Economic Crisis And Instability Of Pakistan | Another Sri Lanka In The Making?

Pakistan, the 5th most populous country in the world, was one of the most powerful countries in South Asia by almost every economic measure until the decades after independence. However, due to political instability and failure to adopt and implement the right policies, the financial condition of Pakistan is continuously declining.

As a result, the country is going through an economic crisis due to inflation, rising commodity prices, a trade deficit of over $44 billion, debt repayment pressures from various countries and financial institutions, and a shortage of foreign exchange reserves. As a result, the country’s inflation rate reached 13.8 percent in May 2022.

In addition, the currency lost its value against the US dollar and was exchanged at 207 Pakistani rupees per dollar. Due to the disruption of essential imports, the country’s foreign reserves have already fallen below 10 billion dollars. But what exactly caused such a disaster in Pakistan’s economy?

Overview

With an area of 8 lacs (7,96,095) square kilometers, Pakistan is the 37th largest country in the world. Also, it’s the 5th largest in the world, with a population of over 24 million. In FY 2021-22, the country’s GDP was 41st in the world, with a GDP of $365 billion and a GDP growth rate of around 6 (5.97%) percent. On the other hand, the country’s per capita income was 1798 dollars, less than Bangladesh or Sri Lanka.

Currently, Pakistan lags far behind Bangladesh in every economic measure. But four decades ago, from the 1970s to the early 20th century, Pakistan was in a strong position on these financial metrics. The country was even ahead of South Asia’s two most developing countries, India and Bangladesh. Pakistan’s average GDP growth rate during this period was 5.3 percent, while that of India and Bangladesh was 3.2 and 4.4 percent, respectively. In addition, Pakistan was well ahead of Bangladesh and India in terms of GDP per capita during this period.

Recently, Pakistan has been going through one of the most economic crises in the country’s history. Last year, the Pakistani rupee lost 24.66 percent against the US dollar. Currently, the country exchanges 207 Pakistani rupees for one dollar, compared to 154 rupees a year ago. Due to this, fuel oil prices have increased in the country, starting from edible oil and all the daily essentials. Edible oil is being sold at Rs 605 per liter in the country.

According to a Bloomberg report, 40,000 small and large industries in Pakistan’s commercial capital, Karachi, are about to shut down due to rising electricity and fuel prices. Even the printing of textbooks for the new academic year has stopped due to a lack of paper. To deal with the situation, the newly empowered Prime Minister Shahbaz Sharif announced the imposition of a ‘super tax’ on Pakistan’s prominent industries and the rich.

In addition, the country’s cabinet has approved a ban on foreign travel by government officials except for essential trips, and a 40 percent cut in fuel allocations for ministers and government officials, in addition to banning ministers and government officials from receiving medical treatment abroad. Restrictions have also been imposed on the purchase of vehicles for government use.

Furthermore, it has been decided to make all government meetings virtual. Moreover, any food arrangement and entertaining guests in government offices is prohibited. In addition to taking loans from Saudi Arabia, the country’s government expects a bailout from the IMF to help the country’s economy recover from such a situation. Note that this is the IMF’s 13th bailout package for Pakistan in the last three decades.

Reason Behind Economic Crisis

According to the Central Bank of Pakistan, the country’s foreign reserves were more than $17 billion in FY 2020-21, which fell below $10 billion (9.82) at the end of FY 2021-22. One of the reasons behind the decline in foreign reserves is the country’s growing trade deficit. A decade ago, Pakistan’s trade deficit was more than $20 billion in FY 2012-13, which more than doubled to about $44 billion by FY 2021-22. The main reason behind the increase in trade deficit is the increase in imports against exports. In addition, due to the global supply chain disruption due to the impact of the Corona pandemic, the global inflation rate continues to rise.

Meanwhile, in February 2022, the situation worsened when the Russia-Ukraine war broke out. Russia and Ukraine are significant suppliers of fertilizers used in agriculture, including global cereal grains such as wheat and maize. Russia is also the world’s largest oil and gas producer. Due to the war, all commodities and fuel prices rose even further than they already were.

In such a situation, as the USA changed its fiscal policy to reduce global inflationary pressures, the currencies of all countries worldwide began to lose value against the US currency. As Pakistan’s currency depreciates, prices of all essential commodities in the country begin to rise. The Pakistani rupee is still losing value against the dollar, despite the country’s government changing its policy rate to bring inflation under control.

The country’s import problems have also increased due to the loss of value against the dollar. The country’s import burden increased by 30.15 percent to $73.38 billion in FY 2021-22 against $56.38 billion in FY 2021-21.

On the other hand, although the country’s export earnings increased, they did not increase in line with the imports. As a result, export earnings rose 16.13 percent to $29.38 billion in 2021-22 from $25.30 billion in FY 2021-21. As a result, the trade deficit of $31.08 billion in FY 2021-21 increased by more than 41 percent (41.58%) to nearly $44 billion (43.99) in FY 2021-22.

In addition to the increase in Pakistan’s trade deficit, foreign direct investment in the country has also decreased continuously. In FY 2020-21, the country’s total FDI amount was about 2 billion dollars (1.86), which dropped to 1.6 billion dollars in FY 2021-22. Even in FY 2019-20, Pakistan’s FDI was around $2.6 billion (2.59).

Although the country’s remittance income has been growing for several years, the country’s current account balance stood at $15.2 billion as of May 2021-22 due to the country’s widening trade deficit and declining FDI, which was only 1.2 billion dollars in the previous year. Due to such a shortfall in the current account, the country’s foreign reserves have also decreased.

Another primary reason for the decrease in foreign reserves is the increase in external debt of Pakistan. According to the Central Bank of Pakistan, the country’s total debt at the end of March 2022 was $278 billion, 76.3 percent of the country’s GDP. Besides, Pakistan’s total public external debt is $117.4 billion, more than 32 (32.2) percent of the country’s GDP.

This debt is one of the reasons for the decrease in foreign reserves of the country because the government has to spend a considerable amount every year to repay these loan installments. According to data from the country’s central bank, Pakistan paid for external debt servicing of $13.42 billion in the FY 2020-21. Meanwhile, in the first three quarters or nine months of the FY 2021-22, external debt servicing stood at about 11 (10.89) billion dollars, which is 20 percent of the country’s budget of 54 billion dollars for that fiscal year. But what is the reason for the state of the country’s economy?

The main reason for Pakistan’s economic condition is the country’s political instability. Since its independence in 1947, the country has been ruled by military rule several times. Even in the country’s history, no elected political party has been able to complete its term. Due to so many governments and power changes, no government could adopt any long-term policy for Pakistan’s economic and infrastructural development. Also, foreign investment in the country has not increased due to a lack of stable government and necessary infrastructure for business. However, the country has been ahead in various economic indicators. 

In addition, Pakistan’s budget is heavily invested in military or defense. Therefore, even though external debt servicing is now the most significant part of the country’s budget, the defense budget was once a major part of the country’s budget. Due to this, the country is constantly in a budget deficit and has taken loans from various donors, including the World Bank and IMF, to fill the deficit. So far, Pakistan has received 22 times aid from the IMF. Due to this, the country’s foreign debt has increased continuously. 

Another reason for the increase in Pakistan’s foreign debt is that most of the ongoing infrastructure projects in the country are being built with foreign funding. Out of which, due to the China-Pakistan Economic Corridor, CPEC, Pakistan’s debt to China alone is 64 billion dollars. The amount of debt increased so much that the country had to borrow again to repay the debt.

Apart from this, there has been a negative impact on the environment in the country’s overall business, including tourism, starting from the stoppage of international cricket due to terrorism in the country. Because of these reasons, Pakistan again approached the IMF and Saudi Arabia. And the IMF and Saudi Arabia have set several conditions for providing aid to Pakistan. If it fails to fulfill these conditions, the country may go bankrupt like Sri Lanka.