The ongoing episode of distress in parts of the United States banking industry, caused by the rapid rise in interest rates, has renewed focus on “zombie” banks — barely surviving, financially undead institutions that have large unrealised losses sitting on their thinly capitalised balance sheets. The term has previously been used for firms that are financially unviable but have been kept alive by repeated government bailouts, akin to our state-owned enterprises.
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 a dwindling pool of, friendly countries?
Which are nominally sovereign and independent, but only on paper? Where a large swathe of the population has tired of the shenanigans of a corrupt, self-serving elite and are seeking a permanent exit from the country? Where businesses and the affluent are actively moving their capital abroad? In other words, a country “hollowed out” in almost every sense by an asset-stripping, rapacious elite involved in internecine conflict?
If Pakistan comes to mind, let us first consider another country with somewhat similar endowments of natural resources and intelligent, hardworking people that has already crossed the line to failed state status: Lebanon.
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 has been a fractured polity, a hollowed-out economy, de-industrialisation, capital flight and brain drain, endemic shortages, widespread poverty, societal breakdown and social chaos. Not to mention 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.
Widening internal fissures aside, the red flags have been raised even from the outside for a very long time, either in Pakistan’s abysmal ranking in the Worldwide Governance Indicators, or its uncomfortable position in the Fragile States Index straddling the “warning” and “alert” categories.
However, 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 wheels appear to have come off the political system, with the government, parliament and Election Commission deciding to openly violate the Constitution and flout the judgement 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.
While these shenanigans are playing out, the economy is in a tailspin. Businesses and industries are closing, many permanently (referred to as “hysteresis”). This situation has given rise to massive unemployment, on the one hand, and capital flight and brain drain from the country on the other. 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.
The bad news could get much worse. 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.
Banks are 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”.
Government borrowing from the banking system accounts for almost 70% of the latter’s total lending, and 92% of its entire deposit base. Ten years ago, the figures were 62% and 81% respectively. Each T-bills auction requires a massive prior injection of liquidity by the State Bank to allow banks to be able to lend to the government. This is an untenable situation – which is being made worse each passing day by the political impasse.
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?
An unequivocal and immediate return to constitutional rule and the rule of law is the only way forward. The timely holding of free and fair elections by a credible and neutral set-up, and the transfer of power without impediment or conditions to the elected civilian government will defuse the multiple pressures that have built up.
Unconstitutional measures to delay elections and prop a discredited and failed set-up, or extra-constitutional measures to impose a technocratic government, will only deepen the fissures and not lead to either political or economic stability.
Ultimately, however, the answer revolves less around what needs to be done and more around who will step up. Who amongst the current actors on stage will be able to rise above petty egos and self-interested behaviour, however destructive to the national or institutional cause, and take a stand for following the constitutional path? (Sadly, if even “brother” judges of the Supreme Court cannot demonstrate the requisite behaviour at a moment of extreme national peril, then it is expecting too much from the other lower-calibre players involved. We appear to be well and truly marching to the drumbeat of the March of Folly.)
To be sure, the window of opportunity to stave off the worst possible outcome has become narrower, and a chain of events with its own internal logic and momentum has been set in motion that could lead to unintended consequences and highly uncertain as well as undesirable outcomes.
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.
The writer has been a member of several past economic advisory councils under different prime ministers.
This article was first published on Dawn.
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