In an ideal world, voters would have grilled candidates with tough questions about their promises. After all, creating jobs and delivering relief necessitate dismantling the rent-seeking, patronage-driven status quo. But attempting such a feat in the current environment might lead to the government’s own demise within weeks. No matter the outcome of February 8th, the incoming party will struggle with legitimacy, given the recent political turmoil. In such a context, antagonizing the public or powerful status quo backers is unthinkable. This suggests that 2024 might not be a year of bold reforms, but rather a year of muddling through at best, or facing unprecedented challenges at worst. The path ahead is fraught with uncertainty, but one thing is clear: Pakistan’s economic journey hinges on navigating these difficult choices with foresight, courage, and a willingness to challenge the status quo. While the road might be bumpy, it is a journey the nation must embark on for a brighter future.
The dust settles on February 8th, and the victor emerges, grasping the reins of a nation wobbling on the cliff. Campaign promises, brimming with optimism and relief, instantly collide with the unforgiving reality. The honeymoon period, usually a time for settling in and establishing direction, quickly transforms into a battleground where the new prime minister, and particularly the finance minister, face a relentless wave of challenges. Negotiations with the International Monetary Fund (IMF) for a new multi-year agreement, replacing the expiring $3 billion standby arrangement, stand as the immediate hurdle. This, followed by the presentation of a budget in the early summer, paints a picture of a daunting landscape, one that will test the new regime’s institutional relationships in ways rarely anticipated. The budget season, often viewed as a litmus test, will offer a crucial peek into the new same page narrative a page desperately needed to fulfill the aspirations of the country’s 250 million citizens.
Volumes of analysis have dissected the structural reforms Pakistan’s economy desperately needs. However, instead of retreading that familiar ground, let’s focus on three critical headwinds the incoming government must confront, headwinds that will truly test their resolve. Pakistan’s mountainous debt burden severely restricts the new government’s ability to provide relief to the masses. Without an IMF program, the external debt situation plunges deeper, leaving austerity measures and tax hikes as the only options. Austerity will leave entrenched patronage networks thirsty, while tax hikes will inevitably clash with powerful status quo elements who benefit from the current system. Adding another layer of complexity, the government might have to make a crucial decision on debt restructuring. While staying the course with the IMF reduces this possibility, missteps or delays could force their hand, opening a Pandora’s box of dire consequences.
For nearly five years, inflation has ravaged the purchasing power of millions of households. While adjusting energy prices might lead to a temporary spike, the true culprit behind the spiral is the gaping fiscal deficit. IMF-enforced austerity might tame the inflationary beast, but at the cost of growth. The alternative – shrinking the government and broadening the tax base – threatens the status quo. Choosing the former limits job creation, while the latter risks instability by confronting powerful beneficiaries of the current system.
Maintaining baseline economic stability hinges on foreign inflows. Despite promises of billions from “friendly countries,” concrete inflows remain elusive. The Special Investment & Corporate Fund (SIFC) or no SIFC, the new government must devise innovative strategies to attract foreign currency. They might hope that, as in the past, an IMF program unlocks additional multilateral flows, or perhaps even dream of borrowing more from international markets. These, however, offer only temporary relief, given the underlying debt dynamics. The more likely scenario involves limited inflows, as unlocking significant funds requires reforms resisted by the status quo, or a fortuitous geopolitical event generating new revenue streams. This leaves the government with a stark choice: antagonize status quo backers to secure new inflows, or maintain the status quo and hope for unforeseen opportunities. By fall 2024, the honeymoon period will be a distant memory. Even after making the difficult choices outlined above, any government, regardless of popular support, will face depleted political capital. The best-case scenario paints a picture of a ruling party under immense pressure in 2025.