Is Pakistan heading for a Sri Lankan-style meltdown

Pakistan, meaning the land of the spiritually pure and clean, is, alas effectively skint.

Ten thousand containers sit at ports unless payment is received, industry has no power for production, and an agricultural state is now importing food..if it can afford to.

A macroeconomic meltdown is underway with all the conventional smoke signals: a collapsing economy, rising inflation of 30%, a run on the currency (thus making imports more expensive for locals), depleting reserves (less than the cost of a decent Premier League side …ie shy of $3bn), fuel and now food shortages, with the staple chapati flour in short supply.

Wages arrears threaten food security, health outcomes have worsened with malaria on the rise, education attainment is appalling, and literacy rates are barely over 50%.

Successive failure of policy since independence in 1947 has led to this outcome – IMF bailouts, Arab largesse, US dollars to keep the Taliban at bay, Chinese mercantilism of late –  none of it has stalled the longer-term trend towards a failing state. The risks of a Sri Lankan-style total collapse are now real, even if there is a short-term sugar rush of IMF support and additional Gulf financing.

Pakistan’s population is 10 times larger than Sri Lanka’s 22m, its economy worth $350bn, 4 times larger. Similarities include a history of poor governance, populist governments happy to run fiscal deficits and recent Chinese capture through heavily conditional lending for infrastructure, most notably the China-Pakistan Economic Corridor from Kashgar in NE China to Gwadar on the Indian Ocean. 

Pakistan’s socio-economic collapse should ring alarm bells, even next door to India. Pakistan has nukes and borders an even more basket case in Afghanistan that chooses to nurture a medieval male-dominated system of government and exports terrorism and 80% of the world’s opium. 

Pakistan resembles Egypt in the political and economic role of the military. The Jasmine Revolution, Arab Spring et al. began on the economic tail of the 2008-09 global crisis. Pakistan could face the same scenario…and an arc of instability from Iran, and Afghanistan to Pakistan.

And oh, Pakistan faces mammoth climate risks. It is home to more glaciers than any other country, melting as temperatures hit 50 degrees in the summer. A third of the country was flooded in 2022, and the heatwave decimated agricultural yields.

Short-term economic fixes are sticking-plaster solutions, but I suspect that’s what will happen. The government will likely follow the spend-less, tax-more IMF message and get a couple of billion dollars, enough to ride out a few months…until the next crisis, probably later this year. However, this macro-fiscal support will not trickle down to the masses, and the risk of a Sri Lankan-style mass protest fuelled by Islamist extremism becomes ever more likely.

 

* With experience across academia, think tanks, central banking, EU Accession and reforms across 40 developing and transition countries, Dr Rupinder Singh works with multilateral organisations and governments as an independent adviser. He is an Executive member of Liberal International (British Group).

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2 Comments

  • Peter Martin 18th Feb '23 - 10:47am

    Whenever a countries like Sri Lanka and Pakistan get into a mess financially we hear arguments to suggest that somehow an adherence to MMT has been the cause. However, this is to misunderstand what MMT actually is. A key tenet is that taxes drive money. So whilst we say the Government doesn’t need taxation revenue to spend we do say that taxation gives the currency a value. Therefore, if there is a runaway inflation problem, the likelihood is that the taxation system is not functioning anywhere near as well as it should.

    The Indian government recently had similar concerns. There were far too many cash based, and so tax free, transactions and took the quite drastic step of cancelling low rupee notes. Whether this would be also be effective in Pakistan is questionable but the government should adopt a policy of ‘whatever it takes’ to make the system work more effectively and support the type of government spending which is necessary to pull the economy out of a hole.

    The low level of foreign reserves isn’t too much of a problem in itself. Going to the IMF for a bail-out, or a top up of those reserves, isn’t a solution. In any case, the IMF are likely to insist on the implementation of more of the same type of policies which caused the problem in the first place.

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