Pakistan’s Looming Economic Crisis

According to Pakistani-American economist Atif Mian, the Imran Khan-led administration inherited a terrible economy. However, he left it in a worse form, with a soaring budget deficit, current account deficit, and stagnant average income. [1] Even though Imran Khan's Prime Ministerial campaign was all about providing employment, eradicating poverty and stabilizing the economy, the primary factor behind his ouster has been the economic slump in Pakistan.

In November 2021, Pakistan's inflation reached a new peak. This is mostly due to the global surge in crude oil prices, which has resulted in higher freight costs. Pakistan is also a net importer of vital foods such as lentils, wheat, edible oil, and sugar. Notably, food imports account for over 16% of Pakistan's total imports. The global surge in food costs has had an impact on Pakistan. High food inflation is sometimes attributed to a poor crop during the previous planting season. In recent years, sharp increases in energy prices have exacerbated inflationary pressures and imposed additional costs on the average citizen. Inflation in Pakistan is predicted to reach 15% by the summer. With the United Nations' Food and Agriculture Organization reporting record-high food costs through its Food Price Index, which presently stands at 159, which is the highest since 1990, the food prices in Pakistan will continue to rise. The country is already seeing double-digit inflation. [2]

The Economic Crisis-

Pakistan had sought foreign financial help from the International Monetary Fund (IMF), the United Arab Emirates (UAE), and China to combat its economic crises in 2013, 2016, and 2018. Later, Pakistan had also agreed to receive $3 billion from the Saudi Fund for Development (SFD) in 2021 to boost its foreign exchange reserves. [3] The current crisis in Pakistan is ascribed to a slew of policy initiatives that have failed to provide the desired results and political turmoil in various sections of the nation.

The IMF loan came at a high cost to Pakistan since it imposed many economic restrictions and changes. The IMF loan is contingent on decreasing the budget deficit, amending banking and tax legislation, enhancing the social safety net for vulnerable people, phasing out power subsidies, and limiting the central bank's foreign exchange market participation. Given its economic structure and indicators' performance, Pakistan struggled to fulfil the IMF's requirements. Pakistan's incapacity to bargain with the IMF was reflected in a failed meeting in October 2021, leaving the country with little choice but to seek assistance from Saudi Arabia. Interestingly, the terms of its Saudi Arabian loans are more liberal than those of the IMF. On the other hand, Saudi Arabia charges a far higher interest rate than the IMF soft credit. Historically, Pakistan and Saudi Arabia have always enjoyed a robust bilateral relationship, owing to their religious affinities. Both of these nations are members of Organization of Islamic Cooperation (IOC). Huge amounts of aid have traditionally flown from Saudi Arabia to Pakistan to promote religious activities and help humanitarian concerns.

Debt Obligation-

Pakistan's state external debt reached $86.4 billion in June 2021, an annual growth rate of 10.8%. Revaluation of losses owing to the depreciation of the US dollar against other foreign currencies, which inflated the value of external debt in dollar terms, explains the growth in external debt. The Special Drawing Rights (SDR) appreciation versus the US dollar accounted for more than half of the revaluation losses. Pakistan's foreign state debt is mainly sourced from four places: international organizations, bilateral institutions, commercial entities, and Eurobond and Sukuk. [4]

Pakistan may also be facing a significant balance of payment (BoP) problem, as the State Bank of Pakistan's reserves has plummeted to a hazardous $11 billion, just enough to cover one and a half months' worth of imports. In only one month, the country's reserves plummeted by $5 billion. Imports are on the rise, as evidenced by the fact that imports accounted for 52.2 per cent of the recent increase in tax revenue. The country's trade imbalance is alarmingly high at $35 billion. With reserves at an all-time low, Pakistan is projected to service $2.5 billion in debt in the current quarter alone (April to June). [5] Our reserves are similarly shaky, with the majority of them being debt-financed.

Political Implications-

The political as well as legal crisis that has overtaken the country since the elaborately planned overthrow of the PTI administration, will exacerbate the approaching economic disaster. The formation of a shaky rainbow coalition with legitimacy and credibility concerns for an interim period will obstruct the whole-of-nation reaction that a crisis of this size necessitates. Faced with the real threat of a widespread backlash and the need to call elections sooner rather than later, the administration's desire for genuine changes will be muted, as will the government's heterogeneous coalition of political parties and interests. Like every other crisis a country faces, political stability is indeed required. Amid this, the new Pakistani Prime Minister has formed a National Economic Advisory Council comprising 21 members to review the economy of the country. [6] However, for this measure to work, this government needs to be in power for a considerable amount of time without any political skirmish.

Reasons For The Crisis-

Pakistan's present economic crisis is mainly due to short-sighted policy decisions that have resulted in massive expenditure on non-developmental and economically nonviable projects. Economic mismanagement, long-term debt financing of fruitless infrastructure projects like the Gwader-Kashgar Railway line project, and a heavy reliance on foreign borrowing rather than internal institutions exacerbated the country's problems. The construction of the China–Pakistan Economic Corridor (CPEC) raised the debt load by allowing more foreign loans to be obtained. CPEC, in particular, has resulted in a Chinese debt to Pakistan of US$ 64 billion, up from US$ 47 billion in 2014.

The ongoing depreciation of the Pakistani Rupee versus the US dollar has added to the country's growing external debt. Foreign investors stayed away due to falling trust, negative ratings from international rating agencies, and Pakistan's greylisting in the Financial Action Task Force (FATF). According to figures from the State Bank of Pakistan, foreign direct investment (FDI) inflows into Pakistan have never exceeded 1% of GDP. Pakistan has fallen into the infamous 'debt trap' due to a continuous cycle of obtaining new loans and repaying existing ones. Furthermore, due to the international community's unwillingness to lend to Pakistan, the government has been forced to rely mainly on China and Saudi Arabia, leaving it subject to their complicated conditions.

Pakistan has been dealing with a growing trade deficit as a result of rising import costs and declining exports. In the financial year 2018, Pakistan's trade imbalance reached an all-time high of US$37.7 billion. The trade instability increased by a whooping percent of more than 117.25% in the very first five months of the current fiscal year. Pakistan has one of the lowest trade-to-GDP ratios in the world, according to the Asian Development Bank in February 2022. The onset of the COVID-19 epidemic worsened the situation even further. Major exporting commodities, including cement, textiles, leather, and sporting goods,, had no buyers during the epidemic. The fact that Pakistan buys necessary goods and exports non-essential goods has contributed significantly to the growth of the trade deficit. Pakistan imports commodities primarily for household use. Pakistan's foreign exchange reserves have plummeted due to a rising trade imbalance and declining investment. Foreign currency reserves declined by 1.97% to US$23.550 billion in the second week of November, compared to US$24.025 billion the previous week. Commercial bank reserves also fell to US$6.605 billion in November 2021, down from US$6.699 billion in November 2021. [7] The value of the current reserves was diminished due to the devaluation of the Pakistani Rupee versus the US Dollar.

CONCLUSION-

According to experts, addressing economic imbalances by external borrowing is not at all a long-term solution, and Pakistan must implement structural economic changes in its monetary and fiscal policies in line with the practises and policies of international institutions. The curtailing of unprofitable construction projects, lowering import expenses, and relying more on indigenous enterprises might help Pakistan prevent further escalation of this current crisis in the short term view. The political crisis must also be resolved by free and fair elections that would usher in a legitimate administration with a new mandate for more significant long-term recovery. To begin the arduous road to economic recovery, a strong administration representing the wishes of the majority of the people must be in place.

END NOTES-

[1] Pakistan’s economy slumps to catastrophic low: Report – ThePrint. (n.d.). Retrieved May 9, 2022, from https://theprint.in/world/pakistans-economy-slumps-to-catastrophic-low-report/932890/

[2] [3] What led to the economic crisis in Pakistan? - Indian Council of World Affairs (Government of India). (n.d.). Retrieved May 9, 2022, from https://www.icwa.in/show_content.php?lang=1&level=3&ls_id=7100&lid=4811

[4] IMF programme likely to resume. (2022, April 11). The Express Tribune. http://tribune.com.pk/story/2352076/imf-programme-likely-to-resume

[5] Economic Fallout of Pakistan’s Political Crisis. (n.d.). Retrieved May 9, 2022, from https://thediplomat.com/2022/04/economic-fallout-of-pakistans-political-crisis/

[6] Structural weakness of Pakistani economy driving away investors: Report. (n.d.). Retrieved May 9, 2022, from https://www.aninews.in/news/world/asia/structural-weakness-of-pakistani-economy-driving-away-investors-report20220503140915/

[7] Pakistan’s economic crisis: Dawn. (2022, April 14). The Straits Times. https://www.straitstimes.com/asia/south-asia/pakistans-economic-crisis-dawn

Pic Courtesy-Abuzar Xheikh at unsplash.com

(The views expressed are those of the author and do not reflect views of CESCUBE.)