A crisis can be an opportunity …By Dr Sania Nishtar

I hope that the situation Pakistan is currently witnessing will be the worst it gets, with no further escalation. We were already facing a crippling economic crisis, an unprecedented political crisis, a constitutional crisis, burgeoning terrorism, and a crisis of trust – all while the country is reeling from the aftermath of the most devastating flood in its history.

The nation’s institutions stand divided. Parliament and executive are openly contesting the powers and mandates of the Supreme Court. The premise of separation of powers in Pakistan’s parliamentary system and the judiciary’s independence is being contested through legislative overruling clauses in hastily ushered in legislation. News is circulating about divisions in institutions that are regarded as pillars of the state.

In such a toxic context, the country has witnessed the politically motivated illegal arrest of Pakistan’s most popular leader, former prime minister Imran Khan. People took to the streets in unprecedented numbers after the arrest, the rupee devalued by over 3.5 per cent in 48 hours, and the stock market crashed. Bloomberg warned that this will further delay the IMF bailout package heightening the risk of a sovereign default.

Let’s be reminded that the state of Pakistan’s economy has never been so precarious – its outcomes are dire for everyone, but especially the poor, and the middle class. Pakistan’s GDP growth rate forecast has already been downgraded from 4.0 per cent to 0.4 per cent and may even end up being in the negative by the end of the fiscal year severely limiting economic and livelihood opportunities.

Net federal revenue isn’t even enough for interest payments. Poverty is estimated to have soared to 40 per cent, which may just be the tip of the iceberg. The current 36.4 per cent CPI is the highest in 59 years and the weekly Sensitive Price Indicator depicts a year-on-year increase of 48.35 per cent; food inflation in April was 46.8 per cent and 52.2 per cent for urban and rural areas, respectively.

The unprecedented 21 per cent interest rate, 33 per cent increased annual electricity tariffs, 57 per cent rupee devaluation since April 2022, raw material import restrictions, and significantly escalated cost of production have been catastrophic for businesses. Every industry is facing its own crisis – an auto crisis, cement crisis, digital crisis, airline industry crisis, steel crisis, pharma crisis, textile crisis, crisis in every SME sector – the list goes on and on. Large-scale manufacturing has contracted 5.56 per cent in the first eight months of the current fiscal year. In the textile industry alone, seven million jobs have been lost, impacting a staggering 45 million families. According to a recent Gallup survey, one in every five respondents claims that either they or someone in their homes has lost their job.

Businesses’ access to credit has also been affected since commercial banks’ financing for local businesses has been crowded out by government borrowing given the curbs on international borrowing in the wake of Moody’s credit rating falling from Caa1 to Caa3. The negative impact on the industry invariably hits poor workers much faster than it impacts profits, and more job losses may be on the anvil.

Pakistan remains on the verge of default, with no IMF deal on the horizon. According to Moody’s, Pakistan could default without an IMF bailout as its financing options beyond June are uncertain, with the State Bank of Pakistan’s reserves at $4.46 billion, enough to cover just a month’s imports.

What is shocking is that, despite these fears having lingered for months, there is little mainstream discourse on this potentially impending calamity. Factions within the country who would traditionally intervene when economic performance declines, are now indifferent for unknown reasons.

If Pakistan were to default, this would have devastating ripple effects throughout the economy, and impact everyone – but the poor more severely. Sovereign default would reduce the government’s ability to raise new commercial debt. Stock market crashes would be imminent, and bank runs likely. The rupee would devalue significantly more, and reduced dollar inflows would require cutting down imports, which would further stifle local manufacturing, which heavily relies on imported inputs. Pakistan would face hyperinflation, and the contraction in the economy due to manufacturing losses would result in mass layoffs. This means burying the poor and middle class alive.

Not far from home, Sri Lanka is still reeling from its sovereign default from last year. Following its suspension of repayment of $7 billion of international loans, the country faced an economic meltdown. There were shortages of fuel, cooking gas, medicine, and other essential items. This cascaded into a political crisis in Sri Lanka. When a sovereign default unfolds in an existing political crisis, its impact can increase manifold.

Experiences from other countries show that the impact of a sovereign default are palpable even decades later; economic outputs are known to fall around 20 per cent below that of the counterfactual, poverty headcounts 30 per cent higher than pre-crisis levels, health outcomes are far worse and life expectancy lowers by 1.5 per cent.

The events of the last 72 hours which triggered after Imran Khan’s arrest did not just erupt out of nowhere. They are the product of growing frustration against years of endemic corruption and state capture by the elite of Pakistan’s institutions, which are now at loggerheads with its people. Any further escalation would be catastrophic. The situation could further deteriorate if a wheat crisis emerges due to governance failures, evidenced in the tendency to hoard, despite the wheat bumper crop. People are already on the streets in a deeply polarized country. Adding hunger to this mix could mean adding fuel to inextinguishable fire.

In this bleak situation, we need to be reminded that every cloud has a silver lining. So, this crisis could also be an opportunity.

While I can list several economic reform plans, no number of technical solutions will work in the current context of extreme polarization, conflict, and uncertainty, unless the root causes for this situation are addressed. So, the priority must be to end this mayhem. Some institutions of the state do have the ability to rectify the current situation; they must do the right thing. Peoples’ will must be respected, which is why fair and transparent elections are imperative.

Alongside elections, we need deep-rooted reform of institutions to institutionalize democracy in its true sense, since democracy is not just about popular vote. It is a set of institutional arrangements and constitutional devices which entail checks and balances and transparency. Meanwhile, some time-sensitive matters need urgent attention. The stalled IMF programme and budget-making in its wake is one of them. The other is the urgent need to mobilize our diplomatic capital in the context of the upcoming G7 meeting in Japan to make a case for debt relief given that Pakistan’s debt has now become unsustainable.

Every moment counts if the aim is to use this crisis as an opportunity. This will take a lot of hard work and sincerity. There is no room for the incessant inflammatory rhetoric in this equation.

Curtesy