Written By Rimsha Malik
Although there is no one definition of a recession, it is typically understood to be a significant decline in economic activity that lasts for months or even years. When a country’s economy experiences negative GDP, rising unemployment, declining retail sales, and contraction income and manufacturing metrics over an extended period of time, most experts classify the situation as a recession. In Pakistan’s case, the extremely unstable rupee, a high risk premium on global financial markets, a significant debt load, and the recent shock of the catastrophic floods all contribute to our tragic record of economic collapse. Further pressure will be imposed on Pakistan and the region as a result of high import costs, a slowing of export demand globally, and China’s slowdown. All of these unfavorable economic signs suggest that Pakistan is about to enter a recession.
The default threat persisted in Pakistan after the first ten years of independence. Due to escalating debt and the cost of servicing, it will continue to be at risk of bankruptcy. If the economy’s course is not changed, it will continue to be dependent on borrowing from outside sources.Because our economic administrators have never tried to improve the economy by implementing the necessary fundamental changes, Pakistan’s financial situation has grown hazardous. Finance Minister Ishaq Dar assured that. “There is no chance that Pakistan will default”. There has been no default but a significant monetary crisis is about to begin.
The future for the world economy is also bleak. Since the beginning of the year, there has been discussion about the probability of a worldwide recession in 2023 due to a quick decline in growth expectations, rising inflation, and tightening financial conditions. The IMF claims that the downturns in China and Russia, the US’s sluggish consumer spending, and the tight financial conditions brought on by higher-than-expected inflation rates globally are the key causes of this gloomy forecast. The aftermath of the Ukraine war is also making the economic situation more complicated. Global growth is projected to reach 3.2 percent in July 2022, down from 6.1 percent in July of last year and 0.4 percent less than predicted in the most recent outlook update in April. According to the UNCTAD’s 2022 trade and development assessment, the anticipated global downturn could potentially cause more harm than the 2008 financial crisis.
Due to higher-than-anticipated inflation, particularly in the US and the main European economies, financial conditions are tightening globally. An estimated $360 billion in future income for developing countries outside of China would be lost as a result of the recent trust rate increases in the US, and net capital flows to poor countries are now negative. In fact, the research stated, developing nations are increasingly supporting wealthy nations. This year, there has been a significant devaluation of the currencies of almost 90 developing nations relative to the dollar. Pakistan is experiencing one of its most difficult balance-of-payment crises. The country’s foreign exchange holdings have drastically decreased to a pitiful $6 billion, barely enough to pay for imports for a month. Due to this, Pakistan’s credit rating and investor confidence indices have sharply declined. The already negative economic outlook is made worse by persistent political instability and growing military threats. The dynamics of a global downturn and its possible effects on Pakistan’s macroeconomic fault lines are understood by the authorities. The IMF Programme has not been relaxed, nor has there been an empathetic response to pay for the devastation caused by the catastrophic floods. Any government that carries out prior steps related to subsidy reduction, power sector reforms, and the elimination of various distortions would pay a significant political price. Pakistan would have no other option but to finish the fund scheme before it expires in June 2023. According to Najy Benhassine, the World Bank’s Country Director for Pakistan, “The recent floods are expected to have a substantial negative impact on Pakistan’s economy and on the poor, mostly through the disruption of agricultural production.”
The increased cost of doing business, weakening demand in our traditional trading partners, and lack of competitiveness in the manufacturing sector will all put more pressure on exports. Job losses are imminent during a recession, and the financial industry will be under a lot of pressure from non-performing loans. With 2.5 million new workers entering the market each year, the current structure of economy is unable to offering respectable employment opportunities for youth. In order to export human resources to ageing nations like Japan and Germany, Pakistan must prioritise and invest in knowledge-based professions. In addition to relieving the demand on jobs, this will increase the amount of remittances. More losses are anticipated in the stock market and real estate industries, but both of these fields are associated with the wealthier sections of society. Due to a lesser reliance on bank loans, Pakistan’s economy, which depends heavily on informal transactions, may be able to protect small and medium-sized businesses from some of the shocks associated with recessions.
The main problem for us is to maintain economic stability in the meantime because both the world and local economies may deteriorate before they recover. The only practical strategy to follow during the crisis will be to reduce imports of non-essential goods and dependence on oil, save energy, and sell strategic interests in valuable state-owned companies to generate foreign currency. To create a sustainable economy, the ruling elite should think about moving their policy emphasis from populist infrastructure projects to targeted subsidies and delegated institutional models.
About Author:Bio: Researcher at Center for International Strategic Studies, AJK (CISS- AJK) Muzaffarabad. Working on Strategic Transitions and Realignments and International Politics and Security.