Pakistan’s general election is unlikely to throw up any winners. The front-runner Imran Khan has already been sentenced to 31 years of jail time in a series of show trials. His predecessor and rival Nawaz Sharif has meanwhile seen an earlier conviction overturned. The winner of the contest will be responsible for a weak economy while wielding little authority to implement reforms, and will eventually shoulder the blame for the inevitable crisis.
Just how bad is Pakistan’s economy? According to the IMF, Pakistan’s economy shrank by 0.5% in 2023 and is projected to grow at 2% in 2024. These numbers don’t convey the entire picture. Inflation is high at almost 30%, while almost all other economic indicators – energy consumption, trade, and manufacturing have fallen. Consider energy: from Oct-Dec 2023, Pakistan generated 9.6% less electricity compared to the same period in 2022 – as higher energy prices brought down demand. One of the conditions of the IMF bailout in 2023 was a reduction of energy subsidies, resulting in multiple price hikes in the past six months.
Likewise, Pakistan’s imports, also an indicator of economic activity, are down 14% for the first six months of 2023-24 compared to the previous year. Car sales have been less than 5,000 vehicles/month since Oct-Dec 2023, nearly two-thirds down compared to the previous year. These numbers indicate that the projected 2% GDP growth for 2024 may turn out overly optimistic.
Pakistan’s problems are in large part due to an unsustainable debt and high military spending. In its 2023-24 budget, the interest payments by the Pakistani government were higher than the tax revenues. The spending on defence equalled a third of the tax revenue. The combined spending on interest payments and defence was up 25% over the previous year (2022-23).
Just these two items pushed the budget into a deficit, requiring the government to borrow to meet its expenses. Pakistan’s Debt adds up to 75% of its GDP. A large chunk of the borrowings, nearly $100 billion, is owed to foreign lenders led by China, as well as MDBs such as the ADB and the World Bank. Getting the economy back on track will require debt restructuring (including foreign debt) and reduced military spending.
An elected government will be expected to negotiate with creditors to restructure Pakistan’s foreign debt. Looking at recent examples, this is unlikely to be quick. Sri Lanka defaulted on its external debt in April 2022, and negotiations for restructuring this debt are still on. Zambia defaulted on its foreign debt in November 2020 and arrived at a deal to restructure part of this debt in June 2023. The agreement was delayed by China’s reluctance to agree to a haircut. Some private lenders continue to hold out, so a deal on the entire debt is still not in place. The military budget, meanwhile, is altogether out of the purview of Pakistan’s civilian government.
This combination of a high debt burden and the large military spending makes a quick economic recovery for Pakistan unlikely. The winner of the 8th Feb election will have to live with the taint of being the military’s chosen candidate, and the blame for the long economic crisis that lies ahead. The real winner will be the candidate who manages to stay out of prison (read not Imran Khan) and out of office as well.
Amit Bhandari is Senior Fellow for Energy, Investment and Connectivity, Gateway House.
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