Imran Khan became the 22nd Prime Minister of Pakistan on Aug. 18, 2018. His initial popularity derived from his visionary promise to build a new Pakistan based on growing economic opportunities for the impoverished Muslim majority of 220 million people.
However, rampant inflation and escalating national debt hampered the implementation of his vision. Although he maintained the support of young Pakistanis, some of his political allies defected to the opposition. Khan was ousted from office on April 10, 2022, when he lost a parliamentary vote of no confidence.
For many people, especially in the West, the politics of Pakistan are mysterious and utterly complicated. Hence, it is beneficial to briefly reflect on the financial and economic reasons that contributed to the collapse of Khan’s government.
Yoshihide Suga, Prime Minister of Japan from 2020-21, once said that “A strong economy is the source of national strength.” The financial and economic trajectory of Pakistan in the 21st century may well confirm the validity of Suga’s dictum.
Pakistan is a country with enormous potential and talented people. But corrupt and dishonest leaders have been responsible for instigating internal convulsions, which have damaged the reputation of Pakistan in the world.
Between 1999 to 2022, four different political regimes ruled Pakistan. The first regime covers the period from October 1999 to August 2008, when the military ruled Pakistan with a civilian government.
During this period, in 2005, the Karachi Stock exchange crashed. The crash wiped more than $13 billion off the value of the share market in a matter of days.
In 2008, more than 4,500 investors applied for compensation, although the total number of affected investors exceeded 50,000.
Global financial calamities such as the collapse of Enron in December 2001 and the WorldCom scandal of 2002, followed by the collapse of Lehman Brothers and the Global Financial Crisis (GFC) in 2007-08, exacerbated investors’ distrust in the capacity of the capital markets to generate wealth.
As Pakistan’s economic and fiscal crisis unfolded in the early months of 2008, inflation soared to 25 percent from a rate of 7 percent in the preceding year. Before the year’s end, share prices at the Karachi Stock Exchange had collapsed by nearly 60 percent from their peak in April 2008. Aggregate market capitalisation—the market value of companies based on the current market price of their shares—shrank to less than 20 percent of GDP at the end of 2008, compared to the peak of about 100 percent nine months earlier.
The GFC manifested itself in the emergence of serious balance-of-payments discrepancies, which resulted primarily from an unprecedented increase in imports, partly caused by a sharp increase in oil and food prices.
There were also reports that Pakistani residents stashed a sizable amount of capital abroad, but Pakistan’s balance-of-payments accounts did not document this properly.
Hence, it was the terms-of-trade shock rather than a capital flight that was the single most important external influence on Pakistan’s deteriorating macroeconomy.
However, in addition to a very tense domestic political situation, the collapse of the international financial markets also caused investors in Pakistan to anticipate, early in 2008, the collapse of the Karachi stock market.
These financial and economic dislocations reveal that Pakistan’s precious minerals and natural resources, including coal, gold, copper, bauxite, mineral salt, chromite, and iron ore, were not used by the authorities or private investors to establish a robust economic foundation for future sustainable growth.
During the second political period, the post-global crisis period starting in September 2008 and ending in March 2013, Pakistan suffered from bad governance.
Good governance promotes the equitable exploitation of natural resources and supports equal opportunities among people to stimulate economic and social development.
Although the maintenance of good governance is the primary obligation of any government, governing Pakistan became a nightmarish project. For example, the government failed to develop an efficient and fair tax system. As a result, the tax policies in Pakistan excessively burdened the public and favoured businesses.
In addition, the absence of comprehensive economic and budgetary planning contributed to corruption and misuse of national resources. This is reflected in Pakistan’s low score on the 2021 Corruption Perceptions Index, where it languishes near the bottom with a score of 140.
Pakistan thus needed to revise its strategies regarding the governance and management of civic matters to attain economic growth and foster development.
Another blow to Pakistan’s economy happened in 2016—in the middle of the third period that lasted from June 2013 to June 2018—when the International Consortium of Investigative Journalists (ICIJ) released 11.5 million secret documents, later known as the Panama Papers, and made these publicly available.
The documents, sourced from Panamanian law firm Mossack Fonseca, contained embarrassing financial revelations about public figures in many countries, including Pakistan. These public figures were ostentatiously involved in corrupt behaviour and questionable tax-avoiding practices for the purpose of securing personal gains. Pakistan was thus unable to extricate itself from these Panama revelations. Financial fraud and poor governance resulted in an increase in Pakistan’s debt levels.
The fourth period coincides with Imran Khan’s government, which faced numerous internal and external challenges, including the devastating COVID-19 pandemic. Moreover, like the rest of the world, Pakistan faced a recession from December 2019 when all economic indicators were showing downward trends.
The best-performing countries like India, Singapore, Malaysia, and Australia also faced severe threats, resulting in lockdowns, border closures, social distancing, mask and vaccine mandates, adversely affecting their economy.
However, Pakistan implemented a “smart” lockdown policy to restart economic activities, including work from home policies and the development of home delivery services, among other measures that successfully contained the spread of infection. It also unleashed the potential of good governance in the country.
Additionally, given Pakistan’s “strategic” position on the Asian sub-continent and the interest of foreign donors in providing help, the country continued to benefit from foreign investment.
Provided Pakistani policymakers and politicians have learned from their past experiences, mistakes could be avoided, and the economy might enter a period of sustained rapid growth. If so, the Khan government may have bequeathed a legacy of economic stability and prosperity, and Suga’s dictum would finally be realised.
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