As Pakistan struggles with yet another round of loans from the IMF, people are keen to ask how we got here in the first place. The answer seems simple. Unrestricted and unsustainable spending by the state is compounded by a painfully low tax base. The lack of sufficient and good-quality domestic production leads to an overdependence on imports and a lack of exports, especially in intermediate to high-value goods. Interest payments on past debts are racking up. In short, everything is moving in the same direction: a negative balance of payments.
The next question, obviously, is what is the solution?
“Austerity,” the answer is from the IMF and economic theorists. The government must substantially scale back its spending, especially on wasteful subsidies on energy and consumption. It must raise taxes and take active efforts to widen the tax-base. But revenue-raising measures such as taxes come second; the priority is always to strangle spending and reroute revenues to debt servicing and perhaps to productive investments.
But how viable is austerity, and is it even the right answer?
To many, the contention with austerity in a country like Pakistan is perhaps also the reason it is needed. The country is too poor. Whilst the state is hard-pressed to pay its debts, its people can barely afford the necessities for living. Unprecedented inflation due to dependence on global value chains ruptured by international conflict and the COVID-19 pandemic has meant that the price of basic foodstuffs has skyrocketed, as has the cost of transport, energy and of general living. Successive and sharp rises in the price of petrol, for example, has been a significant political issue for months now.
Such issues disproportionately affect the poorest segments of society. The abrupt scaling back of state subsidies on petrol has caused the price to triple in the span of a year, and for many, owning their own form of personal transport (primarily motorbikes) is no longer viable. Public transport is woefully inadequate, and is even completely missing in most places outside major urban centers. Even within urban areas, the cities of Punjab are far better connected and funded than cities in Sindh, KPK and especially Balochistan, reflecting decades of provincial inequality.
There are other reasons why it is difficult to commit to a program of austerity in a state like Pakistan. Floods in the northern areas that devastate infrastructure and homes are virtually a yearly occurrence now, and the quality of construction and maintenance is incapable of sustaining such events. Disaster aid from the state is always required in such occasions. Furthermore, capture of the state apparatus by a dominant military establishment also means that military budgets are largely unaffected by economic downturn and continue to draw huge and disproportionate sums of money out of the national coffers, even during periods of austerity.
Another significant cause of the issue is unprofitable state-owned enterprises in the country. Pakistan International Airlines is perhaps the most famous one, but others such as Pakistan Railways are also significant contributors to the drain on state finances. These companies have workforces numbering thousands of people above what is required for them to work due to public hiring, and downsizing or privatisation is rendered virtually impossible due to political pressure: employees are designated as public-sector employees and thus protected from unjustified firing. These companies are thus extremely inefficient and operate on perennial losses.
The inability of the Pakistani state to raise enough revenue to service its debts means that its liabilities to foreign – but also increasingly domestic – creditors are in the billions of dollars, and only rising due to the accumulation of interest. Austerity seems the natural solution, but it is full of risks that a poor state like Pakistan can hardly afford.
So what is needed for austerity to work, or what is the alternative solution?
In an ideal world, the solution is simple. The state must actively pursue the expansion of its tax-raising capabilities, especially by focusing on those segments of the population that are currently untaxed, such as agricultural landholdings. Secondly, state spending must be focused towards public investment rather than simply subsidies, in order to create economic growth and break the current cycle of stagnation the economy finds itself in.
The issue is that the world is not ideal. Political economy constraints mean that certain, powerful, segments of the population will always go untaxed barring significant reform, and it is these same segments that would owe the most in taxes. Secondly, investment by the government in creating actual economic activity is prevented by the state of the market in the country; whereby the only profitable investment in the country today is in the realm of real estate, and that too exceedingly in speculative holding rather than in construction on that land. Even if alternate, viable sectors existed, the government doesn’t have the money to invest and lacks the credibility to attract private investment.
Pulling government spending as required by IMF structural adjustment and other proponents of austerity is thus unrealistic for Pakistan, for the reasons outlined above. No realistic alternate solution presents itself, as any such solution would require the provision of large sums of money for public use by a well-functioning and aligned government, both of which the country simply doesn’t have. Barring significant reform that would enable the latter to become possible, the Pakistani economy seems set to keep dragging on in this endless cycle of debt and stagnation. It is living – quite literally – on borrowed time and money.
Taut Bataut – is a researcher and writer that publishes on South Asian geopolitics, exclusively for the online magazine “New Eastern Outlook”.