Pakistan’s own economic crisis has sparked worried comparisons to the disaster unfolding in nearby Sri Lanka.
Hambantota in southern Sri Lanka housed ousted President Gotabaya Rajapaksa following the recent crisis, until he was forced to flee the country entirely. That continues a trend of the city, and especially its strategic deep-sea port, being in the news for all the wrong reasons. In 2017, when Sri Lanka found itself struggling to make debt repayments on time, it sold a 99-year lease of the port to the Chinese company that had constructed it for some quick cash. Many analysts and writers penned articles pointing to Hambantota as Exhibit A in the theory that China deliberately plunges developing countries into a “dept trap” by offering loans to finance extravagant infrastructure projects.
Similarly, many analysts and writers who warned the same fate might befall Pakistan, where Chinese authorities have been heavily involved in investment projects, particularly under the China-Pakistan Economic Corridor (CPEC) since 2015. Like Sri Lanka’s Hambantota, the Chinese have been heavily investing in Gwadar, the deep-sea port in Pakistan’s southwestern Balochistan province that serves as the epicenter of CPEC in Pakistan. Hence, the news about Hambantota port rang alarm bells in the corridors of power in Pakistan. Some feared that if Chinese influence further increased in Gwadar, it might follow the example of the Sri Lankan port, for all the wrong reasons.
Today, the current political and economic situation has worsened tremendously in Sri Lanka, culminating in the country defaulting on its debt payments. Amid shortages of basic necessities, Sri Lankans have erupted in mass protests. And the crisis is unlikely to be resolved soon, even though the protesters have forced Rajapaksa to quit. He was replaced by Prime Minister Ranil Wickremesinghe, who is also unpopular with the masses and seen as a symbol of the political status quo.
Once again, Pakistan (among other developing countries) has come under discussion in light of the worsening situation in Sri Lanka, with questions as to whether the country may fall down the same dark path.
Undoubtedly, Pakistan, too, has a shambling economy, now going from bad to worse in the wake of political uncertainty. There is gross unemployment, while the inflation rate has skyrocketed. Among other things, The News, an English national daily in Pakistan, reported recently that the value of the Pakistani rupee versus the U.S. dollar has worsened more than 4,100 percent, from just 4.76 rupees per U.S. dollar 50 years ago, in May 1972, to a whopping 200 rupees per dollar on May 18, 2022. The depreciation of the Pakistani rupee against the U.S. dollar continues its downward slide, and it stands at 225 per dollar at the time of writing, further compounding the country’s economic miseries amid dwindling foreign exchange reserves.
Like Sri Lanka, Pakistan has welcomed Chinese investments to support its ailing economy. This is why some analysts argue that heavy Chinese investments in Pakistan pushed the country to the brink of economic collapse. But that narrative is an exaggeration: Most of Pakistan’s problems, especially its economic problems, are the creation of its own mismanagement, lack of planning, political uncertainty, and, above all, the deteriorating relations with neighboring countries that have had traditionally good relations with Pakistan.
A case in point is the recent government of former Prime Minister Imran Khan, which came to power in 2018, allegedly with the backing of powerful security establishment. During his tenure, which came to an abrupt end in April 2022 through a no-confidence motion in the parliament, Pakistan’s relations with both Saudi Arabia and Turkey deteriorated. Traditionally close friends of Pakistan, these two countries have previously supported Pakistan in times of need. Meanwhile, China, an all-weather friend of Pakistan, remained dissatisfied with progress on CPEC projects, which slowed down under Khan’s rule. Thus as Pakistan’s economic crisis began to sink in, Islamabad’s friends were less disposed than usual to provide a bail out.
Perhaps most notably, Pakistan’s ties with the United States plummeted. Washington remained furious over Pakistan’s role in supporting the Taliban in Afghanistan, to the extent that U.S. President Joe Biden did not call Khan after becoming president. The downward slide did not stop there. Khan went one step further and visited Russia in February 2022, a move bound to anger the U.S. — it happened to be the very day Moscow began its invasion of Ukraine.
When he was ousted by a no-confidence vote in parliament, Khan further blamed the U.S. for his downfall. In the media and public gatherings, he claimed he was the target of a U.S. conspiracy to remove him from office. Khan’s strategy was to whip up anti-U.S. sentiments in Pakistan in order to gain votes and to woo his political opponents – and it worked. In the recent by-elections in Punjab, the most populous province in the country, his party clinched a majority of seats, thanks to his fiery speeches and the upsurge of inflation that began during his own rule.
Above all, Pakistan’s powerful security establishment has extended its role and influence in all sectors, including politics. It is common knowledge in Pakistan that governments come and go with the military’s approval. But the heavy hand of the security establishment has created a stalemate in the country, preventing it from proceeding on the path of development. Most of Pakistan’s problems, including its economic and political uncertainty, emanate from this issue. For example, Pakistan’s security-centered approach to nearby terrorist groups pushed the country onto the grey list of the Financial Action Task Force (FATF), with economic consequences. Successive governments have struggled to remove Islamabad from the grey list (and stay off it).
On the other hand, the new government in Islamabad, led by Prime Minister Shehbaz Sharif, is faced with myriad problems, starting with an economic crisis. In the wake of prevailing economic issues in Pakistan, the Sharif government is negotiating with the International Monetary Fund (IMF), to receive $2 billion in relief funds. Yet, if the prevailing political uncertainty further increases, it will be quite hard to get this package from the IMF. For the purpose of attaining a loan package, Pakistan has reportedly taken several steps to reduce its expenditures, increase energy prices, and improve tax collection, as demanded by the IMF. But these moves are unpopular with the public and could lead to yet another change in government this fall, when elections are due.
Moreover, Pakistan has a long history of running to the IMF when economic challenges become dire. Its repeated requests are proof that this is not a long-term solution to Pakistan’s economic woes.
As the economic crisis continues to unfold, the parallels to Sri Lanka are becoming alarming. Like Sri Lanka, Pakistan faces a growing shortage of foreign exchange reserves, limiting its ability to import basic necessities like food and fuel. And like Sri Lanka, too, that economic turmoil is mapped onto fertile grounds for political contestation. Should the economic situation bottom out, Pakistan could also spiral into mass protests and a leadership vacuum.
Noted Pakistani columnist Zahid Hussain is one of the voices warning that Pakistan must take action now to avoid Sri Lanka’s fate. “What led to Sri Lanka’s economic collapse is obvious. Crippled by the shortage of foreign exchange, the country has not been able to pay for imports of even essential commodities such as fuel. In fact, the crisis had been building up for many years as the country piled up foreign debts to the tune of $51bn,” he wrote for Dawn, a Pakistani daily.
“…There are many developing countries, including Pakistan, which confront a similar predicament. We may not be in Sri Lanka’s shoes yet, but are not very far off as there are some comparable symptoms.”
Unfortunately, grounded realties tell us that Pakistan is, gradually and slowly, slipping into dire economic and political uncertainty. If the policymakers of Pakistan continue to ignore the warning signs, as they have always done in the past, things may lead to a similar crisis as that unfolding in Sri Lanka. It is high time Pakistan swallowed the bitter pill of hard economic reforms before it is too late.
Muhammad Akbar Notezai is a Lahore-based journalist and correspondent for The Diplomat.
This article was originally published on The Diplomat. Views in this article are author’s own and do not necessarily reflect CGS policy.