By Anwar Iqbal
Published in Dawn on September 08, 2024
WASHINGTON: In a sobering analysis of Pakistan’s economic turmoil, Princeton economist Atif Mian has warned that the country is facing an unprecedented financial crisis driven by a complex web of challenges.
Mian, a Pakistani American scholar, points to the convergence of skyrocketing domestic and external debts, unsustainable pension liabilities, and a failing power sector as critical factors plunging Pakistan into an economic abyss. His assessment paints a grim picture, suggesting that Pakistan’s economic distress is uniquely severe, making it a stark example of fiscal mismanagement on the global stage.
“Pakistan’s domestic and external debts, its unfunded pension liabilities, and the zombie power sector have pushed Pakistan into a deep fiscal crisis. It is hard to think of another country in as bad a shape,” Mian wrote in a comment posted on his official X account.
Reacting to Mian’s analysis, former Treasury Head at Chase Manhattan Bank, Asad Rizvi, urged him to offer practical solutions to address these challenges and put the economy back on track. Rizvi also requested Mian to explain how advanced economies with high debt-to-GDP ratios manage their situations.
Believes financial distress is driven by skyrocketing debt, unsustainable pensions, failing power sector
Mr Rizvi emphasised that without addressing critical issues such as the tax-to-GDP ratio (by documenting the economy), the bank advances-to-deposit ratio, and reducing open market operation (OMO) injections, which currently stand at Rs 11.974 trillion, the economy will struggle to rebound. He also highlighted the need to stabilise the currency in circulation (CiC), which is Rs9.12 trillion, and tackle the circular debt of Rs2.5tr.
Another commentator noted that Pakistan heavily relies on the generosity of external benefactors and seems unwilling to make the tough decisions necessary to revive its economy.
Addressing these concerns, Atif Mian told Dawn that the debt-to-GDP issues faced by advanced economies like the United States and Japan differ fundamentally from those confronting Pakistan.
“These are countries with well-anchored inflation, a long history of credible monetary policy (and hence currency strength), a strong economy over the long run (as measured by productivity growth), and a well-run taxation system,” he explained. “All of these give these countries a much larger fiscal space to play with — and as a result, markets are very forgiving to these countries.”
Mian further referenced a statement by former French president Charles de Gaulle from the 1960s, who criticised the advantages the United States enjoys due to the dollar’s status as the world’s primary reserve currency. De Gaulle famously referred to this as an “exorbitant privilege,” arguing that this status allows the US to run trade deficits and borrow at lower costs, placing an unfair economic burden on other countries.
Mian and other international economists have recently warned that Pakistan faces a bleak future as its economy remains in a perilous state. He urged Pakistani leadership to heed these warning signs and take corrective action before it’s too late. Critics, however, argue that Pakistan’s leadership is more preoccupied with domestic politics than addressing the nation’s economic woes.
Analysts have identified three critical “doom loops” perpetuating the crisis. The first is the fiscal loop, where the government struggles to pay debt interest and unfunded pensions, forcing the country to continually borrow to meet its obligations, including civilian and military expenditures.
The second is the external loop, which has crippled national trade. Pakistan imports two dollars for every dollar it exports and relies heavily on remittances, leaving little room for sustainable growth.
The third and most dangerous loop is the downward confidence spiral. As disillusionment grows, promising young individuals are increasingly unwilling to stay in the country, deterring investment and exacerbating the already dire fiscal and financial situation.
These dynamics drive Pakistan toward deeper despair, with the public’s discontent manifesting in political instability. Observers note that Imran Khan’s current popularity is less about his policies and more about being a vessel for the people’s frustration. Regardless of who holds power, the country’s political landscape will remain volatile under these conditions.
“The military holds immediate power – but they are squeezing sand; the more they squeeze, the more it slips away. The country is slipping away,” a commentator observed.
In response to calls for solutions, Mian and others have pointed out that while strategies do exist, the willingness of Pakistan’s leadership to prioritise the welfare of the people remains in question. “I have never seen such rulers and politicians who care so little for others and so much for themselves,” one analyst lamented.
