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Pakistan Economic Crisis 2022 is Worsening with no Quick Fixes

Pakistan economic crisis 2022: trade deficit of $48 billion, PSX becoming Asia’s 3rd worst performing stock market, and foreign reserves of a mere $9 billion

Deepening Economic Crisis of Pakistan

Pakistan economic crisis 2022 is worsening with fast depleting foreign reserves, soaring inflation, crashing stock exchange, and IMF deadlock. With a population of over 220 million people and an average earning of less than $3.20 a day, Pakistan is already a lower-middle-income economy according to the World Bank’s definition.

The only country with a higher inflation rate than Pakistan (24.9%) is bankrupted Sri Lanka (54%). The foreign exchange reserves have dwindled to $9.7 billion as of August 2022. The trade gap shrunk to $31.8 billion in the fiscal year 2018–19, to $23.2 billion in 2019–20, to $30.8 billion in 2020–21, and then to an enormous $48.64 billion in the current fiscal year 2021–22.

Pakistan economic crisis 2022
Pakistan economic crisis 2022: According to the latest staistics, trade deficit has increased by more than 21% in ten months

Compared to June 2022’s exports of $2.9 billion, total exports stood at $2.2 billion in July. In other words, exports declined by more than $700 million in July, a 24% shrink, which does not bode well. The lower-middle income poverty rate stands at 39% while the upper-middle-income poverty rate is 77%, which shows the fragile nature of Pakistan’s economy.

Polarized Politics in Pakistan

Pakistan is currently faced with political and economic instability. On the one hand, there seems to be no reconciliation between the government and the opposition. None of the two polarized groups is willing to take a step back.

The government’s only priority is to quell opposition rather than take substantive steps to fix the economy. The so-far achievements of the PDM government include the Elections (Amendment) Bill 2022, which deprives over 7 million overseas Pakistanis of their right to vote.

The government also amended Section 16 of the National Accountability Ordinance 1999, which proposes that all corruption cases involving an amount below Rs 500 million would not come into NAB’s purview. Not surprisingly, over 90% of all pending cases in NAB will go out of its gambit. Yes, NAB was used as a political victimization tool under PTI, but it does not mean NAB should be made toothless or that Rs 500 million of corruption is acceptable.

Pakistan Economic Crisis 2022 is Worsening under PDM Government

Despite his experience of working for the International Monetary Fund, the Asian Infrastructure Investment Bank, and the World Bank, Miftah Ismail thinks the only way to avoid default is to remove subsidies and increase taxes and duties.

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Pakistan Economic Crisis 2022: Due to excessive imports and pressure on the currency rate, foreign exchange reserves decreased to $9.7 billion, just enough to cover 1.5 months’ worth of imports. Credit for this video goes to Taimur Rahman – Urdu.

The dollar has reached its highest level in Pakistani history and there are reports of Pakistan’s bonds being sold at half price in the international market. Even after implementing the tough conditions of the IMF, the much-needed $1.2 billion tranche has not been released yet. There are reports that the IMF has made the loan installment subject to a financial guarantee from Saudi Arabia.

Considering this, the common folks have also worried about whether Pakistan is going to go bankrupt. Not only the public, but economic experts, international economic watchdogs, foreign media, and even friendly countries are frequently asking, ”Is Pakistan also going to become Sri Lanka?”

Finance Minister Miftah Ismail has publicly said that even friendly countries like Saudi Arabia, China, and the United Arab Emirates are now reluctant to bail out Pakitan.

Can Pakistan be bankrupt like Sri Lanka?

No! Pakistan will not go bankrupt like Sri Lanka. At the core, there is a difference in the economic structures of Pakistan and Sri Lanka. A large part of the income of the Sri Lankan economy has been related to tourism. According to statistics, tourism has been Sri Lanka’s largest export industry, but tourism revenue has been affected due to lockdowns during the COVID-19 pandemic.

The 2019 Sri Lanka Easter bombings, which killed 269 people, also led to a drop in the flow of tourists. This reduced supply of dollars created high inflation. To gain temporary benefits, the government introduced some policies that gradually dwindled foreign exchange reserves and weakened the economy.

Apart from economic policies, political instability was also cited as the main reason for Sri Lanka’s bankruptcy. For many years, the rule was in the hands of a single family. One brother was the president; the other brother was the prime minister; the nephew was the minister, and the relatives held key positions in the government.

Pakistan economic crisis 2022: Pakistan may not default but it is on the same route as Sri Lanka

Right Decisions at the Wrong Time

The policies included banning the import of fertilizers and giving subsidies on food and petroleum. The aim was to reduce the fiscal deficit, but this decision proved counterproductive, and the production of crops dropped. It was followed by a severe shortage of agricultural products. The imports had to be more than doubled to meet the food requirements, putting more pressure on the Sri Lankan currency.

Apart from this, people were given subsidies on petroleum products and food items to fight inflation. This decision quickly reduced foreign exchange reserves. Making matters worse, the Sri Lankan government did not approach the IMF on time.

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The government believed the IMF program would increase inflation, another wrong move by the government. Now, Sri Lanka is trying to get into the IMF program, but no good news yet come.

Pakistan will not Default Despite the Dismal Economic Situation

Pakistan will not default despite the dismal economic situation in 2022. Firstly, Pakistan’s foreign reserves stand at over $9.7 billion, which is not the lowest in our history. In October 2008, Pakistan’s foreign reserves dipped to $ 6.7 billion but still did not go into default.

Pakistan’s foreign reserves reached an all-time high of 24.026 USD bn in Oct 2016

SBP data

Similarly, there is no one oligarchic political party holding key positions. Although PPP, PML-N, JUI-F, and most of the parties in the coalition government are mostly oligarchic, still these parties have leaders from different origins. There is diversity and no one family has an all-out monopoly as in Sri Lanka. Many ministers have experience in running governments along with a team of professionals.

Unlike Sri Lanka, Pakistan has a better economic policy in some areas. Pakistan has not made the same mistake as Sri Lanka in banning the import of fertilizers. This is the reason that, despite the severe inflation, there is no difficulty in getting flour, pulses, sugar, vegetables, meat, and other food items. The prices have certainly increased, but the purchasing power has also increased to some extent.

PTI-led Pakistan, unlike Sri Lanka, handled the COVID-19 pandemic better. Pakistan’s GDP growth in 2020 and 2021 was around 6%, which was one of the highest in the world. Moreover, Pakistan does not heavily rely on tourism industry but has a diversified portfolio.

IMF Deal and along with Help from China, KSA, UAE

China has also given Pakistan $2.3 billion. The United Arab Emirates has also inked a deal to invest over $1 billion. The Amir of the State of Qatar Sheikh Tamim Bin Hamad Al Thani also talked to PM Shahbaz Sharif which also bodes well for Pakistan.

To assist cash-strapped Pakistan and strengthen depleting foreign exchange reserves and resuscitate its fragile economy, Saudi Arabia has agreed to provide Pakistan with a “sizeable package” of almost $8 billion.

Importantly, IMF has also agreed to release the next tranche of $1.2 billion, which has improved the confidence of the investor and strengthened the position of the rupee against the dollar. Hence, Pakistan seems to have avoided the looming risk of default.

Pakistan has Same Problems as Sri Lanka

Zafar Paracha, the General Secretary of the Exchange Companies Association of Pakistan says the economic conditions of Sri Lanka and Pakistan are different, but the problems are common to some extent.

Zafar Pracha further said that the dollar reserves of the banks have decreased dangerously. Pakistan is almost out of dollars to cover imports. The remaining reserves can hardly cover imports for a few weeks. Consequently, the rate of dollars in the market seems uncontrollable.

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A few days ago, the dollar touched almost Rs 250, an all-time high. Similar to Sri Lanka, Pakistan has banned about 1000 luxury and non-luxury items to bridge the trade deficit. The $2.3 billion received from China has already been consumed.

Pakistan Economic Crisis 2022: The latest Consumer Price Index (a reading of inflation) has crossed 21.3%, a historic high. The credit for this video goes to CNA Insiders.

Frustrated, the government has decided to sell LNG plants and some shares of PSO. This will bring about $2.5 billion dollars to the country’s choked economy. But the issue is that this money will also be exhausted in a few days, and after that, the situation is likely to get worse.

There is also a shortage of dollars in Pakistan. People want to send dollars for overseas payments, but the transfer takes 8 to 10 days. The State Bank is approving only those dollar transactions that are considered necessary. The country needs big inflows of dollars, which is not the case. This scarcity of dollars is similar to Sri Lanka.

Pakistan has already Gone Bankrupt

Shabar Zaidi, former Chairman of FBR, says the country had gone bankrupt back in December 2021. He believes Pakistan has become Sri Lanka but is not willing to publicly announce it. To him, the country cannot get out of this situation without reducing the trade deficit.

He also believed that the mistakes made by Pakistan are the same as those made by Sri Lanka. In Pakistan too, like in Sri Lanka, the subsidy on petroleum products dwindled foreign reserves and caused significant harm to the economy. Lowering electricity prices was also an ill-advised decision, as the Pakistani economy did not have the capacity to bear the brunt of the subsidy.

Pakistan economic crisis 2022
Pakistan economic crisis 2022: The SBP’s foreign exchange reserves amounted to $20.15 billion in August 2021; today hardly $9 billion

Like Sri Lanka, Pakistan has been seeking loans and assistance from China, the UAE, and Saudi Arabia, mainly to pay for imports and debt servicing. Saudi Arabia has linked the guarantee of $4 billion to the IMF bailout package.

Although Saudi Arabia has supported Pakistan in every difficulty, this time the situation is worse. Previous loans were also given at high-interest rates. So, it is too early to say anything about the looming risk of default.

Short-term and Long-term Strategy for Pakistan Economic Crisis

According to Shabbar Zaidi, there are two ways to cope with the current economic challenge. Firstly, if PTI is able to make government in the center, the situation can improve. Another way is to go for the general election as the new government will be more stable, which will restore the trust of the investors and political chaos will diminish considerably.

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In the long run, Pakistan needs to reduce the fiscal deficit, reduce liabilities, build local small and medium enterprises, and shun reliance on loans. A country cannot be run by loans. Moreover, sources of income have to be increased, and a favorable environment for foreign investment has to be created.

Currently, Pakistan needs about $41 billion for the fiscal year, which can only be met by taking loans. But the question arises that even if $41 billion for this year is paid from loans, Pakistan needs about 80 billion dollars in the fiscal year 2023. It means Pakistan will have to become export-oriented rather than a loan-driven country.

Pakistan economic crisis 2022: What can we Learn from Philippines?

A review of the economic situation in the Philippines can be a great guide for Pakistan. In 2005, the Philippines was close to bankruptcy. Foreign exchange reserves were left for only 3 months of imports. The President decided to go into the IMF program, which led to a sharp rise in inflation.

After that, the President proposed a better solution to this problem through political consultation. An independent economic body was formed that included economists from the Philippines and around the world who were not affiliated with politics or political parties.

Since then, this economic body is void of any political interference. Governments come and go but they do not change the core economic policies. This charter of economy stored the confidence of the investors and foreign direct investment exponentially increased.

The stable economic policies also improved the environment for business and the local industries developed, which increased exports of Philippines. Notably, Philippines paid all loan of IMF in 2006 and never again it had to go to IMF for bailout package. Therefore, Pakistan economic crisis 2022 calls for a charter of economy to come out of the vicious circle of debts.

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By Rizwan Bosan

I am a ghostwriter and blogger. My 3.91 GPA in English graduation earned me a gold medal. I also hold a degree in advanced writing from the University of California.

8 replies on “Pakistan Economic Crisis 2022 is Worsening with no Quick Fixes”

Excellent article.This article is good written , informative and knowledgeable.
It was easy to understand and the problems were highlighted with their cause.
Overall it was an interesting and fun to read article.

A good factual analysis of the present dismal situation of the economy of Pakistan. The expression & the tone both are in accordance with the strict factual discussion. The Philippines example at the end brings a heartening note. The charter of economy must be the only focus of the present day top notch of the Pakistani politics including the real power brokers as well.

A good factual analysis of the present dismal situation of the economy of Pakistan. The expression & the tone both are in accordance with the strict factual discussion. The Philippines example at the end brings a heartening note. The charter of economy must be the only focus of the present day top notch of the Pakistani politics including the real power brokers as well.

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