Pakistan’s perfect storm: An economic crisis meets a political one
Pakistan’s news cycle has shifted from bailout negotiations with the IMF to pitched battles between former prime minister Imran Khan’s supporters and security forces
Pakistan’s news cycle has shifted from bailout negotiations with the IMF to pitched battles between former prime minister Imran Khan’s supporters and security forces. The events suggest that Pakistan is witnessing a two-pronged crisis with an economy in the doldrums and an extremely popular opposition leader taking on the government and the military. Here are three four charts which explain this in detail.
Probability of Pakistan slipping into recession is 70%
A median forecast in a Bloomberg survey of 27 economists published on March 15 put the probability of the Pakistani economy slipping into recession at 70%. Pakistan’s lingering political and economic turmoil, coupled with multiple delays in the IMF’s bailout program, are the main reason for this. “There is no continuity of policies regardless of who is in power, which is a big red flag for the lender as well as any friendly countries”, said Luqman Nadeem, general partner at FlatRock Associates in the Bloomberg article cited above.
The October 2022 projection (latest available data) of IMF expects Pakistan’s GDP to grow at 3.5% in 2023, against a 6% expansion in 2022. In contrast, Bloomberg sees the economy contracting 2.2% in the financial year ending June, compared with a 6% expansion the previous year. It is to be noted that the IMF growth projections correspond to the calendar year, instead of fiscal year.
See Chart 1: Pakistan actual and projected GDP growth
And surging inflation is only worsening the economic pain
The State Bank of Pakistan raised its benchmark interest rate to 20% in March, the highest in 25 years. While the central bank is trying to contain inflation (at the cost of growth) policy measures undertaken by the Pakistani government to comply with IMF regulations – a hike in taxes, a cut in subsidies, allowing the currency to weaken – have been counterproductive in terms of inflation. Data from the State Bank of Pakistan shows that retail inflation, as measured by the general Consumer Price Index has been increasing at a faster pace in the aftermath of the Russian invasion of Ukraine. The annual growth in inflation was 12.2% in February 2022, and more than doubled to reach 27.6% in January this year. It rose further to 31.5% in February. Food inflation was 41.9% in February , up from 14.3% in February 2022. The Pakistani Rupee has depreciated by 55% since February 2022. The US dollar-Pakistani Rupee Exchange rate was Rs.261.5 per dollar in February, up from Rs.183.85 per dollar in April 2022.
See Chart 2: Monthly inflation in Pakistan
Imran Khan outside power is far more popular than Imran Khan in power
Data from Gallup Pakistan, an affiliate of a global survey research agency, shows that Imran Khan enjoys majority support across the country in the latest public poll held in the first 20 days of February. Khan was positively rated with 61% of Pakistanis having good opinions about him, followed by former Pakistani PM Nawaz Sharif at 36% and foreign affairs minister Bilawal Bhutto Zardari at 36%. A majority of the respondents (62%) blame the coalition government of the Pakistan Democratic Movement/Pakistan Muslim League-N (PDM/PML-N) for the economic turmoil, while only 38% blame the previous Khan government (Pakistan Tehreek-e-Insak or PTI). If one were to compare the latest poll numbers with those of January 2022, a clear jump in the approval ratings of Khan is visible. In January 2022, only 36% of the respondents had a favourable opinion of Khan, while Nawaz Sharif enjoyed majority support at 55%. Khan lost his prime minister ship in April 2022.
With national elections due by October, Khan has been locked in a bitter political stand-off with Shehbaz Sharif’s government, with the government trying to arrest him before the elections.
See Chart 3: Approval rating for political leaders in Jan 2022 vs Feb 2023
Structural adjustment programmes, because they inflict a huge economic cost, are anyway politically very difficult to sell for the government implementing them. The fact that the incumbent Pakistani government has decided to precipitate a conflict with the major opposition party rather than build a bipartisan consensus has only worsened the crisis . To be sure, there is nothing to suggest that Imran Khan’s return to power will help address the entrenched crisis in the economy. When Khan took over the as prime minister in 2018, he appointed Atif Mian, one of the most respected Pakistani economists, currently a professor at Princeton, as his economic advisor. Mian was let go after protests from fundamentalist sections, who objected to an Ahmadiyya Muslim being given the position. Had Imran Khan implemented the policies Mian had asked for, things may not be so bad today.