Pakistan’s economy has severely taken a turn for the worst in the past year. The Russia-Ukraine crisis, the recent devastating floods in Pakistan, and uncontrolled external debt has caused a steep rise in prices of commodities. Industries have scaled down or terminated operations entirely causing the unemployment of hundreds of thousands. Inflation might reach 33% by the end of the current fiscal year. The rupee has depreciated by around 44% since April 2022.
Fitch, Moody, and S&P have all downgraded Pakistan’s rating 7 times in the last 10 months – unprecedented for the country. The external debt stands at around $126.3 billion. The forex reserves stand at a feeble $3 billion which means the country is severely close to defaulting. The IMF is forcing the government to adopt tougher taxation policies for a bailout, which will irk the populace further. The situation is so dire that around 800,000 Pakistani professionals exited the country in 2022 primarily due to a lack of jobs and the stifling prices of everyday commodities.
However, what is transpiring in Pakistan is not a unique phenomenon. In fact, its arch-nemesis and neighbor India went through a similar and in many ways worse, ordeal in 1991.
India in 1991
In 1991, India was suffering a twin deficit where its fiscal deficit was around 8.4% of its GDP and its current account deficit was around 3% of the GDP. India’s forex reserves were stagnating between $1.3 to $1.5 billion, and at the time, this meant that it would be unable to meet its import requirements for even three weeks. The low reserves led to a sharp depreciation of the Indian rupee as well.
During this time, the total external debt had risen to over $70 billion (one of the highest in the world then). Akin to Pakistan’s current crisis, India too was downgraded by Moody. The situation became so catastrophic that the Chandra Shekhar government could not even pass the budget in February 1991. The downgrading by Moody also meant that borrowing from international creditors had become more costly. Inflation hovered high around 14% followed by low growth and rising unemployment.
To stay afloat, the country needed an emergency IMF bailout. It did this by desperately pledging its gold reserves – initially 20 tonnes of gold was sent abroad to raise $234 million. Later, India’s RBI surreptitiously airlifted 47 tonnes of gold to the Bank of England to secure $400 million. When the public discovered this, there was massive outrage and the Chandra Shekhar government crumbled soon after.
Indian Recovery: A Few Good Men
After Chandra Shekhar’s government fell, a minority government of Narasimha Rao entered. Manmohan Singh was made finance minister on June 24, 1991 and was pivotal in changing the course of Indian history. One of the major moves the new government made was depreciating the Indian rupee in two phases – first by 9% and later by 11%. There was significant opposition to this move but it was needed.
Singh took tough decisions, and initiated economic liberalization with structural reforms, which laid the foundations of a modern India. One way this happened was via a complete revamp of India’s existing trade policy framework – the goal was to produce an export-oriented economy. India augmented trade relations with its neighbors, including China, as well as other South Asian countries.
Even during these reforms, India had to pledge gold 3 times so it did not default. The PM gave the finance ministry the autonomy it needed to make decisions that might have been unpopular politically but essential economically.
Taxes were decreased while the country’s economy was opened up for foreign direct investments, by:
1) Dismantling the chronic license Raj.
2) Abolition of monopolies & restrictive trade laws.
3) Privatization of state-owned entities.
These liberalization policies helped the country bolster its forex reserves – the result was that before the year’s end, India had paid off its loans for which the gold had been pledged. These reforms eventually shaped the juggernaut that became the Indian IT sector and the Indian economy in general.
Lessons for Pakistan
The main takeaway for Pakistan is that it is possible to come out of this economic crisis. Although there is no one-size-fits all solution for Pakistan, there are important lessons from India’s 1991 economic crisis:
1) Bringing in patriotic and competent people so that tough decisions can be made.
2) Desperate times call for desperate measures. Pakistan needs a bailout, whether from China and/or the IMF so the country does not default and hence has space to improve its economy. This is a double-edged sword however.
3) Essential economic reforms must be undertaken to reshape Pakistan’s economy. This includes removing red tape (to attract FDI and local startups), digitalization, and utilizing natural resources such as gas, gold, cooper, and oil so a valuable export-oriented economy is created.
4) This crisis will take its time to placate especially in the midst of such political and public outrage, therefore, equanimity is required. A great example of this is Manmohan Singh shrugging off all pressures from the Indian bureaucracy when they opposed his reforms.
