Pakistan’s struggle for economic stability

A newfound sense of hope and excitement surrounded Pakistan when former cricket world cup winner, Imran Khan, was elected prime minister in 2018. Khan replaced a corruption-plagued government led by Nawaz Sharif, and in doing so, broke the cycle of the ruling elite of Pakistan. However, as he would come to find out, the financial situation of Pakistan and his response to it would pose one of the most difficult challenges in his tenure.

 

Pakistan is currently in significant financial trouble, with external debt and liabilities growing from 95 billion USD in 2018 to around 113 billion USD in 2020. Moreover, the country is running a high trade deficit, with imports over exports doubling, which can lead to high unemployment in the manufacturing sector, due to decreases in domestically manufactured products. One main reason for the growth in debt stems from Khan’s reluctance to depend on US aid, and thus curb US involvement in Pakistani politics. Foreign fiscal aid subsequently drastically decreased from the US – from an average of 1.3 billion USD per year since 2010 to just 423 million in 2018. Because of this, Khan was forced to seek funding elsewhere, namely in China and Saudi Arabia, each with their own political agendas.

 

Pakistan has historically maintained a good relationship with Saudi Arabia, with the country currently hosting over 1 million Pakistani workers, and loaning 3 billion USD to the country in late 2018. However, relations have become increasingly strained after Pakistan sought Saudi support in its conflict with India over Kashmir, and the Saudis subsequently pushed for Pakistan to repay loans of 1 billion USD, which they did only with the aid of additional Chinese loans.

 

The China-Pakistan Economic Corridor (CPEC) is a collection of infrastructure projects throughout Pakistan aiming to modernise the country, mainly seeking to improve Pakistan’s poor transport network. The project is being financed primarily by China and was worth 62 billion dollars as of 2020. This has the scope to reduce economic inefficiency by fostering increased mobility. However, this is seen by some as a debt-trap, with China allowing Pakistani debt to build up in order to exploit the country politically and strategically later. Similarities can be drawn to China’s relationship with Sri Lanka, for example, which, unable to repay Chinese loans, were forced to cede control of Hambantota, a port a few hundred miles from India. Given China’s competitive relationship with India, this move was seen by many as strategic. Pakistan may find itself in a similar situation.

 

In spite of these financial issues, hope still exists for the country. Pakistan seems in control of the pandemic without having needed to enforce a harsh lockdown. Moreover, Pakistan is a country with economic potential; in recent years tourism has grown significantly as the country hosts important natural and historical attractions and recently has become much safer to travel to with the government clamping down strongly on terrorism. In addition, Pakistan also has the potential to generate renewable energy, in the form of solar and wind power, according to the World Bank, which suggests that utilising just 0.071% of the country’s suitable area for solar energy would meet the country’s current electricity demand. Finally, through CPEC projects which could improve transportation routes, logistical bottlenecks and idle times are slowly subsiding despite the possible threat of China’s political influence.

 

The construction of many major motorways, wind farms, coal power plants, and even an extensive 820km fibre optic line across Pakistan have helped modernise the country. China has been the biggest investor, namely through CPEC projects, however other investors including Norway, the United Kingdom, and South Korea have all also stepped up their investments. Pakistan attracted 2.6 billion USD in foreign direct investment in the fiscal year 2020, almost double the 1.4 billion USD it drew the previous year. The Pakistani government has facilitated such growth through tax incentives and exemptions in certain sectors and in certain zones of the country.

 

Pakistan is at a crossroad, having freed itself from the former ruling elite and US political control, but in doing so has allowed nations such as China and Saudi Arabia to become more involved in addressing Pakistan’s ailing economy.  If Pakistan and Imran Khan are able to fund future projects without an over-reliance on China or Saudi Arabia, the future of the country seems promising. Perhaps through striking similar deals but with smaller neighbouring countries, Pakistan’s financial and political stability could be improved without the cost of foreign political involvement. Nonetheless, if nothing is done to address the sharply growing debt and trade deficits, Pakistan’s economy may contract and Khan’s political opponents may look to increase pressure, and possibly even return Pakistan to its elite rule, propped up once again by the US.

 

By Hadi Ahmed

Sector Head: Jared Gibson

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