Pakistan’s Economy is Reeling from a Year of Political Turmoil

Whoever wins the power tussle among politicians, military and judiciary, the country’s economy is the big loser

· Pakistan’s economy is forecast to grow just 0.6% in 2023, compared with average expansion of 4.8% among developing countries in Asia, according to the Asian Development Bank.

A year of political instability that led up to the arrest of former Prime Minister Imran Khan this week has crippled Pakistan’s economy, plunged millions into poverty and left the country at the edge of default.

The deadly protests, detention of top members of his party and deployment of troops since his arrest will likely accelerate that economic descent. More than 3,500 of Mr. Khan’s supporters were arrested this week, police say.

A court in Islamabad granted Mr. Khan bail on Friday after the country’s Supreme Court ruled the manner of his arrest on Tuesday unlawful.

The confrontation between political parties and a military prone to coups has even split the judiciary, which might have been expected to arbitrate the clash. The contest has been so ferocious because the authority of the military, which has dominated Pakistan almost since its foundation in 1947, is under assault to an extent never before seen.

Over the past year, Pakistan’s foreign-exchange reserves have emptied, while the International Monetary Fund has suspended its bailout for a second time.

Mr. Khan was ousted in April last year. His replacement as premier leads a shaky coalition that must hold national elections this year and has balked at taking unpopular decisions needed for the sake of the economy. Inflation has topped 35%, with the rupee losing half its value against the dollar as industrial production has shrunk.

“The main culprit is political instability,” said Mohammed Sohail, chief executive of Topline Securities, a Pakistani stockbroker. “Successive governments have focused more on their survival than managing the economy.”

There is no end in sight to the mayhem. Mr. Khan faces some 150 cases lodged by the government against him. His successor, Prime Minister Shehbaz Sharif, has defied a Supreme Court order to hold a key regional election, a move that could prompt the court to remove him from office.

Mr. Khan’s ouster—which he blames on the military—galvanized support around him and his call for fresh elections, convulsing the country in protests for more than a year.

The army has acknowledged intervening in politics in the past—it has seized power four times—but denies political interference now, saying it is neutral.

Compounding the political situation, catastrophic floods last summer cost the country an estimated $30 billion, while domestic terrorist attacks have also jumped.

Pakistan’s economy is forecast to grow just 0.6% in 2023, compared with average expansion of 4.8% among developing countries in Asia, according to the Asian Development Bank. Pakistan’s annual inflation rate is predicted by the bank to be the worst in Asia this year.

The South Asian nation’s 75-year history has been marked by cycles of military rule; the most recent ended in 2008. But even when not in power, the military has sought a pliant civilian administration, according to analysts who say the army helped Mr. Khan to office in 2018.

As prime minister, Mr. Khan tried to assert himself over the generals but in doing so lost military backing. To shore up public support, Mr. Khan introduced gasoline subsidies that the IMF said were unaffordable. In turn, the lender suspended its bailout. Two months later, Mr. Khan lost a confidence vote in Parliament and, like all other Pakistani prime ministers before him, failed to complete his term.

Pakistan’s foreign-exchange reserves were $4.4 billion in early May, only enough to pay for one month’s worth of imports, having fallen below $3 billion in previous weeks. Debt payments due in May and June total $4.8 billion, according to the country’s central bank. How Pakistan will make debt payments after June is unclear, experts say

The country’s finance minister, Ishaq Dar, who didn’t respond to a request for comment, has insisted that Pakistan won’t default.

“The present government inherited serious economic challenges and took a hard decision to revert to the path of economic stability even at a heavy political cost—and that too in the year of general elections,” Mr. Dar wrote in a local newspaper column this month.

Pakistan is being kept afloat by short-term loans from allies Saudi Arabia, the United Arab Emirates and China, and it is urging those nations to provide billions more urgently. Restrictions on imports—to conserve foreign currency—are hurting industries dependent on imported raw materials.

Exports are shrinking, and production by large manufacturers was down 12% year-over-year in February.

“Instead of doubling down on the economy, what this regime has done is to ensure it doubles down on trying to silence Imran Khan,” said Taimur Jhagra, who served as a provincial finance minister under Mr. Khan. “And Pakistanis have literally had to pay.”

In opposition, Mr. Khan’s stance against the military has hardened.

Mr. Khan blamed the military and government for an assassination attempt at a rally in November that left him with an injured leg. The army and government deny involvement.

Taking their cue from the former prime minister, his supporters have lashed out at the military in public and on social media for months. When Mr. Khan was arrested, protests pointedly targeted military property and installations, drawing troops to the streets and a sharp warning from the army that it will “react strongly” if such action is repeated.

Emergency rule—which would prevent elections—is under consideration by the authorities, officials said. A military takeover remains possible, according to experts.

Mr. Khan, speaking to reporters in court Friday, singled out Army Chief Gen. Asim Munir as his antagonist now. Mr. Khan has said he was removed from office by Gen. Munir’s predecessor. The military rejected the accusation.

“General Asim Munir and, under him, the senior army leader, support democracy from their heart and soul,” said Maj. Gen. Ahmed Sharif Chaudhry, the military spokesman. “There is no question of martial law.”

Some government officials say the military has decided that Mr. Khan can’t become prime minister again. However, Mr. Khan is by far Pakistan’s most popular politician. A survey in March by Gallup Pakistan, a local pollster, put him nearly 30 points clear of his nearest rival.

The aim of the government and military, Mr. Khan’s party says, is to knock their leader out of politics before elections due by October. A conviction, following his arrest over a corruption charge, would bar him from becoming prime minister again. Mr. Khan denies any wrongdoing.

The military didn’t respond to a request for comment. The government says that it is willing to negotiate with Mr. Khan over a date to hold regional and national elections on the same day later this year. It says that Mr. Khan must face the court cases, and that he jailed many of his political opponents when in power.

“This is the worst kind of demagoguery, the worst kind of fascism. He is spreading anarchy, chaos and destruction in the country, only to protect himself against accountability,” Ahsan Iqbal, the planning minister, said this week.

Experts say that without an IMF bailout, Pakistan is heading toward default.

The government briefly rejoined the IMF deal last summer, but then decided that the terms—including putting up the price of electricity, gasoline and raising taxes—were hurting its public support and walked away from the agreement.

The IMF indicated earlier this month that it was waiting for Pakistan to lock in additional loans from other sources, and also announce a supporting annual budget before restarting the bailout.

Pakistan has among the highest inflation rates in the world, soaring to 36% in April from 13% in March last year. That compares with 6% in neighboring India in March this year. Pakistan’s food inflation is running at around 50%, despite the central bank raising interest rates to 21%, the highest level in the country’s history.

The economic pain produced by the political turmoil has engulfed the poor, with nearly four million people in the past year dragged below the poverty line—living on less than $3.65 a day—according to the World Bank.

Pakistan’s once-burgeoning middle class has also suffered.

Malik Abdul Kareem has two small businesses in Islamabad—a workshop that repairs car air-conditioning units and a food shack. The profits had enabled him to climb into the middle classes. But, as households cut back on expenditures, he estimates that business is down 60% on last year.

Standing on the sidewalk one recent afternoon, he pointed to his 15-year-old Honda car, saying it was up for sale. Instead, he would go back to riding a motorcycle to save on gasoline. He is looking into emigrating to Australia.

“If this country catches fire, nothing will be left,” said the 53-year-old. “You’ve put a gun to my head and now I have no choice but to fight.”