The dramatic rise in the number of terrorist attacks, the political unrest and the terrible floods that hit Pakistan last summer are all factors contributing to the worsening economic crisis the country is facing. As a direct consequence of this, inflation has reached an all-time high.
According to the data provided by the Pakistan Bureau of Statistics (PSB), Pakistan's retail inflation reached its highest level in the week ending on March 22, reaching 47 per cent annually. The surge in inflation was primarily attributable to the increasing cost of food. The cost of vital commodities has been rising in the country, with the prices of essential food items like wheat flour leaping by a whopping 120.66 per cent on-year and onions by 228.28 per cent. The increase comes even though the overall supply of these goods has stayed the same.
Several commonly used goods have also seen their costs soar to all-time highs, with cigarette prices increasing by 165.88 per cent, tea prices increasing by 94.60 per cent, basmati broken rice prices increasing by 81.22 per cent, and egg prices increasing by 79.56 per cent. In addition, energy costs continued to skyrocket, with the price of cooking gas increasing by 108.38 per cent, the price of diesel by 102.84 per cent, and the price of gasoline rising by 81.17 per cent. There have been numerous stampedes and general chaos at the various official wheat bag distribution points. There have also been reports of individuals who have died due to exhaustion while waiting for aid to be distributed.
The Pakistani government depends on the International Monetary Fund (IMF) for the timely release of the subsequent portion of the aid that is a component of the $6.5 billion bailout package secured for the country in 2019. Therefore, from January 31 to February 9, marathon negotiations took place between representatives of the IMF and Pakistani authorities in Islamabad. Before releasing the next portion of financial assistance, the IMF reportedly demanded stringent austerity measures and assurances on external financing.
As a result, the increase in the cost of petroleum went into effect on March 16. In Pakistan, the price of regular petrol (MS) is 272 rupees, while the price of high-speed diesel (HSD) is 293 rupees. The price of a litre of kerosene oil has increased to 190.29 rupees, whereas the price of a litre of light diesel oil continues to be 184.68 rupees.
Impact of the economic crisis
On February 21, to improve tax collections and satisfy the terms imposed by the IMF for requesting a USD 1.1 billion loan facility to prevent an economic collapse, the Pakistani National Assembly unanimously adopted a money bill. The lower house of parliament passed "The Finance (Supplementary) Bill 2023," often known as a "mini-budget," just days after the International Monetary Fund urged the cash-strapped nation to take bold action to prevent falling into a "dangerous position" where its debt needs to be restructured. The proposed law would increase the sales tax on high-end items from 17 per cent to 25 per cent. Moreover, a rise from 17% to 18% has been made to the general sales tax. To keep its 'foreign exchange' reserves over $3 billion, Pakistan desperately needs an IMF disbursement, and with this bill's passage, Pakistan will be one step closer to receiving that disbursement.
S&P has given Pakistan one of the lowest credit ratings feasible, CCC+. Electricity outages, empty gas stations, and soaring food prices are all current problems. As a result, Pakistan is in danger of collapsing. According to Pakistani pro-Army commentators, economic instability may lead to lower defence spending, damaging the country's ability to retain a strong and modern defence force. This crisis could also affect the troops' morale because they might not receive their pay on schedule or encounter other monetary issues.
Pakistan's financial structure
The Pakistani Army controls the whole economy, from the military to civilian petrol stations, hawala banks, export-import enterprises, etc., as Pakistan's GDP is the Army's GDP.
Pakistan's military budget increased from USD 10394.50 million in 2020 to USD 11304.80 million in 2021, as per SIPRI. The locals are used to seeing significant spikes in military spending. With a record high of USD 11732.10 million in 2018 and a record low of USD 153.40 million in 1957, Pakistan's military expenditure climbed by an average of USD 3113.09 million between 1951 and 2021.
Global macro models used by Trading Economics and other institutions project that Pakistan's Gross Domestic Product (GDP) will grow by 2.80% per year by the end of 2022. If Pakistan's economy gets back on track, econometric models project its GDP annual growth rate to range between 3.50 per cent in 2023 and 5.00 per cent in 2024. The worldwide macro models and expertise of Military Trade Economics predict that by the end of 2022, Pakistani defence spending will have reached USD 12,000 million.
Military-owned businesses
The Pakistani military is thought to have substantial financial holdings in several industries, including real estate, construction, agriculture and mining. However, since the military withholds financial data regarding its economic endeavours, it is impossible to officially determine the precise net worth of the Pakistani military-run business empire.
In a written response to a senator from the Pakistan People's Party, Defence Minister Khwaja Asif informed the National Assembly that the Fauji Foundation, the Shaheen Foundation, the Bahria Foundation, the Army Welfare Trust (AWT), and the Defence Housing Authorities (DHAs) oversaw nearly 50 projects, units, and housing colonies across the country.
Resolution with Pakistan military
The Pakistani military owns and operates shopping malls, hospitals, schools, colleges, and universities and even builds and sells new homes. Charitable organisations such as the Fauji Foundation (Pakistan Army), Shaheen Foundation (Pakistan Air Force), Baharia Foundation (Pakistan Navy), Asakari Foundation, AWT, DHA etc., oversee the operations of these businesses. The mere fact that they may avoid paying taxes is what gets them recognised as charities in the first place. These organisations' professed mission is to improve service members' lives, yet their stockholders are actually former Army generals. Moreover, Pakistan's military generals receive lavish retirement benefits.
Pakistan has requested $1.1 billion from the IMF, but if the military cuts costs by just 10 per cent, they will have $1.2 billion to spend.
If enterprises managed by the military are taxed at the same rate as non-military businesses, that will be good for the economy as a whole. The wisest course of action would be for the Pakistan Army to stop engaging in commercial enterprises and instead focus solely on defensive operations. The Pakistani armed forces should distribute a portion of their profits to the exchequer for a reasonable amount of time if they are serious about stimulating the economy. Since private enterprises provide post-retirement work opportunities and supplemental income, the likelihood of the Army shutting one down is low.
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Conclusion
Pakistani economists have begun to sound the alarm that the government should prepare for inflationary pressure to rise steadily over the remaining days of this month. On March 21, the government announced a package that will provide commodities that are used daily at a reduced price at utility stores during the month of Ramadan.
The country believes that the Pakistani Army is at war with India to safeguard Islam. To do this, the Pakistani Army regularly trains jihadists who are dispatched to India to commit terrorist acts. This will undoubtedly bolster the Pakistani military's claim to a significant role in allocating funds.
The Pakistan Army can stop these illegal operations of arming and training terrorists, provide weapons and ammunition, and assist the country in making better use of its resources and revenue. The economic unrest has allowed the Pakistani military an opportunity to make amends for their dark past and present themselves in a more positive light.
(Dinesh Kumar Pandey is a Senior Fellow at the Centre for Air Power Studies and was a Group Captain in the Indian Air Force. Views are personal.)