WHY DO THE LIGHTS IN PAKISTAN KEEP GOING OUT?

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What Pakistan's Collapse Could Mean for the World

By William B. Milam       26 February 2023

The question in the title of this article has landed again in our inboxes and our consciences by the power outage throughout the entirety of Pakistan last Monday, January 23. In some parts of the country, the blackout lasted into Tuesday and even Wednesday. This followed a what could be called a perfect storm of disasters to Pakistan’s economy and for its people, from the natural disaster of a super-sized flood that is disrupting rural life and agricultural production to the dysfunctional political squabbling that over power while the counry faces a serious existential crisis, that may end very badly. It is not much of an exaggeration to say that power outages in Pakistan are a dime a dozen. They occur much too frequently for most Pakistanis, but outages that cover the entire country for an entire day, let alone several, are not normally so common. Most outages are localized, a town, a part of a city, a province. And most of the time, they do not last a full day, but typically a few hours because the demand on the power grid has become suddenly too great and someone has to go without power until the demand goes down. In Pakistan, the power grid is like a roulette wheel in which the little round ball that goes around the bowl of numbers determines whether one has light all 24 hours or only a few. This particular power outage, however, was a signal for all to see that a perfect storm of major setbacks is bringing a serious economic crisis that now has to be front and center of Pakistani concerns. An economic meltdown is threatening the country.

Pakistan is subject to recurrent economic crises, typically driven by balance of payments difficulties which, when flawed policies are in force, tend to spin out of control and rise to a level that threatens default on its sovereign debt. To escape the economic and financial disaster of a default on its debt, Pakistan has turned to the International Monetary Fund (IMF) 23 times since 1980 to help it out of the financial bind by extending loans to shore up its finances. In return Pakistan promises economic reform to put its economy on a sustainable basis, and so it can repay the loans. Often it receives financial support from friendly surplus countries in its region like Saudi Arabia, which increases the international support. It is a drama that many Pakistanis have seen too many times; They know how it ends, or really how it never seems to end. And by now, the IMF must also know how it always ends- with the Fund basically rolling over the growing debt, and no economic reform to speak of, only another crisis around the next corner.

But this time looks different in important ways. First, this is a mega crisis, not limited to the financial sector but impacting across the entire economy and society (nor would a similar crisis caused by debt default be limited to that sector). Add to the balance of payments crisis, the impact of the natural disaster flood on food production, the fact that Pakistan is more dependent on costly Ukranian wheat as well as foreign energy imports than most countries, its soaring inflation, its currency hemorrhaging value (depreciating rapidly), its huge debt overhang (a big chunk to China) which it will never be able to satisfy without rescheduling (the result of living off borrowing from abroad for most of its existence), its rapidly dwindling foreign exchange reserves (down to, perhaps, only a few weeks of imports), one gets the feeling that Pakistan is looking into an economic and political abyss, and could follow Sri Lanka into that abyss.

Second, Pakistan looks to be in a policy paralysis. It can’t even make up its mind this time whether to take that walk to the IMF’s door, although there seems no alternative. And the longer it waits, the closer it gets to default We know that an election is due later this year, and the approach of an election always puts a chokehold on the sitting government, but this seem like a very problematic time for the finance minister who has held the job several earlier times to talking tough  and taking a confrontational approach to the IMF on his way to the Fund’s door, when the object will be to get the fund to relax its conditions and bail Pakistan out. The way I read the numbers is that Pakistan is in the direst economic strait it has ever been, and default is getting more likely every day. (Of course, nitpicking experts point out that default has already occurred as friendly country lenders have rolled over the loans that have come due. One rumor is that the government is not able now (or not willing) to pay for containers of goods at Pakistan’s ports; this is perhaps what is causing reports of noticeable shortages of goods, including food, in the markets.

Most reader’s initial response will be, “why are we not sot surprised?’ And rightly so. As alluded earlier, Pakistan has 30 years of experience at getting continually bailed out after constantly living on others income. Pakistan has had many chances to undertake a structural reform of its economy and has had a number of such programs under the aegis and with the support of the IMF and often the World Bank. These programs were aimed primarily increasing the revenue generation of the government so that Pakistan could build a self-sustaining economy, one that could stand on its own and not have to borrow from abroad for recurring expenditures. I had not looked for some time at one of the primary indicators of “self-sustaining,” the tax to GDP ratio of Pakistan. It was very low the last time I checked, which may be a decade ago. The ratio last year, according to official statistics was 9.9 %. Just for context, I looked randomly at some others. Afghanistan’s was also 9.9% India was 12 %. Bhutan was 13%. Obviously, that ratio differs among groupings of countries, with more developed countries having generally higher ratios. The World Bank has the World average at 13.5 %, but I wouldn’t put a lot of faith in that number. But in general the OECD countries are over 30% though the US is only 20 %. Latin America is about 15 %. Oil producers have low percentages, but they are financed by their underground liquid gold. The poor countries, Africa primarily, also have low ratios although Rwanda sticks out with a 15% ratio. However, a nuclear power, with a large military to support, and a pretense at to play in the big leagues, (and with large segment of its population at the poverty level) has no business with a 9.9 % tax to GDP ratio. It has been a scandal and a shame for 30 years that Pakistan could not bring itself to recognize that living on the cuff cannot last forever. It is very late, but perhaps not too late, to join the list of self-sustaining survivors.

The article appeared in the Friday Times