Sri Lanka and Pakistan

Written by Hasnain Haikal Memon 12:09 pm Articles, Current Affairs, International Relations, Pakistan

Is Pakistan Becoming Another Sri Lanka?

Hasnain Haikal Memon compares the crisis in Sri Lanka with that of Pakistan. For him, the answer to whether or not Pakistan will become another Sri Lanka is not a simple “yes” or “no”. He argues that the two South Asian states are facing similar problems – inflation, currency devaluation, external debt, political instability – and if these issues persist, Pakistan might transform into a crisis state. However, even then, there’s a possibility that, unlike Sri Lanka, Pakistan might not descend into chaos.
About the Author(s)
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Mr. Hasnain Haikal Memon has a keen interest in social issues, the economy of Pakistan, and global politics. He holds a bachelor's degree in chemistry and has published certain anthologies of poetry on online platforms.

The Pressing Question

The question of whether or not Pakistan may face a similar economic crisis as Sri Lanka has become the talk of the town as the new government took hold of the reigns of the state and its troubled economy. The debate was initiated much earlier than that and has received much-needed attention among politico-economic analysts and the masses.

The answer to the question cannot be merely answered in “yes” or “no” because of the complexity involved. Whether the country will really suffer such devastating economic depression and political instability is debatable, but the present state of the country’s political and economic landscape alludes to such an occurrence. However, a disaster is always in the making when smaller shocks are not addressed as seen in Sri Lanka over the years. Considering the present state of Pakistan’s economic and political canvas, such a crisis may arise if left unaddressed.

The Crisis in Sri Lanka

Presently, the Sri Lankan economy has already plummeted. The country is buried under debt; its foreign reserves have completely dried out and the Sri Lankan rupee has utterly devalued – over 300 rupees against a dollar.

There is a shortage of food, and medicines, and people are facing more than 10 hours of load shedding. Inflation has soared up to 133 percent. All this has ignited political instability and economic collapse. It has hurt the industry and agriculture which in turn worsened the already depressed conditions of Sri Lanka.

The people have taken to the streets for the rising inflation, fuel prices, and shortage of staple items. People have been standing for hours to get food and fuel. All of this has charged people’s emotions. With chaos and crisis unraveling in Sri Lanka, an angry mob burnt down the former prime minister’s (Mahinda Rajapaksa) house and stormed the prime minister’s office as the president fled the nation.

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Nevertheless, what caused such a devastating downfall of Sri Lanka’s economy with over 20 million people – majorly dependent on agriculture and tourism – has been an outcome of many political and economic missteps taken by the Rajapaksa government over the years. In 2019, Gotabaya Rajapaksa became the president of Sri Lanka and in 2020, his brother Mahinda became the prime minister.

After coming to power, the Rajapaksas cut off taxes, banned the import of artificial fertilizers to appease the popular base, and continued obtaining debt. These policy decisions initiated a chain reaction to bring the country’s economy to its knees. Resultantly, the tax base went down, bringing more than 1 million people out of the tax net.

Agriculture was badly hurt as the fertilizers ban decreased land productivity and tea production—one of the major contributors and exports of the Sri Lankan economy—fell down. This also brought loss to industries as they were involved in the production of commodities. The country began to witness a shortfall in revenue, increasing goods prices, decreasing reserves, and higher expenditure with increased international borrowing.

Besides, the advent of COVID-19 and the present war on Ukraine fanned the fire of the already devastating Sri Lankan economy. It affected the tourism sector as tourism represents one major economic pillar for Sri Lanka, generating food shortages and increased oil prices coupled with its shortage. Therefore, the Sri Lankan crisis is one of the key events and lessons for regional countries, especially Pakistan, which are edging towards a similar crisis.

Pakistan’s Walk along the Same Path

Against this backdrop, the answer as to why Pakistan may find itself in a similar crisis is echoed by the presence of similar crisis elements in prevalent economic instability. The inflation is increasing, the rupee is devaluing, external debt is shooting up, and both fiscal and current account deficits have moved beyond control.

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The presence of similar elements of the Sri Lankan crisis in Pakistan’s economy affirms the tricky path for the country’s economy. Much like the Sri Lankan reduction in the tax net, Pakistan’s 2022 fiscal budget targets an increase of 17% in taxation. However, increasing 63% indirect taxes and only 37% progressive taxes reflects upon the dearth of forward-thinking strategies.

Inflation was never this high (over 60%) in Sri Lanka, similarly, Pakistan’s inflation as experts warns is about to hit an all-time high of 24% soon. In 2015, the external debt of Pakistan stood at less than $60 billion, and in six years, it more than doubled to over $130 billion in December 2021, and the borrowing continues. However, in those six years, exports of goods and services barely increased from $30.5 billion to $31.5 billion in FY21.

In this period, external debt increased by over 200 percent and exports by only 3 percent. Additionally, The News reported that the Pakistani rupee has depreciated 4,100 percent against the dollar, from just 4.76 rupees per U.S. dollar in May 1972, to over 200 rupees per USD. This further compounds the country’s economic miseries and pushes the economy to a similar path trodden by the Sri Lankan economy.

Another similarity between Pakistan and the Sri Lankan politico-economy is that of dynastic politics. The Sri Lankan political sphere has been dominated by the Rajapaksas as one brother became the president, and the other premier, while other important offices were held by cronies of the Rajapaksas.

Pakistan too is marred by similar trends as many of the political parties have been under severe criticism for familial politics with fathers and sons dominating the arena. Even recently, PMLN (Pakistan Muslim League-N) exhibited so by placing a family in two significant offices. Such trends of favoritism halt democratic decision-making and blind leadership of efficient and objective decisions required to control the storm.

Pakistan’s tax-to-GDP ratio has remained low in comparison to emerging economies, averaging 11 percent from FY 2010 to FY 2021. The country’s currency, like its Sri Lankan counterpart, is struggling for value and inflation has soared over 20 percent with foreign reserves falling as the economy breathes. The government is worried about securing a relief package from the IMF as Pakistan is pushing fuel prices to meet IMF demands, furthering inflationary pressure on the people.

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The origin of all this economic instability in Pakistan mainly lies in the political leadership’s inability to reach consensus over serious issues, short-term policies to appease the masses as done by Rajpaksas in Sri Lanka, and mismanagement of the economy over the years. All of these have led to lesser national capacity to generate revenue, lower tax base, discouraged industries, and continued borrowing.

Conclusion

There are certain silver linings in Pakistan’s economy that suggest that Pakistan may not fall into a similar trap as Sri Lanka. The Sri Lankan economy is heavily dependent on tourism for revenue, but Pakistan has never been tourist-dependent. Pakistan is nearly food sufficient while Sri Lanka has a scarcity of it. Moreover, the Sri Lankan economic crisis has four major components: foreign exchange reserves, food, fuel, and medicines, while Pakistan has only three, excluding food. Pakistan has entered into 23 arrangements with the IMF since its membership; Sri Lanka has had 16.

All in all, while the present Pakistani economy may have showcased many similarities with the Sri Lankan crisis, hope cannot be undermined. The answer to whether Pakistan may materialize into a crisis like Sri Lanka or not, can never be simply “yes” or “no.” However, if the political leaders gather on the same page over economic issues, sideline their political mudslinging, and reach a consensus to have consistency in the long-term decisions over the economy, the coming of a crisis can be averted.

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