Washington, DC – On the brink of economic collapse, exacerbated by natural disasters and floods, Pakistan has also been facing tumultuous political shifts in power in a desperate attempt to save the rapidly sinking ship. But the problem has been around for a while. The country’s economy has been teetering on the edge of ruin for years.
The unprofitable business environment and the grossly inadequate handling of the economy have brought the country to its knees, as it is already grappling with a dire scarcity of investments from its regular sources. This year in August, following reviews under the Extended Fund Facility (EFF), the IMF announced that Pakistan would be allowed to draw the equivalent of $1.1 billion. However, the sheer magnitude of the devastating floods and monsoon washed away any hopes for a relatively quick or easy recovery, even with this help.
To top off the economic crises, contenders vying for the country’s political seat of power continue to pursue all possible avenues to bag the prize. The most popular amongst rivals is the politics of freebies— which could prove to be the final nail in the coffin for the staggering economy.
Over the years, Pakistan has been slipping steadily into a concerning state of balance of payment deficits. The country’s economy has become increasingly unsustainable, with dwindling foreign exchange reserves and rising imports. Couple that with the usage of freebies by political figures to sway public opinion in their favor, and you have a recipe for disaster.
Freebie politics has insidiously been at the core of many countries’ crises. It is no secret that the pandemic has driven the economies of the strongest countries into the ground. Some countries, like the US, have managed to rise from the ashes, but the UK (the world’s 6th largest economy) has been unable to re-establish a stable foundation. The most recent downward spiral of the UK’s economy, as well as the catastrophic ruin of Sri Lanka, has, at its core, involved this mistaken higher ground of action.
The short stint that Liz Truss’s government pulled at the helm of affairs in the UK for 45 days was enough to send the economy toppling. The Truss government took several misguided routes to contain the rising inflation within the country while using unsustainable methods to jump-start the economy.
The former finance minister, Kwasi Kwarteng, announced the largest tax cut in the country that had been enforced in the last 50 years. The tax cut set out to leave more money in the hands of the people and organizations, which the government hoped would lead to reinvestment in the economy by way of increased consumer spending, further boosting business engagement in the economy.
However, policymakers should have realized their plan’s unfounded and utopian nature. While the taxpayers and citizens were given tax relief, the burden of the deficit was to fall onto the state, which needed to be more stable to handle. With no provisional funding to cover this loss of revenue, the only route left for the government to resort to was excessive borrowing from the market.
The first signs of economic troubles which reared their head in Sri Lanka also date back to 2019, owing to Rajapaksa’s newly formed government and their eagerness to uphold the grossly unviable promises they had made to the people during the time of the election.
Tax cuts were the most disastrous move for Sri Lanka’s already troubled economy. While tax cuts are, in popular opinion, one of the most attractive promises to woo the public, ultimately, they are also the most impractical in the long run. Over time, most economies cannot bear the brunt of the loss in revenue from taxes and are forced to borrow themselves, driving up the national debt. This cycle is unlikely to be broken easily.
Pakistan and its leaders are also, without pragmatic foresight, on the way to making the age-old mistake for which they have devastating examples. The country should focus on drumming up revenue by investing in protective avenues to support the country and bring returns on investment in the long run.
Economic experts believe that the country should focus on cultivating renewable energy resources to manage the country better, as well as diverting attention to other pressing concerns in the environmental context. The amount of money being drained through the country’s freebie policy must be channeled towards better utilization for public welfare, such as providing better educational opportunities and equipping the nation to confront the looming challenge of climate change.
A leading factor in Pakistan’s inability to rise as a country lies in the false narratives fed to the general public. The country’s media does not attempt to highlight the actual challenges plaguing the lives of the ordinary person, such as the dwindling literacy rate, poor education standards, inadequate tax collection, low domestic productivity, and primarily depending on foreign economic assistance and borrowing.
The IMF had suggested the country curb its arbitrary spending much before the surmounting crisis brought on by the devastating floods. Multiple calls have been made for Islamabad to work on bringing down debt levels to a more manageable amount, putting weight behind relevant public spending, and stimulating social and development spending, which is the need of the hour for the region.
A recent report by the UN’s climate summit exposes how the threat of worsening climate change and environmental degradation is unavoidable until concrete steps are taken to foster sustainable development measures in the country. In the past, Pakistan has often needed help with the balance of payments regarding imported fossil fuels. Suppose the government was to invest in its renewable resources to produce power for its industrial and household sectors self-sufficiently. In that case, the over-dependence of the country on foreign aid as well as external debt could reduce significantly in the long run.