In free fall: Breaking up with tea to save economy

Pakistanis love their tea in all flavours. Common Pakistanis also relish the manner in which they sip their tea: they usually pour half a cup into a saucer before slurping the sugary-syrupy liquid.

Published: 03rd July 2022 05:00 AM  |   Last Updated: 02nd July 2022 02:20 PM   |  A+A-

Pakistanis love their tea in all flavours. Common Pakistanis also relish the manner in which they sip their tea: they usually pour half a cup into a saucer before slurping the sugary-syrupy liquid. This could go on endlessly through the day on any Pakistani street.

So, when Pakistan’s Planning and Development Minister Ahsan Iqbal “appealed” to his countrymen a couple of weeks ago to cut down on chai and restrict themselves to just two cups a day—in the name of “austeri-tea”—there, obviously, was a backlash; on the streets and on social media. The ministerial suggestion became a butt of jokes, ribald and otherwise.

The brew is not the only storm in the Pakistani cup. The country is besieged with a host of other complex issues from a sinking economy, including a battered currency, a precarious balance of payment situation; opaque national security vis-a-vis a resurgent Tehrik-e-Taliban Pakistan backed by the Afghan Taliban and a seemingly problematic Balochistan; a rudderless policy on Kashmir; a listless foreign policy insofar as America is concerned; to Pakistan’s traditionally bitter internal political rivalry. Prime Minister Shehbaz Sharif has taken a calculated gamble in imposing a ‘super tax’ on the rich. This is a double-edged sword. Much as it may bring in revenue for the cash-strapped government, the measure can turn the wealthy against the ruling coalition at a time when both sides in the National Assembly are preparing for the elections due in August 2023, unless advanced this year.

Meanwhile, Iqbal’s appeal came in the backdrop of a mounting economic crisis. Pakistan has weathered many economic storms but this one appears to have flattened all past recovery curves. On the brink of bankruptcy, the country has not just singled out the humble tea, of which Pakistan is the largest importer in the world—the country imported tea worth Rs 13 billion or $60 million in FY 2021-22—but has flirted with the possibility of cutting down on working days to save on fuel. This alone would help save an estimated $2.7 billion in precious foreign exchange.

“Our broth is a mix of structural, political and geopolitical elements in which governance incompetence coupled with global inflationary tendencies have combined to produce the mess we are in now,” Zafar Habib, an Assistant Professor at the Peshawar-based Institute of Management Sciences, told this correspondent over the phone.

Earlier this month, Pakistan’s coalition government led by PM Sharif decided to restrict wedding functions in Islamabad beyond 10 pm in an effort to cut down on power consumption in an already chaotic situation where load-shedding is the norm rather than the exception. Early this week, when Pakistan failed to secure a deal for natural gas supply for July, Sharif warned his countrymen of increased power outages in the coming weeks. Government notifications instructed people to opt for frugal wedding receptions where only one dish be served to guests.

The woes deepened when the Sharif government hiked fuel prices for the third time in the last 30 days or so as part of the International Monetary Fund’s (IMF) conditionalities to revive a bailout package. Petrol prices were recently raised by 56 per cent or Rs 84. As a result, the current price of petrol is Rs 233 per litre. The price of speed diesel went up by 83 per cent since May with its current price now standing at Rs 263 to a litre.

Notwithstanding an IMF bailout package—Pakistan and IMF indicated recently that talks will resume with the former requesting that it be enlarged from $6 billion to $8 billion—Sharif presented a tax-heavy budget for 2022-23. Islamabad has structured its budget to meet the IMF’s bailout objectives and this involves a huge increase in fuel prices, removing subsidies on energy and additional sales tax on petroleum products.

These measures, demanded by the IMF, were to come into force from July 1. Also, the government has agreed to raise taxes, both direct and indirect, considerably. Large industries such as cement, oil, sugar, steel, textiles, automobiles, fertiliser, aviation, chemicals and beverage, among others, will now have to pay a 10 per cent‘ super tax’.

Pakistan’s natural allies—China, Saudi Arabia and the UAE—have already advanced loans and pledged to stand by the country. But Islamabad’s traditional allies, which backed the country during a similar, if less intense, crisis in 2018 before it approached the IMF, have now said that Pakistan must move 
the Fund first.

While hiking fuel prices would generally be considered a bold step, it could cause to make Sharif unpopular. The political backlash was immediate when Khan attacked the government. The common people continue to reel as a result of the hike in fuel prices: there are reports of restaurants shutting down and cab services and home deliveries terminating. “The sorry state of affairs is an outcome of unwise economic management,” an Islamabad-based social policy expert, who did not wish to be identified, told this correspondent over the phone.

To rub salt into such a national wound, the Pakistani Rupee has been on a free fall as it touched 212 to a dollar this month. What makes the situation absolutely grim is the country’s fast-depleting foreign exchange reserves—according to the Pakistan Tribune, only $9 billion—which will last just about six weeks of imports. Over the last year or so, the Rupee has devalued by 34 per cent; it closed last June at Rs 157.54, becoming Asia’s “worst-performing currency in 2022”.

The rupee has been battered like never before and especially at a time when Pakistan is faced with a widening current account deficit and the National Stock Exchange of State Bank of Pakistan-held reserves plunging to their lowest level since the end of 2019.

The situation is not gloomy. It is desperate. And Pakistan may soon follow Sri Lanka’s path to perdition. Writing in the Tribune late last month, former Commerce Minister Humayun Akhtar likened the economic situation to the definition of insanity: “doing the same thing over and over again and expecting a different result each time”.

For Akhtar, that is how “successive governments in Pakistan have managed the economy. When faced with an economic crisis, our first reaction is to seek external loans under an IMF programme. This course of action also has a parallel requirement of economic reforms to avoid the crisis from happening again. Pakistan has never cared to do that”. Indeed, Akhtar goes so far as to say that Pakistan’s “external debt and the current account deficit are not just the country’s biggest economic issues, they are a national emergency”.

Habib sees the economic mess as an outcome of the “shock” of two years of the Covid pandemic and the lockdown. “The economy was sailing. It was by no means smooth-sailing but the pandemic and the Imran Khan government’s lack of competence, followed by the post-Covid oil and the Ukraine crises have brought us to this denouement,” says Habib.

The fast downslide—and not only from the economic perspective—began long before the Sharif government took over the reins of power after Khan’s ouster. “Even by the standards of Pakistan’s perpetually unstable politics, the last 10 weeks in the country have been exceptionally turbulent,” writes Madiha Afzal, a fellow at the Brookings Institution’s Foreign Policy, Centre for Middle East Policy and Centre for Security, Strategy and Technology.

The economy and the politics conflated in Pakistan before Khan lost the vote of confidence on April 10. According to Habib, once the Taliban came close to capturing power in Kabul, Pakistan became a “convenient scapegoat”. The “problem”, if at all the Taliban’s steady gaining ground can be described as one, could have been avoided had US President Joe Biden not initiated the withdrawal of American forces when he did.

The overnight disappearance of the Afghan army on the one hand and the Pakistani forces’ Operation Zarb-e-Azb in the Northwest Frontier, where its fighting capabilities were minimised, created the ground for the Taliban takeover of Kabul. “This gave the opportunity to the Tehrik-e-Taliban Pakistan to regroup. By 2021, there was a clear resurgence. And now we are witnessing the outcome in the FATA (Federally Administered Tribal Areas) and other parts of Pakistan where it is said to have struck violently,” Habib says, adding that the “Baloch resistance”, which has made “inroads among educated Baluchis”, making it “way more organised and vocal” now.

Habib agrees that since the Balakot episode, India-Pakistan relations have “certainly not improved” but have “remained frozen at a point” from where it has not worsened. “Pakistani decision-makers realised that the so-called Kashmir scenario wasn’t playing out for the Kashmiris, especially after the state’s constitutional status changed. New Delhi’s diplomatic assault, along with the FATA quagmire, stopped the Pakistani regime in its tracks. The Indians for the first time responded to Pakistan in a more strategic manner on Kashmir,” Habib says, adding that “Islamabad’s nuisance value (over Kashmir) has subsided considerably” especially as it has sought to project itself as a “responsible state”. However, Habib 
says this “is not gaining traction”.

While the “national security election” of 2018, in the words of the Islamabad social policy expert, threw up Khan at the helm, the cricketer-turned-politician functioned “independently of the West”. However, like other prime ministers in the past, Khan too didn’t make it past the five-year term despite being backed considerably by the powerful military.

Meanwhile, even as the Sharif government fumbles—and stumbles—on a road to recovery that is yet distant, the Pakistani military remains in the background, watching the evolving situation. To be fair to the military establishment, it gave a long rope to the Khan dispensation before intervening in ways that ultimately led to the no-confidence vote. For the sake of stability, both political and economic, the military will allow Sharif and his team sufficient time. Khan has been trying—and will continue to strive—for an early election, but much will depend on the synergy between Sharif and the military and the outcomes of the austerity drive and the economic revival plans.

On his part, Khan chose to ignore the military. The Khan-military stand-off began in early 2021 over the transfer of the Inter-Services Intelligence chief. Matters came to a head in October that year when Khan dragged his feet on putting his signature on the transfer order that had already been approved by the military. He wanted the then ISI chief Lieutenant General Faiz Hameed to remain in his seat till the next general elections while the military had already named his successor in Lt Gen Nadeem Ahmed Anjum.
The political turmoil, which began with Khan’s ouster, continues unabated with the former prime minister not taking time out to “lick his wounds and contemplate his next moves”. On the contrary, he has thrown himself headlong into the ongoing battle with Sharif who continues to blame his predecessor for policies that “damaged the economy”.

While the Sharif-led coalition government has not made too much noise on the sentencing of Lashkar-e-Taiba deputy head and the Mumbai 26/11 terror attack principal planner Sajid Mir, alias Sajid Majid Chaudhury, to over 15 years in prison, the speed with which the punishment was meted out indicates that the new regime seeks to build bridges with the West.

Mir was earlier declared “dead” in December 2021 but was arrested less than two weeks after the Sharif government took over. India has not reacted to this development but Mir’s sentencing, analysts say, was an overture towards the West and was, in all likelihood, aimed at seeking leniency in relation to the Financial Action Task Force (FATF) which sought key actions by Pakistan on prosecuting individuals named for terror financing and money laundering.

From the perspective of Pakistan’s internal politics, the passing of a Bill in the National Assembly in late May this year to abolish the Khan government’s putative electoral reforms, which was aimed at giving expatriate Pakistanis the right to vote, may not have a wider impact in the general elections due in August 2023. But it will certainly cause more bitterness between the two ruling and the opposition groupings in the weeks and months to come.

Both Pakistani and Indian analysts are not sure whether Khan has learnt lessons from the mistakes of the past, but his political programmes and the issues, primarily economic, that he has begun raising and for which he has been taking to the streets, indicate an intense battle ahead.

But as the country roils over the extremes in politics and economy, Khan is reported to have quietly ‘sold’ three bejewelled watches and pocketed Rs 36 million in the process. When most Pakistanis are reeling in the aftershocks of an economy gone bad, Khan’s little commerce on the side—whether for personal gain or to donate to his movement’s cause—remains to be seen in the season of austerity.
A divided polity, a fragile financial situation and Pakistan’s uncertain relations with western powers and in the subcontinent do worry analysts within Pakistan and in India. “Pakistan has very deep structural problems and these require the government to go to the drawing board. Without this, there can be no enduring solution on any front,” says Vivek Katju, former secretary at the Ministry of External Affairs.

“The Pakistani and the world leader knows that Pakistan cannot be allowed to go the Somalia way. After all, it has nuclear weapons and the situation now fills everyone with anxiety,” Katju says, hoping that “whatever the international financial institutions may do, Pakistan will be kept afloat” and the IMF’s “prescriptions must be fashioned to tell Islamabad to live within your means”.

There is a glimmer of hope that the situation may yet turn around. Two weeks ago, the rupee recovered by about Rs 4 and the stock exchange, not the best barometer to gauge the health of the economy, recovered from about 37,000 to 41,000. Loans from European partners have been rescheduled. The Chinese and the Saudis have advanced loans and more may come in from the UAE and Qatar.
Fixing the economy will need long-term measures but will political uncertainty recede anytime soon? The Sharif coalition of political parties could successfully oust Khan from power and took the economic burden which, ideally, a regime with at least three years to go for the general elections, should have taken. Clearly, the Shehbaz Sharif government is standing on thin ice. 

The Afghan Taliban has defied the status of the Afghan-Pakistan border and provided a haven to the anti-Pakistan insurgent group, the Tehrik-e-Taliban Pakistan, which has killed thousands of Pakistanis and seeks to establish a Taliban-style, Shariah-compliant state in Pakistan.

Prime minister shehbaz sharif’s
‘super tax’ on the rich is a double-edged sword. Much as it may bring in revenue for the cash-strapped government, the measure can turn the wealthy against the ruling coalition.

Pakistan stares at bankruptcy despite ongoing negotiations between Islamabad and IMF to resume the latter’s $6 billion bailout package. The free-falling Pakistani Rupee—which has become Asia’s “worst-performing currency in 2022” with a drop of nearly 16.5 per cent (since December 31, 2001) against the US dollar—crossed 212 per dollar on June 21. The foreign exchange reserves have depleted to below $9 billion and the country has less than six weeks of import cover remaining, according to media reports. The IMF has set tough preconditions like hiking electricity tariffs and imposing a levy on petroleum products to revive the stalled $6 billion bailout package to Pakistan.

According to ‘Water Crisis in Pakistan: Manifestation, Causes and the Way Forward,’ a report released by the Pakistan Institute of Development Economics, the country ranks 14 out of 17 “extremely high water risk” countries in the world, as it wastes one-third of available water. More than 80 per cent of the country’s population faces “severe water scarcity.” Water availability has dropped from 5,229 cubic meters per inhabitant in 1962 to just 1,187 in 2017. Besides affecting the agriculture sector, which contributes to 23 per cent of Pakistan’s GDP and employs 42 per cent of its labour force, the crisis will pose a threat to energy and food security, according to analysts.

Pakistan is currently producing 22,000 MW of power against a requirement of 26,000 MW—a shortfall of 4,000 MW. However, some Pakistan media reports have pegged it at around 7,800 MW. According to a June 7 Daily Times report, Karachi was reeling under outages for up to 15 hours, while Lahore experienced blackouts for nearly 12 hours. A day before, the Pakistan government had announced its decision to reduce scheduled power cuts to 3.5 hours daily stating that by June 30 this would be brought down to two hours daily.

Last week, US Senate Majority Leader Charles E Schumer blamed former PM Imran Khan for strained relations between the US and Pakistan. The Sharif government of late, however, is cosying up to Washington, as opposed to Khan’s anti-US campaign that he had intensified after being voted out of power. As Pakistan’s economy is in a deep crisis, the country often turns to West-led financial bodies such as the IMF and the World Bank. So, it would be in Islamabad’s interests to adopt a conciliatory approach with the west for now—the Washington-based IMF has provided 22 bailouts to the country since 1958, state media reports.

As many as 1.7 million children and women, as of 2021, needed nutrition services, 4,63,000 required access to healthcare, and 1.8 million needed water, sanitation and hygiene. Moreover, Pakistan’s polio eradication campaign is in shambles—a high number of cases emerge in the northwestern tribal district of North Waziristan. Eight polio cases were recorded in the span of just one month, raising concerns about the rise of the disease among its 220-million population. 

Pakistan stares at ruin with a begging bowl in hand. With its economy in shambles, the looming Afghan Taliban terror threat, bitter internal political rivalries and the IMF twisting its arm, an unstable neighbour is India’s biggest headache.

India Matters


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