Pakistan’s Economic Crisis: Signs of Intrinsic Flaws
Pakistan's economic situation will deepen in the following months as structural weaknesses and policy uncertainties boost recessionary risks, exacerbating political insecurity and security concerns. Pakistan's enormous foreign debt has generated a catastrophic financial crisis and default speculation. The World Bank describes Pakistan as South Asia's "weakest economy" and has been dealing with soaring inflation in recent months. The country's troubles are exacerbated by diminishing foreign reserves, which have dropped to an all-time low of $3.1 billion, according to government statistics released on January 28. The Foreign reserves would only be able to support imports for the next two to three weeks, causing alarm in Islamabad. Conversely, inflation has more than quadrupled year on year to 24.5%, according to figures issued for December 2022. Food costs have risen the greatest, with inflation reaching 35%.
When difficult times demand desperate measures, Pakistan's central bank, the State Bank of Pakistan (SBP), hiked the main lending rate by 100 basis points to a 24-year high of 17% on January 23. As part of the terms the International Monetary Fund (IMF) gave for continuing funding, the unofficial ceiling on the USD-PKR (Pakistani Rupee) exchange rate was also eliminated. As a result, the Rupee fell to a 20-year low against the dollar on January 27 at Rs 262.
Pakistan is facing a multifaceted catastrophe. Its economy is on the verge of collapsing owing to a potential political crisis, a sinking rupee, decades-high inflation, disastrous floods, and a serious oil shortfall. Inflation is at its highest in decades, the economy is slowing, and the central bank has boosted interest rates dramatically in response to a weak currency. Food and gasoline prices are significantly challenging for regular people, and the monsoon floods have worsened the country's economic problems.
HIGHEST INFLATION IN PAKISTAN SINCE 1975
The Ministry of Pakistan estimates that the inflation rate has reached around 27.77%. This is the highest level since 1975. It has moved closer to default, echoing the warnings of other emerging countries such as Sri Lanka and Venezuela. Increasing inflationary pressure has pushed up the prices of essential goods such as wheat, onions, and gas cylinders. In January 2022, the average price of a 20-kilogram bag of wheat flour was 1,164.8 Pakistani Rupees (PKR). The amount increased by 50% to PKR 1,736.5 in January 2023. Moreover, significantly subsidised energy costs and one of the lowest retail fuel and diesel rates in South Asia harmed the Pakistani economy in the long run.
According to data from the last two decades, the budget deficit was as low as $2.25 billion in 2004 and reached an all-time high of $25.31 billion in 2019. The spending continued to rise, while Pakistan could not boost revenues and broaden the tax net. As a result, the budget deficit continued to grow. The income collected is mostly utilised for opex (operation expenditures), such as paying employees and performing other governmental functions of the country rather than infrastructure construction or development. The main reason the IMF postponed the delivery of $1.1 billion to Pakistan, due last November was a lack of budgetary restraint. The International Monetary Fund has requested Islamabad to implement austerity measures, beginning with an increase in energy expenses, a hike in taxation rates, and an increase in critical loan rates.
EFFECT OF DEVASTATING FLOODS
The devastating floods that devastated Pakistan during the recent monsoon season between July and September of 2022 also wreaked havoc on the country's already-struggling economy. In addition to killing 1,739 lives, the floods destroyed infrastructure to $40 billion. This was according to a World Bank assessment released in the month of October. Floods destroyed almost 8 million acres of crops and displaced 33 million people. The country's south and southwest, including most of Sindh province and parts of Punjab and Balochistan, were the most hit. Floods in the Sindh area nearly wiped off crops such as bananas, wheat, dates, and onion, staples in Pakistani diets. As a result, the government was compelled to acquire food commodities that it would not have imported otherwise, according to experts. The floods also caused labour dislocation and infrastructure devastation in flood-affected areas. Policymakers' efforts have turned towards restoration and rebuilding, while the focus should be on poverty alleviation and mitigating the effects of the economic crisis. Sharif successfully got $10 billion in total help, largely in the form of loans, during an international donors' summit in Geneva last week.
POLITICAL MISMANAGEMENT IN PAKISTAN
Operating a political economy reliant on aid and grants from key allies and international organisations have negatively impacted Pakistan's budgetary health. Governments have been accused of making little effort to broaden the tax net and diversify income sources. A number of analysts and the current Shehbaz Sharif-led administration have blamed the former Pakistan Tehreek-e-Insaf (PTI) government led by Imran Khan for the country's worsening financial situation. Khan's economic incompetence resulted in a severe financial crisis, inflation and massive international and domestic debts. One of Khan's most criticised decisions was the delay in approaching the IMF, despite analysts suggesting that the government seek a rescue package in 2018. Pakistan ultimately requested a rescue package in May 2019, over a year after stating they would not approach the fund with a "begging bowl."
The IMF also emphasised the oil sector is over $15 billion in debt. Pakistan's immediate economic troubles have lasted more than three years, with the IMF's rescue package suspended in 2020, flood losses in June 2022, and governmental incompetence leading to an economic catastrophe in 2022. The IMF loan is crucial for the Pakistani economy since the State Bank of Pakistan's foreign exchange holdings have fallen to $2.91 billion.
CONCERN FOR INDIA
Pakistan's strained relations with India continue to deprive the former of a potentially revolutionary economic and investment partner. In 2020-2021, India and Pakistan's total bilateral trade was $329 million. According to the Ministry of Commerce, this increased to $514 million in 2021-2022, with Indian exports outnumbering Pakistani imports. Thus yet, India has not responded to Pakistan's economic turmoil. When asked about India's position on recent developments in Pakistan, Foreign Minister S Jaishankar remarked on January 28 that it would be inappropriate for him to comment on the events in Pakistan. Shehbaz Sharif had called India for economic collaboration a week before, claiming that hostilities between the two nations over the previous seven decades had only resulted in economic suffering.
The softening of Islamabad's stance, which has previously placed Kashmir at the centre of future discussions with India, is viewed through the lens of the country's economic woes. However, some Indian scholars are concerned by Pakistan's deteriorating economy and believe it may have strategic and security repercussions. If Pakistan's economy collapses, India may be forced to deal with a refugee inflow. Additionally, if Pakistan becomes a failed state, there is a chance that terror networks may strengthen their influence within Pakistan, which could directly affect India's interests.
EXTERNAL HELP
The problem in Pakistan is claimed to have worsened in recent weeks due to the IMF's delay in releasing the $1.1 billion tranche since the fund was dissatisfied with the Pakistani government's budgetary tightening efforts. The IMF is expected to be happy with the government's efforts and increase its participation now that the ceiling on energy prices and currency rates has been lifted and loan rates have been raised. The IMF's approval of Islamabad's budgetary austerity measures will open the path for more bilateral aid. This includes loans of $3 billion announced by the UAE and Saudi Arabia, respectively. China, Pakistan's biggest regional ally, is also its largest lender, accounting for $30 billion in total foreign debt. In light of the situation, the nation is anticipated to roll over most of its debt. Additionally, China has spent over $60 billion in Pakistan through its Belt and Road Initiative (BRI), including loan and equity funding; Pakistan has borrowed $30 billion from Chinese lenders. China accounts for approximately 35% of Pakistan's total outstanding bilateral debt as of March 2022. While China has already decreased its funding to Pakistan, economists believe a prolonged crisis may make Beijing hesitant to contribute more money.
Donors like China and Saudi Arabia may not add many explicit stipulations to their aid, but implicit strings are always attached. China will turn to Pakistan for advantageous economic prospects, such as the energy corridor that connects the Arabian Sea to China's western provinces and the strategically important port of Gwadar. Beijing would also seek Pakistan's assistance on geopolitical matters ranging from Taiwan to Afghanistan and Ukraine.
Saudi Arabia regards Pakistan as a significant Sunni-majority partner vis-à-vis Iran and an important oil customer and supplier of migrant labour. Riyadh would expect Islamabad to back Saudi aspirations in the Persian Gulf and Saudi leadership as protector of the holy sites of Mecca and Medina.
During the last two decades, the US has attempted to strengthen Pakistan as a stable partner in a region plagued by terrorism and instability, investing tens of billions of dollars in military aid and other support.
CONCLUSION
First and foremost, IMF money would assist Pakistan in avoiding a default on its international obligations, which may have catastrophic ramifications for the country's economy and people. In this way, replenishing foreign reserves is critical. Assistance programmes will also help with flood recovery, but this will be much easier to handle if Pakistan's reserves climb to levels that encourage confidence in the country's capacity to pay its obligations. Pakistan is extremely vulnerable to climate-related calamities and cannot construct a fortress against climate change alone. Greater local readiness and resilience are obviously required, but Pakistan's destiny will ultimately be determined by global success in addressing the drivers of climate change. Pakistan needs external financial help, and any delay increases the likelihood of more administrative actions restricting Dollar outflows. Pakistan will require more than $9 billion to get out of the situation. Nonetheless, much of the funding should come from private sources. The value of IMF funding is to act as a stopgap, restoring confidence and encouraging private flows to continue. Restrictions on opening LCs (letters of credit) and reducing business hours undermine the company to trust. The route forward must involve a better business climate.
Analysts also feel that Pakistan should pursue a two-pronged strategy, concentrating on short-term goals targeted at lowering foreign debt and medium-to-long-term goals aimed at economic restructuring. Experts say that reducing reliance on oil by establishing robust public transportation infrastructure, deregulating fuel costs, and promoting the expansion of export-oriented sectors might improve Pakistan's financial situation. The question is whether Islamabad has the political will to enact radical reforms.
REFERENCES
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(The views expressed are those of the author and do not represent views of CESCUBE.)
