In Pakistan, old hopefuls are struggling to get the weak economy back on track Business and business news

Pakistani voters go to the polls on Thursday amid a deep economic crisis. Inflation is at 30 percent, almost 40 percent of people live below the poverty line and the debt ratio to gross domestic product (GDP) has risen to 72 percent. Pakistan's new government will have to deal with these problems and an aging public infrastructure.

“We have power outages for two hours every day,” said Muhammad Waqas, a caretaker from Islamabad. “In summer, when it’s hot, you sit idle and suffer.”

As with other state-owned enterprises, the inability of successive governments to invest in the Pakistan National Transmission and Despatch Company has left it vulnerable to failure.

More recently, the COVID-19 pandemic and energy supply challenges have dampened Pakistan's growth prospects and limited efforts to diversify its export base away from low-value-added products – such as cotton and rice – towards higher-value goods.

At the end of 2022, eight million people were displaced by monsoon floods, causing $30 billion in damage to the country. The loss of the cotton crop affected the country's textile industry, a major source of exports. In all likelihood, Pakistan's growth rate fell into negative territory in 2023.

Pakistan, which imports much of its food and fuel, consistently runs large trade deficits. Partly due to increased commodity prices, foreign exchange reserves shrank to less than a month of imports last May, leading to shortages of essential goods.

The following month, Islamabad narrowly avoided default after receiving a $3 billion loan from the IMF – its 23rd fund program since 1958. But the loan package came with stringent conditions and unpopular reforms.

As part of the deal, the government agreed to impose new taxes on its struggling energy sector. They also agreed to cut utility subsidies, which led to a sharp rise in electricity prices and hit poorer households particularly hard.

Inflation, which reached nearly 30 percent in December, has risen since early last year after Pakistan's central bank agreed to liberalize the exchange rate as part of an existing IMF program. When exchange controls were lifted, the value of the currency fell sharply.

The Pakistani rupee was Asia's worst-performing currency in 2023, depreciating around 20 percent against the US dollar. “We expect the rupee trend to continue slightly lower,” said Krisjanis Krustins, director at Fitch Ratings. “This will reduce Pakistan’s current account deficit as goods from abroad become more expensive and import volumes fall.”

According to the State Bank of Pakistan, the country recorded a balance of payments surplus of $397 million last December.

Krustins told Al Jazeera: “Pakistan’s imports of goods fell by 27 percent in the last calendar year. Exports continue to be held back by limited human capital and poor infrastructure. So corrections in the trade balance had a depressing impact on the economy.”

Recent job losses have pushed the official unemployment rate to a record 8.5 percent and pushed another 8.4 to 9.1 million people into poverty.

“Structural problems”

Regardless, Pakistan has long suffered from “structural problems,” says Tariq Banuri, a professor of economics at the University of Utah.

“Firstly, Pakistan’s growth rate is not high enough to accommodate the rapidly growing population. It is also one of the worst performing countries in the world when it comes to tax collection. Landowners are exempt from income tax and there is no capital gains tax on real estate.”

Successive governments have refrained from introducing tough tax laws because they feared disrupting powerful business interests, Banuri said. “But that could change this year due to the debt situation,” he added.

Islamabad's failure to increase tax revenues and modernize state-owned enterprises has led to persistent budget deficits and high debt burdens. In absolute terms, foreign debt reached $125.7 billion last year.

Looking ahead, Pakistan has to repay $24.6 billion in foreign debt by the end of June, the majority of which belongs to China.

China is Pakistan's largest bilateral creditor, and Beijing agreed to extend over $2.4 billion in loans last year. Many economists expect the new government will try to secure longer-term funding from the IMF – its current contract expires in April.

Given last year's public spending cuts, “further fiscal consolidation is unlikely,” said Yousuf Farooq, director of research at Chase Securities. “The fund will seek to impose further conditions, but probably from wealthier parts of society.”

“Assuming the new government can get another IMF loan, it will struggle to repay unless it imposes new taxes on agriculture and real estate. If we can also extend short-term contracts with longer repayment schedules, I hope debts will come down in the short term,” he said.

Meanwhile, foreign investment continues to be hampered by security concerns along the Pakistan-Afghanistan border. Since the Taliban returned to power in Kabul in 2021, Islamabad has accused its neighbor of harboring militants who carry out attacks on its soil.

Political crisis

A spreading political crisis is also threatening Pakistan's economic recovery. Today, Islamabad's fragile democracy is overseen by an interim government following the dismissal of Imran Khan as prime minister in April 2022.

The legitimacy of the February 8 election was questioned because Khan was not on the ballot. He is in prison on corruption charges. And although he is barred from running, Khan's approval rating is 57 percent, higher than any other politician.

As things stand, the Pakistan Muslim League-Nawaz (PMLN) chief is the favorite to win. Sharif's PMLN has seized power four times in the last three decades, either under him or his brother Shehbaz Sharif.

Earlier this month, the Supreme Court further weakened Khan's Pakistan Tehreek-e-Insaf (PTI) campaign by banning the use of a cricket bat as a symbol – a major setback in a country where millions of illiterate voters identify candidates by their party logos .

For Banuri, the economics professor: “People are right to criticize Pakistan’s political system, which is dynastic and extractive. But despite all this, I remain an optimist. I think the worst of the economic crisis is behind us.”

“While I always hope that tomorrow will be better than today, I do not believe that the major political parties will bring about meaningful change. They seem to be much more concerned with gaining power,” he added.