Cover Story

Economic Disaster

Pakistan has all the potential to climb out of its worsening economic situation. What it needs is better governance.

By Shahid Javed Burki | June 2022

Political problems have economic consequences. There are many instances of how that has happened in Pakistan’s long and often-troubled history. There are analysts in Pakistan who, watching the developing situation in Sri Lanka, worry that Pakistan may also be headed that way – towards bankruptcy. In order to see whether that could happen, let us first examine what is occurring in that distant island’s economy, before applying its lessons to Pakistan.

The Sri Lankan crisis dates back to the time when the government fought and ultimately won a long civil war in which the Hindu Tamil population in the country’s northeast was trying to detach itself from the majority Buddhist population in the rest of the country. The Buddhists make up 75 percent of the country’s population. The war cost the country some 100,000 lives and also took a heavy economic toll. However, the immediate reason for the current economic situation was the presidential poll of 2019 in which the challenger Gotabaya Rajapaksa proposed sweeping tax cuts that were so reckless that the incumbent government thought that it must be a campaign gimmick. The then finance minister Mangala Samaraweera assailed the move as dangerous since it would put a huge burden on the already stressed public finances. A steep cut in value added tax from 80 percent to 15 percent was promised and it was also indicated that other levies would be scrapped.

With the elections over and with Rajapaksa having won the contest, the promised tax cuts were implemented. The new president also restored the presidential powers accumulated by his office during the 10-year rule of his strongman brother, Mahinda Rajapaksa. The family’s brand of populist authoritarianism was restored with appeals to Sri Lankan Buddhist nationalists. The effects of these moves were quickly felt when ordinary citizens having ran out of money to buy basic needs. They surrounded the Presidency and ransacked the offices of the Health Ministry to obtain essential medicines. Soon after these developments, the Sri Lankan administration declared bankruptcy, the first time this happening since the country gained independence in 1948 from British rule.

It would take a real pessimist to equate the Sri Lankan situation with what Pakistan faces today. The political elite in Colombo has brought the crisis upon themselves. The sharp cuts in government revenues were entirely unnecessary but took the country towards bankruptcy. The Rajapaksa family also seemed not to have bothered about the decline in food availability around the world. Even at the best of times, Sri Lankans were not able to grow enough rice – their staple food – to feed themselves. However, global food shortages made their situation even more difficult. Sri Lanka is not the only country where food riots have occurred. They have taken place in Peru and some parts of Africa. “This is lot worse than what we saw in 2008 or 2011,” warned Arif Hussain, chief economist at the United Nations World Food Program. His organization says 44 million people in 36 countries are “teetering on the edge of famine,” and 276 million are food insecure, double the number of people from the year before the pandemic began. The country worst affected is not Sri Lanka but Afghanistan, Pakistan’s neighbour. There millions may perish from disease and hunger. Children are likely to be affected the most.

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