Pakistan, which has been facing the worst economic crisis in decades, is closer to the edge and may become the next Lebanon, a former government advisor warned on Thursday. Sakib Sherani, who served as principal economic adviser to the Ministry of Finance from 2009 to 2010, compared the current situation in Pakistan with that of Lebanon. He said Lebanon has endured decades of infighting among corrupt factionalised elites, warring power centres, and competition for influence among international and regional power brokers. The result, he said, has been a hollowed-out economy, de-industrialisation, 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 in infighting, or looting, to notice," Sherani wrote in an editorial piece in Dawn. He began his article with the banking crisis in the US. He said the events unfolding in America have renewed focus on 'zombie' banks — barely surviving, financially undead institutions that have large unrealised losses sitting on their thinly capitalised balance sheets.
Before joining the government, Sherani served as the chief economist at ABN AMRO Bank NV from 2000 to 2009. Turning to the economic crisis in Pakistan, the economist said: "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 pool of, friendly countries."
Pakistan meets almost all the criteria listed by Sherani. Islamabad is unable to service its debts due to the forex reserve shortage, it has restricted imports, and reaching out to friendly countries to stave off the default scare. Economists in the country believe even the expected tranche of $1.1 billion from the IMF won't be enough and Pakistan at some point will have to restructure its debts.
Sherani suggested that Pakistan was nominally sovereign and independent, but only on paper. 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.
The financial advisor said Pakistan's economy was in a tailspin as businesses and industries were closing, many permanently. This situation, he said, has given rise 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 pauperisation, millions face outright destitution," he wrote.
Pakistan's inflation soared to 35.4 per cent in March, the highest since 1965. Just this week, the IMF slashed the country's growth forecast to 0.5 per cent from 2 per cent earlier. The global institution also predicted 27 per cent inflation for this year, the second highest in the sub-continent only after Sri Lanka. High inflation and import restrictions are hitting people and businesses in Pakistan.
"The bad news could get much worse," Sherani said. "After wreaking destruction on the real sector, the economic crisis is headed towards 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)."
Sherani shared some data to back his claims. He said the government borrowing from the banking system now accounted for almost 70 per cent of the latter's total lending, and 92 per cent of its entire deposit base. However, ten years ago, these figures were 62 per cent and 81 per cent 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," he said.
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