Pakistan's Political Crisis' Economic Consequences

Political upheaval, economic uncertainty, and social discontent are spreading throughout Asia, Latin America, Africa, and Europe. The European Union is experiencing an energy crisis, which is having global consequences. Governments are experiencing significant issues as a result of inflation that does not appear to be "transitory." Food costs are out of control. Sri Lanka is in the midst of a full-fledged economic crisis, and protesters are asking for the Rajapaksa's' resignation. Protesters have taken to the streets in Peru, as they have in this South Asian country. They have compelled the government to declare an emergency. Pakistan is the most recent victim of this political unrest, which, sadly, has the potential to extend to other countries.

Imran Khan, Pakistan's former prime minister, was recently deposed in a no-confidence vote. He is the country's only prime minister who has been deposed by a no-confidence vote. On April 9-10, 174 members of the House of Representatives voted against his administration at midnight. Despite the lack of evidence, allegations of foreign influence played a key role in the drama. While the political drama was nothing short of a Hollywood script, the economic ramifications of these events can be disastrous for the average citizen and the government.

Inflation in Pakistan is predicted to reach 15% by the summer, and the United Nations' Food and Agriculture Organization reporting record-high food costs through its Food Price Index, which now stands at 159 – the highest since 1990 – food prices in Pakistan will continue to rise. Already, the country is seeing double-digit inflation. Food prices increased by 14.5 to 15.5 percent year over year in March, and experts have previously warned about a coming threat to food security, which I discussed in a story published in The Diplomat in December 2021. An increase in food prices is closely tied to an increase in social unrest.

Pakistan could also face a significant balance of payment (BoP) problem, as the State Bank of Pakistan's trespass has meted to a hazardous $11 billion, barely enough to cover one and a half months' worth of imports. In just one month, the country's reserves plummeted by $5 billion (of March). Imports are on the rise, as evidenced by the fact that imports accounted for 52.2 percent of the recent increase in tax revenue. The country's trade deficit is alarmingly high at $35 billion. With reserves at an all-time low, Pakistan is projected to service $2.5 billion in debt in the current quarter alone (April to June). Our reserves are similarly shaky, with the majority of them being debt-financed. IMF and World Bank.

Pakistan's fiscal deficit is likely to reach almost $24 billion under the current circumstances, the largest on record. Pakistan's total debt has now surpassed $27.6 billion.

In this context, Prime Minister Shehbaz Sharif's new government is faced with a dilemma: should it employ populist tactics like further lowering energy prices to garner votes in next year's general elections, or should it take bold, necessary steps that would make it instantly unpopular?

If Pakistan does the former, it will follow in the footsteps of Sri Lanka. Increased costs, particularly for gasoline and petroleum levies, are urgently needed to provide much-needed cash to the government. Due to a reduction in the petroleum levy, the government will only receive $55 million out of a projected non-tax revenue of $3.3 billion. However, the new government has already begun by extending a relief package that includes a 10% rise in pensions and wheat subsidies, among other things.

What is the duration of these measures?

It's difficult to say when the administration will have to reverse course. The worldwide situation, on the other hand, leads us to believe that the turnaround will occur shortly.

The increase in COVID-19 cases in China will exacerbate the global supply chain disruption already underway. This will – and already is – result in higher business costs, which will be passed on to consumers.

The most significant factor is rising global inflation. The Federal Reserve of the United States has taken a hawkish position, meaning it will continue to raise interest rates, strengthening the dollar versus a basket of other currencies and putting additional fiscal pressure on developing countries. The dollar index has already surpassed 100 for the first time in two years. Pakistan will find it increasingly difficult to survive without taking significant steps with its reserves at the aforementioned level and the sword of debt financing hanging low. The IMF (and China) may be able to assist, although this may result in price increases.

Panic in the commodity and financial markets; a global inflationary spiral; rising food prices; and an increase in protests, particularly in the United States.