunded subsidies’ started to be rolled back. Ismail managed to save the country from potential default. He also advocated for structural reforms and pushed for the end of the fuel subsidies implemented by the previous government. However, following the release of the funds, the country reneged on its commitments for the third time.
Miftah Ismail resigned as the Finance Minister, and was replaced with Ishaq Dar, a long-time member of PML-N, three-time Minister of Finance, and father-in-law to Nawaz Sharif’s daughter. Ismail’s resignation came after months of speculation that the PML-N, including party leader Nawaz Sharif, were not happy with Ismail’s economic policies, especially regarding the fuel price hikes. Prime Minister Shehbaz Sharif was also quite reluctant to put an end to fuel subsidies. PML-N Vice President Maryam Nawaz tweeted that she did not condone the decision to hike petrol and electricity prices, claiming that she stood with the people of Pakistan. Dar also publicly criticized Ismail on numerous occasions, despite belonging to the same party. He claimed that Ismail failed in his negotiations with the IMF, as the conditions put forward were excessively stringent, and that the price hikes and exchange rate adjustments were draining the party’s political capital. Despite Miftah’s best efforts to steer the country in the right direction, he was ultimately undermined by his own party.
Dar, a symbol of the status quo, brought back his outdated economic policies as Finance Minister. In his first speech, he stated that currency stability was his top priority and announced that the rupee needs to be below the Rs200 mark to the dollar. However, as time went by, it became abundantly clear that this would not be possible. Instead of reevaluating his approach, Dar doubled down on his policy of artificially propping up the Rupee, and fixed the interband rate of the dollar at Rs221. He also announced a reduction in petrol and diesel prices, which further exacerbated the issue. In December, amidst the delay in the ninth review between the IMF and Islamabad, Dar boldly asserted that he would not bow down to the IMF. He stated that “I do not care if they come, I don’t have to plead before them. I have to look at Pakistan’s interest first.” Uzair Younus, an expert in political and economic development, stated that by appointing Dar as Finance Minister the government “… have imposed an irrational actor on Pakistan, whose actions are wreaking havoc on Pakistan’s battered economy.” Former Finance Minister, Miftah Ismail was also critical of Dar’s policy, claiming it was ‘madness’ to artificially control the value of the Rupee against the US dollar. Experts claimed that Dar’s policy was extremely short sighted and would only create more distortions in the economy and further aggravate structural imbalances.
The policy choices made by Dar and the coalition government are neither surprising nor novel. They are indicative of a political culture that focuses on short-term fixes and methods of re-election over structural reform and long-term stability.
Another symptom of this culture may be seen in how former Prime Minister Imran Khan managed to capitalize upon the balance of payment crisis. Since his removal from office, Khan’s popularity has only surged. Upon returning to the opposition, Khan held a series of long marches in an attempt to intimidate the government, peddled conspiracy theories regarding his ouster, and once the economy started spiraling, took advantage of the people’s economic woes. He blamed Sharif’s government for the crisis, ignoring the fact that PTI left a deeply damaged economy to the coalition government.
As economic pressures mounted, Khan rallied his supporters to stage nation-wide protests against rising inflation, stating that they would not leave until ‘the coalition government was sent home.’ In January of 2023, he continued to exert pressure on the government, and PTI dissolved its assemblies in the provinces of Punjab and Khyber Pakhtunkhwa, prompting fresh elections to be held within 90 days. Since the two provinces account for nearly 70 percent of Pakistan’s population, Khan believed that fresh elections would increase his party’s hold.
With Khan’s ever-growing popularity and a population struggling to buy basic necessities, the government refused to follow the IMF conditions and implement austerity measures for fear of losing political capital. This was seen by many as a political strategy to survive until the general elections. Saddam Hussein, a research economist, asserted: “Politics and economics must be delinked if we are to take on the path of economic growth and development in the real sense of the word.”
As the situation deteriorated and Pakistan hurtled towards the point of no return, the government finally began acquiescing to IMF conditions and held talks with the Fund in hopes of unlocking the $1.1 billion tranche. However, as Pakistan has reneged on its commitments three times in less than two years, it is clear that a weary IMF came to the table. Pakistan and the IMF delegation held talks in Islamabad from January 31st to the 9th of February, but ultimately failed to reach a staff-level agreement. Following the delegation’s departure, it was announced that talks would continue virtually.
Subsequently, Dar on February 15th tabled the Finance (Supplementary) Bill, 2023, which outlined tax measures to raise an additional Rs 170 billion in the coming months to meet the conditions originally set by the IMF. The bill increased the sales tax to 18% on normal goods, and to 25% on luxury goods. Further action was also taken, including a considerable increase in electricity prices, ranging from Rs3.3 to Rs 15.52 per unit for residential consumers, farmers and exporters. The government also approved the withdrawal of electricity subsidies given to the exporters, effective March 2023. The federal government also increased the price of petrol and high-speed diesel (HSD), along with an increase in natural gas prices, with prices for domestic consumers being increased from 8.5% to 113%. For commercial, power producers, fertilizer plants, general industry and CNG stations, the gas prices have been increased from 10.4% to 105%.
With the government implementing all major prior actions, the secretary of finance announced that the government’s meetings with the Fund are in its final stages. Pakistan was expecting a staff-level agreement with the IMF before the end of the month. However, the IMF Executive Board meeting is not expected to take place before the first week of March.
Although it seems Pakistan may narrowly avert default, the situation remains precarious. According to Moody Analytics, in the first half of the year inflation is predicted to average 33 percent, before trending lower. Furthermore, fiscal and monetary austerity is said to continue into 2024. The general consensus amongst experts is that an IMF bailout alone will not be enough to revive the economy. This is the 22nd loan Pakistan has taken from the IMF. It is clear that the country desperately needs persistent macroeconomic management and a strong financial regulatory structure. This may only be realized through political stability, and a government committed to achieving serious structural reforms to ensure a long-term stable economy. Pakistan can no longer allow economic stability to be sacrificed at the altar of political capital.