The precarious condition of Pakistan is lurching from one crisis to another. Blackouts are the latest and most common manifestation of Pakistan’s economic distress. A brewing debt crisis could plunge the country into financial chaos.
Pakistani Government has received a memorandum from the International Monetary Fund (IMF) outlining the terms and conditions for completing a USD 7 billion loan programme, according to Finance Minister Ishaq Dar. However, cash-strapped Pakistan and the IMF, for now, have yet to reach a staff-level agreement on a much-needed $1.1 billion bailout package.
The already negligible and unreliable reputation of Pakistan is exacerbated. Another unmissable point on the international front is that its relationship with China and the USA is in jeopardy.
Overview of the Crisis
Domestically, citizens are protesting the twin failures of economic and political meltdown with little precedent in the nation’s post-independence history.
Several reports have stated that a series of compounding factors have shaken Pakistan’s economy: double-digit inflation has skyrocketed the prices of essential commodities, and interest rate hikes by the U.S. Federal Reserve and other central banks have resulted in a rapid devaluation of Pakistan’s currency, the rupee. Pakistan’s imports have significantly risen, and exports have remained largely stagnant, widening the trade deficit in recent years.
Rising inflationary pressure has increased the prices of crucial commodities like wheat, onions, gas cylinders, etc. The average cost of a 20 kg wheat flour bag in January 2022 was Pakistani Rupee (PKR) 1,164.8. This shot up to PKR 1,736.5 in January 2023, a 50 per cent rise. This has made a mockery out of Pakistan!
Meanwhile, an estimated $40 billion in damage caused by last year’s catastrophic flooding, a budget deficit worsened by large Government subsidies, and an unforgiving debt load have brought the country to the precipice of default.
Highest Inflation after 1975
According to the figures of the Government of Pakistan, the inflation rate has reached almost 27.77 per cent. This is the highest after the year 1975. It has edged closer to a debt default, echoing the cautionary tales of other developing economies, including Sri Lanka and Venezuela.
Talks for bailout money from the IMF failed to yield a deal this week and will continue, providing no immediate reprieve. However, the amount on the table — part of a $6.5 billion loan program — is still far from enough to replenish Pakistan’s depleted coffers.
According to Geo-Politik, Pakistan has taken 14 loans from the IMF thus far, but paradoxically, they still need to be completed. This, therefore, raises serious questions about the capacity and capability of the Pakistani state to get out of this dead-end.
During the policy-level talks, the IMF expressed its reservations over the projections made by Pakistan’s Ministry of Finance over external financing inflows from multilateral, bilateral creditors and commercial loans, according to The News International report.
Some possible reasons why the conflict of interests arose were: IMF asked Pakistan to reduce the defence budget by 20 per cent. It also asked to impose steep direct taxes and sought property details of top military and civilian officers.
The USD 6 billion bailout package has been repeatedly stalled after former Pakistan Prime Minister Imran Khan-led Government reneged on subsidy agreements and failed on its tax collection commitments outlined in the deal. Pakistan PM Shehbaz Sharif-led Government resumed the programme and received around USD 1.17 billion in August.
The programme stalled again in September at the time of the 9th review as the Pakistani authorities failed to live up to its commitments with the IMF and initiated some fiscal measures in contravention of the conditions agreed, as per the news report. Later, the Pakistan Government agreed to IMF’s conditions as the foreign exchange reserves continued to reduce to dangerously low levels.
Economic crisis due to political mismanagement
The IMF also highlighted the energy sector’s almost $15 billion debt. Pakistan’s immediate economic struggles have persisted for over three years, with the suspension of IMF’s bailout package in 2020, losses from floods in June 2022, and political mismanagement leading to an economic crisis in 2022.
The IMF’s loan is critical for Pakistan’s economy as the State Bank of Pakistan-held foreign exchange reserves have dropped to $2.91 billion. Let’s see the political and geopolitical side of the crisis in brief as well. Fighting between Prime Minister Shehbaz Sharif’s Government and Imran Khan, the ousted former leader, has cleaved the country.
National elections expected in the second half of 2023 could turn messy. And a recent suicide bombing in the city of Peshawar killed more than 100 people, illustrating the risks of Islamabad’s continued links to the Taliban, who’ve tightened their control in neighbouring Afghanistan.
Furthermore, the elephant in the room needs to be addressed, China has invested over $60 billion in the country via its Belt and Road Initiative (BRI), through both debt and equity financing; Pakistan has borrowed $30 billion from Chinese lenders.
Of the total outstanding bilateral debt owed by Pakistan as of March 2022, China accounts for about 35 per cent. While China has already reduced its lending to Pakistan, analysts say a sustained crisis could make Beijing wary of investing more money.
The United States has sought to bolster Pakistan as a stable partner in a region stricken by terrorism and violence, providing tens of billions of dollars in military aid and other assistance over the past two decades. However, some of them argue that the $200 million Washington has provided to Islamabad since summer 2022 barely registers in terms of Pakistan’s need.
The Russia-Ukraine war and the Covid-19 pandemic have pushed the economies of India’s smaller neighbours, such as Sri Lanka, Pakistan, Nepal and Bangladesh, into crises. Most of these countries are struggling to provide even basic amenities to their people, mostly due to the fiscal mismanagement and incompetence of their political leadership.
On the one hand, where these economies are plummeting to the most unprecedented levels and gasping for air (help); ironically, one can’t help but point out that India being a developing country like its neighbours, has surprised the world by growing at the fastest pace India has become so capable due to its sound and innovative reforms, that it has the ability to cater to its own aspirations and provide humanitarian aid to those in need.
Nonetheless, there are several views on the ongoing crisis in Pakistan. Some believe it is because economic problems are blamed on fiscal irresponsibility. An alternative view is to identify Pakistan’s problem to be the ‘resource curse’.
Geopolitics has led to billions of dollars flowing to the country by its geopolitical allies, thus another domino effect. This bonanza has been misused by its politicians and the army. The resulting misgovernance is responsible for economic stagnation. As a result, the loyalty of the masses has been bought by sops and subsidies, resulting in fiscal imbalances. The most unfair of all is that the citizens ultimately bear the brunt.
The catastrophic episode of Pakistan’s economy has exposed the hollow structure and system which has left the country and its citizens in shambles.