All is slightly well

Rarely do we come across news, on the economic front, that allows us to take a big sigh of relief. Luckily, this year has been relatively okay for us. In a report published a few days back, a brokerage firm revealed that Pakistan’s perceived risk of default has declined 88 per cent; Pakistan’s CDS spread has come down from its peak of 12,388 basis points (bps) in November 2022 to 1,493bps. ‘Default risk’ became the talk of the town after former prime minister Imran Khan was ousted from his office following a vote of no-confidence. When the PDM-led government came to power, most people raised alarm bells and predicted that the country was destined to see a precipitous economic fall. Thankfully, this did not happen, although this came with a series of tough economic decisions, including high taxes and a temporary ban on non-essential imports. But this episode also points to the disastrous effects of political uncertainty.

Many experts are of the opinion that, while a high CDS spread is a cause for concern, this was a result of the economic crunch faced during the Covid-19 pandemic. But for Pakistan, political games have been more damaging than any other external factor. In October 2022, a month before the default risk reached its peak, the PDM government asked its finance minister to leave. This was done following a public display of disagreements another former finance minister had with the way the country was handling talks with the International Monetary Fund (IMF). This fuelled discontent among people who were already unhappy with the sudden change in government. What opposition here often forgets is how calls of protest, unstopped criticism towards economic policies, and the expression of a desire to leave the country give something to foreign analysts to keep Pakistan forever in the ‘high risk’ slot. Institutions listen to what experts say about a country, and their predictions that the country may head towards a civil war push them to be wary of Pakistan’s capability to honour its financial commitments, eventually hurting us as such estimates keep foreign direct investment (FDI) away as well.

Most analysts believe that this significant drop has a lot to do with the IMF deal that Pakistan recently secured – a bailout that came after high sacrifices. Moving ahead, the government must focus on expanding the tax net, taxing those who have been enjoying the riches on the back of tax dodges. Authorities should also focus on building trust and incentivising people. They should build employment opportunities for people so they can utilise their potential. Two years of economic troubles have led to a situation where everyone is frustrated, and lacking motivation to be productive. The World Bank also projects Pakistan’s economy to recover slowly but stay below its potential, with real GDP growth reaching 2.8 per cent in FY25. This will be driven by easier imports, fewer supply chain issues, and lower inflation. It says poverty will stay near 40 per cent until FY26 but should reduce gradually with continued reforms. Our finance team must figure out a way to provide incentives to people to increase productivity, without missing out on its revenue targets. Pakistanis have a lot of potential; they only crave decent opportunities. It’s time the government shifted its focus on this important aspect.