Cover Story 
 

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.


While we don’t see a Sri Lanka in Pakistan, the latter faces many problems most man-made – or, more accurately, politician-made. Once again, the country faces a serious balance of payments crisis, but it is not as severe as was the case when President Farooq Leghari, after having dismissed Prime Minister Benazir Bhutto, persuaded me to take up the position of finance minister in the interim cabinet. Within a day of having arrived in Islamabad, Muhammad Yaqub, then the Governor of the State Bank of Pakistan, informed me that Pakistan was within two days of going bankrupt. I flew to Beijing and met with Prime Minister Zhu Rongji when I had come to know very well during my seven and half years working as the Director of the World Bank’s China operations. When I was leaving that position for another job in the Bank, Zhu called me to his office and said that if there was anything ever the Chinese could do for me, I should not hesitate to call. I took upon that offer and spent a day in Beijing and had dinner with him at the State Guest House. I told him of our financial situation. “Before the dinner is over, a deposit of $500 million would have been made in Pakistan’s account at the Federal Reserve Bank in New York,” he said to me. The deposit was made and we were able to pay our bills.

Pakistan faces a serious balance of payments crisis, but it is not as severe as was the case when President Farooq Leghari persuaded me to take up the position of finance minister in the interim cabinet.

The reason why Pakistan runs into these kind of problems with some frequency is that its political leaders don’t have the will to make people pay the taxes they owe the government. There is also corruption at the highest levels of government. As the former Prime Minister Imran Khan pointed out while he was campaigning in the elections held in 2018 and also when he held the office of prime minister, those in power had amassed enormous an amount of wealth charging large amounts of money for the favours done to government clients. That is bad enough; what is even worse is that the money thus garnered was shovelled out into foreign bank accounts or spent on buying expensive real estate. In other words, peoples’ savings were being moved abroad and not kept at home for investment in the domestic economy.

There is consensus among international financial institutions who provide assistance to Pakistan – the IMF, and development banks such as the World Bank Group and the Asian Development Bank – that in the financial years 2021 and 2022, Pakistan’s GDP is likely to increase by about 4.5 percent a year. The country could do much better if it were governed better. I will use a few numbers to make this point. The country’s low tax-to-GDP has inhibited development spending. It is around 17 percent of the country’s national income. Publicly guaranteed external debt is estimated at $91 billion. According to the IMF – the agency to which the country has turned repeatedly, “achieving the fiscal objectives will require a multi-year revenue mobilization strategy to broaden the tax base and raise tax revenue in a well-balanced and equitable manner. It will also require a strong commitment by provinces to support the consolidation effort, and effective public finance management to improve the quality of and efficiency of public spending.” While public finance area is in need of reform, Pakistan has to produce more for exports and get its rich agriculture sector to produce high-value crops rather than concentrate on grain production. With a well-thought out development plan, Pakistan could see its GDP expand by 6 to 8 percent a year.

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