Bilawal Ali Khalid
Ever since 2019, when the global pandemic hit the world, the economic conditions all around the globe have been nothing short of a rollercoaster ride. The Pandemic induced slow-down led to the economies being on the verge of collapse, but through sheer will, they were able to pick up the pieces of what was left behind and move towards the recovery phase.
The lenders stopped lending out money, whereas there was a sudden increase in the number of borrowers and growing borrowing costs. World Bank says that in the next 12 months, as many as a dozen developing economies may not be able to survive their debt. This would be the largest debt crisis in a generation. The World Bank warns of the debt crisis for developing nations as it could have detrimental effects everywhere.
World Bank mentioned 70 low-income and middle-income countries facing debt repayment worth 11 billion dollars. This report suggested that this burden could crush their economies till 2022. Nine days later, Russia invaded Ukraine, which disrupted the supply chains all around the globe. This propelled the financial markets into disarray and triggered a global oil crisis. In March 2022, United Nations released a report warning that 107 countries had severe exposure to the consequences of the Ukraine war. Rising food prices, rising energy prices, and tougher financial conditions would be the major outcomes of the war. These 107 countries represent 1.7 billion people, which is 1/5 of the entire humanity. Sixty-nine countries face all three risks; food, energy, and finance.
These chains of events have created a domino effect all around the globe, with Sri Lanka being one of its first victims. Sri Lanka spent more than its national income, mismanaged finances, and allowed deep tax cuts, destroying its economy. These factors compounded the Lankan crisis and persisted to this day. Sri Lanka’s ruling family Rajapaksa were prominent in politics, with many family members occupying senior positions in the Sri Lankan state. Sri Lanka has a 75% Buddhist population, with the remaining 25% being Tamil and Muslims. Rajapaksa family have devoted Buddha followers and have created unrest in the country by creating severe religious intolerance towards minorities like the Tamils. The family played the religion card, which led to mass social unrest. As the situation worsened, the family had to step down after significant backlash from the public, and the economy has not been able to recover. Fear is that the Lankan crisis could mutate, and more countries are set to fall, putting the entire developing world at risk.
A series of events played a decisive role in Sri Lanka’s downfall resulting in bankruptcy. Pakistan has many similarities to Sri Lanka in its shortcomings as a country.
There’s a lot to learn from Pakistan from this recent crisis in Sri Lanka. Sri Lanka’s literacy rate is 92%, whereas Pakistan’s literacy rate is just 57%, keeping in mind that anyone who can write their name is considered literate in Pakistan. Suppose a literate nation like Sri Lanka couldn’t stop this economic wrecking ball from hitting them. What are the odds of Pakistan avoiding a similar fate and the possible solution?
We talk about politics as much as economics because all economics are ultimately profoundly rooted in politics, even in a non-democracy. Religious intolerance, more spending than national income, corruption, political instability, social unrest, and huge borrowing costs are synonymous with Pakistan. They are the same reasons that played a crucial role in bringing Sri Lanka down.
External debt and current account deficit are the two major economic issues facing Pakistan, and solving them is critical for the economic revival. We have seen Pakistan’s income per capita coming down in recent years, budget deficits going up, and Pakistan’s foreign exchange reserves dwindling. The government of Pakistan must increase direct taxes and reduce exemptions as we may have to go for debt relief from international creditors.
Pakistan is in dire need of an IMF bailout. The IMF has said that they are suspending the program until there is a properly stable government in Pakistan. The IMF’s primary goal is to help a troubled economy tide over an emergency. This is done hoping that the country would make the reforms to avoid a future crisis. Pakistan does not make the reforms during our 20 visits to the IMF. The extent of reforms required in Pakistan is not there due to unstable political conditions and a need for stable and strong leadership.
Before the interim government took over, the PTI government started throwing out subsidiaries instead of trying to discipline itself like they launched the most extensive welfare package in Pakistan’s history to mitigate inflation Impact. In this package, many people can go to their grocery shops and buy edibles at 30% discount, which the government would pay for. The government was bankrupt already and couldn’t afford to spend any more money on welfare. The government tried giving heavy subsidiaries for fuel. It’s the reason why companies try to reduce the petrol prices, they can’t afford to do it. India is in a far better financial situation than Pakistan, but still, the fuel prices in India are far higher than those in Pakistan.
Pakistan has a constant trade deficit because of falling investment and production, but there is no effort to increase them. When we invest and produce less, we have to import more which is financed by foreign loans. The government should focus on importing only what is necessary and make an item-wise review of non-essential imports. The use of local substitutes should be introduced, and campaigns to buy local goods should prevail.
Getting out of this economic crisis would not be easy, and there aren’t any quick fixes that can be applied. One size fits all approach can’t be implemented where we adopt other countries’ policies to get our house in order. The crisis in Sri Lanka has been a wake-up call to Pakistan, and if there is something to be gained from it, it is the lessons on what not to do during a crisis situation. Pakistan needs a stable government first of all, along with experienced experts in every field. Plans must be put in order, and goals must be set. It is a gradual process that would take its due course, but it needs to start from somewhere, and now is the time to start.
