Roving Periscope: Pak turning into a ‘zombie state’, says its own top economist

Virendra Pandit

New Delhi: Pakistan Prime Minister Mian Mohammad Shehbaz Sharif, who has desperately been seeking financial bailouts from whoever would extend a lifeline, famously said “Beggars cannot be choosers.” His Defense Minister Khawaja Muhammad Asif openly declared a few weeks ago that Pakistan was already bankrupt.

Now, Pakistan’s leading economist and former government advisor Sakib Sherani said the cash-strapped country is closer than ever to becoming a ‘zombie state. The word ‘zombie’ means ‘living dead’ or a partially-reanimated corpse.

Sherani, who served as Pakistan Finance Ministry’s Principal Economic Advisor (2009-10), also compared his country’s current situation with that of Lebanon, a country warring against itself since the early 1980s.

Having served as a member of several past economic advisory councils under different Prime Ministers, he knows his country better than most others.

Lebanon—once touted as the Switzerland of the Middle East—has endured decades of infighting among corrupt factionalized elites, warring power centers, and competition for influence among international and regional power brokers, leaving behind a hollowed-out economy, plagued with de-industrialization, capital flight and brain drain, endemic shortages, widespread poverty, societal breakdown, and social chaos—besides a full-blown bloody civil war.

“Unfortunately, Pakistan too finds itself on the edge of a similar dystopian condition. While the country has been a weak, ‘at-risk’ state for a long time, its cognitively-inert elites have been too busy infighting or looting to notice,” Sherani said in an article he published last week in the leading Pakistani daily, Dawn.

Before analyzing Pakistan’s dire straits, he started his article with the banking crisis in the US, saying the events unfolding in America have renewed focus on ‘zombie’ banks — barely surviving, financially undead institutions that have large unrealized losses sitting on their thinly capitalized balance sheets.

Then Sherani, who also served as the Chief Economist at ABN AMRO Bank NV (2000-2009), turned to Pakistan’s acute economic crisis: “Much like zombie banks and firms, can there be ‘zombie’ countries? – countries where state breakdown is advanced, where the economy has collapsed, which cannot service their debts and obligations to foreigners, and which can only meet their essential import needs by handouts and bailouts from increasingly frustrated, and dwindling pools of, friendly countries.”

Pakistan meets almost all these criteria.

The chain of events unleashed since, and by, the establishment’s regime change operation in April 2022 has accelerated the downward spiral. Pakistan has been thrown into political, economic, social, as well as institutional chaos with a heightened danger of unintended consequences and highly uncertain outcomes.

The wheel appears to have come off the political system, with the government, parliament, and the Election Commission deciding to openly violate the Constitution and flout the judgment of the Supreme Court. In addition, the Supreme Court itself is in turmoil with a number of judges in open revolt against the Chief Justice.

Islamabad, waiting for over two months for an IMF bailout installment of barely USD 1.1 billion, finds it impossible to service its debts because of a severe shortage of foreign currencies. It has restricted imports and reached out to friendly countries to stave off the default scare. Pakistani economists say even the expected tranche of USD 1.1 billion from the IMF won’t be enough and Pakistan at some point will have to restructure its debts.

Here, he said, a large swathe of the population was tired of the shenanigans of a corrupt, self-serving elite and were seeking a permanent exit, businesses and the affluent were actively moving their capital abroad.

Pakistan’s economy was in a tailspin as many businesses and industries were closing permanently. This led to massive unemployment, capital flight, and brain drain from the country. “In conjunction with historically high inflation and the biblical floods, there has been a sharp rise in the ranks of the poor. While many are experiencing pauperization, millions face outright destitution.”

Pakistan’s inflation soared to 35.4 percent in March, the highest since 1965. Just this week, the IMF slashed the South Asian country’s growth forecast to 0.5 percent from 2 percent earlier. The global lender also predicted 27 percent inflation for this year, the second highest in the sub-continent only after Sri Lanka, where it soared to over 40 percent last year. High inflation and import restrictions are hitting people and businesses in Pakistan.

“The bad news could get much worse…After wreaking destruction on the real sector, the economic crisis is headed toward Pakistan’s banks. This is the worst manifestation of an economic crisis, as it gridlocks the entire economy potentially for years.”

The former advisor said that Pakistan’s banks were now facing rising pressure on two counts— “first, from mounting losses on their credit as well as investment portfolios due to a sharp increase in non-performing loans and interest rates respectively; second, from the largest borrower in the system potentially going ‘kaput’ (bankrupt).”

Sharing some data, he said the government borrowing from the banking system now accounted for almost 70 percent of the latter’s total lending and 92 percent of its entire deposit base. Ten years ago, these figures were 62 percent and 81 percent, respectively. Each government securities auction requires a massive prior injection of liquidity by the central bank to allow lenders to be able to lend to the state.

“This is an untenable situation — which is being made worse each passing day by the political impasse,” Sherani said. “With Pakistan facing unprecedented challenges and pressures across a broad front, the critical question is: can the dire situation be turned around, or is it too late?”

Sherani, who also served as an advisor at political risk consultancy firm Eurasia Group, said the window of opportunity to stave off the worst possible outcome had become narrower. “Each passing day brings us closer to the edge. If Pakistan is to avoid Lebanon’s fate, the time to act has nearly run out.”