s the year 2022 reaches its end, Pakistan’s economy is mired in complex issues. A review of Pakistan’s economy during 2022 must start with an analysis of economic conditions during the last turbulent days of the PTI-led government.

National economy had been performing poorly during most of the PTI-led government. By the end of 2021, however, it had started a slow recovery, with the GDP growth projected at slightly over 2 percent. The economic slowdown did not affect all population groups equally: the agriculture sector, which primarily employs the poorest in Pakistan’s labour force, had been hard hit, resulting in a significant increase in poverty.

Several factors contributed to economic difficulties during the PTI government. Political instability, rampant corruption (even though ending corruption was the central plank of PTI’s electoral manifesto), poor law and order, severe limits on free speech, weak economic institutions and governance structure significantly constrained investment and put a limit to the structural transformation of the economy.

During most of the PTI term, a deepening economic crisis crystallised into double-digit inflation and disenchanted the masses. When the opposition challenged the teetering regime, the government went into a fire-fighting mode and cut down domestic fuel and electricity prices while global energy prices were rising.

Even if these measures were not enough to appease the masses, the ill-conceived move put further pressure on Pakistan’s fiscal deficit and the balance of payments crisis worsened. The dollar fell to historic lows. The central bank raised the interest rates contributing further to the economic slowdown.

A chain of events led to a no-confidence vote against the PTI government in the National Assembly despite Imran Khan’s histrionics and abetment by certain state actors. One of the allegations the former prime minister threw at the opposition was that it had conspired with the United States to unseat him. While Khan has retracted the claim in recent months, what transpired on the day of VONC may still be a mystery.

When a PDM coalition replaced the PTI-led government in April 2022, a set of challenges waited the new government. Throughout 2022, Pakistan has seen one of the worst inflation runs in its history. The inflation rate had remained in double digits since the emergence of Covid-19, it became virtually uncontrollable in 2022.

For the last six months, the inflation rate has remained close to 25 percent on a year-on-year basis.

A quick comparison of Pakistan’s inflation rates with our neighbours points to something deeply problematic with Pakistan’s economy. While in October 2022, inflation reached 26.6 percent year-on-year in Pakistan, the inflation rate was 8.9 percent in Bangladesh and 6.8 percent in India.

Ironically, PDM’s central argument for a no-confidence motion against Imran Khan was to bring the economy back on track. In the last seven months, however, the economic misery of the masses has worsened as the political leadership has been engrossed in a struggle for survival. Currently, Pakistan is in the middle of yet another political upheaval caused by Imran Khan’s announcement that the provincial assemblies of the Punjab and Khyber Pakhtunkhwa are to be dissolved to force early elections.

According to recent estimates, inflation has started cooling, despite the massive price shocks from the flooding. The recent easing of inflationary pressure is assumed to be the result of an aggressive contractionary monetary policy of the central bank and a tight fiscal policy of the government. Import restrictions on luxury goods and a decrease in global commodity prices have somewhat eased the pressure on the prices.

The recent easing of inflationary pressure is assumed to be the result of an aggressive contractionary monetary policy of the central bank and a tight fiscal policy of the government. Import restrictions on luxury goods and a decrease in global commodity prices have somewhat eased the pressure on the prices.

But these figures may bring little solace to the common man who has seen his purchasing power erode in an unprecedented way.

One wonders why Pakistan has witnessed the extremely high inflationary pressure when other countries in the region have remained relatively immune to external shocks. A primary reason lies in an expansionary monetary policy which speaks of a cavalier attitude. The money in circulation in July 2018 was Rs 4.7 trillion while in June 2021, the money in circulation had reached Rs 7 trillion.

Over the same period, other deposits grew from Rs 11 trillion to Rs 17 trillion. While the money supply grew at an insanely high speed, the aggregate supply remained fixed primarily because the aggregate productivity declined. A heavy and unsustainable protectionist government policy, a massive food import bill, and considerable inefficiencies in the power sector have arrested the growth of aggregate supply.

The massive increase in petroleum and electricity prices during 2022 also caused unprecedented misery for the masses and has exacted a heavy political price on the PML-N-led PDM. Recently, the energy ministry has proposed an electricity surcharge that may take energy price to Rs 31.6 per unit to cover a Rs 700 billion deficit caused by subsidies provided to exporters and farmers.

Even as factors like hyperinflation and political instability played a fundamental role in bleeding the economy, the worst thing to have happened to Pakistan was the massive floods during the monsoon season. At one point, a third of the country was submerged. Thirty-three million people have been affected. Two million houses were damaged or washed away, 1.2 million livestock were killed, 13,000 kilometre roads were damaged, and 8 million people were displaced. Over 600,000 are still living in relief camps. Standing crops were destroyed. Roads, bridges, railway networks and other infrastructures, such as hospitals and schools, were heavily damaged.

The economic cost of the floods was estimated to be over $30 billion. The loss of 1,730 lives topped the tragedies. According to another estimate, the losses reached $40 billion. The floods caused a contraction of 0.9 percent of the GDP in the agriculture sector, which may have spill-over effects in manufacturing, trade and services sectors. The cumulative impact of the floods is estimated to be as high as 2.2 percent of the GDP in FY 2022. National poverty rates may increase by close to 4 percent while multidimensional poverty may increase by around 6 percent because of floods.

The unprecedented floods were caused primarily by climate change, driven mostly by the developed world. Pakistan has been appealing to the world for debt relief and humanitarian help but the assistance offered so far has been a drop in the ocean. The Asian Development Bank has announced a $2.5 billion package, the World Bank has pledged $2 billion in aid and the IMF has approved a $1.17 billion bailout package. Additionally, the United Nations has promised to raise $81 million. The combined assistance comes to around $6 billion, a fraction of the losses suffered by Pakistan. The health and other social costs of the flood are hard to fathom.

Yet another thorn in the flesh is the looming risk of default on external payments. Contrary to popular perception that the risk of default is something peculiar to the current times, Pakistan has always remained vulnerable to the risk of sovereign default after the first decade of its independence. The patterns of vulnerability have remained more or less the same: continuously rising debt and increasing cost of debt-servicing.

The current account deficit exerts pressure on the foreign exchange reserves, which in turn causes more macro-economic instability. The lenders invariably demand austerity and checks on public spending, which may result in an economic slowdown and increasing unemployment.

The risk of sovereign default also has a cyclical pattern. In early December 2022, there was considerable uncertainty surrounding Pakistan’s ability to meet external financing obligations but the central bank repaid $1 billion on the Sukuk bonds. Saudi Arabia extended a $3 billion deposit term to support Pakistan’s reeling economy. Even if the immediate threat of default has subsided, the politics surrounding the default risk continues.

While it is not surprising that the former prime minister, Imran Khan, has expressed his fear of an impending default time and again, controversy among PDM leaders has further exacerbated the uncertainty. Former minister, Miftah Ismail, holds that Pakistan’s default risk will not subside until the IMF comes to its rescue. The incumbent finance minister, however, has sought to assure everybody Pakistan will not default. Both have accused the PTI government of laying ‘landmines’ in the economy.

The Russia-Ukraine war, fears of disruption in global supply chains, volatility in the global commodity prices, rising fears of another Covid-19 wave and United States’ monetary policy also cast long shadows on Pakistan’s economy.

The writer is an associate professor in the Department of Economics at COMSATS University Islamabad, Lahore Campus