Pakistan Economic Crisis 2023 is Worsening with no Quick Fixes

Deepening Economic Crisis of Pakistan

Pakistan economic crisis 2023 is worsening with no quick fixes. The fast depleting foreign reserves, soaring inflation, crashing stock exchanges, and IMF deadlock, Pakistan is facing an economic recession. 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 bankrupt Sri Lanka (54%). The foreign exchange reserves have dwindled to $3 billion. The trade gap shrank from $31.8 billion in the fiscal year 2018–19 to $23.2 billion in the fiscal year 2019–20, to $30.8 billion in the fiscal year 2020–21, and then to an enormous $48.64 billion in the current fiscal year 2021–22.

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.

What Caused the greatest economic Crisis?

Internal political unrest and the flooding disaster in 2022 made things worse. The flood caused an economic loss of over $20 billion, which made things worse. As a result of Russia’s war in Ukraine, food and gas prices around the world went up by a lot, which hurt Pakistan’s economy. The sum of all these elements may have created Pakistan’s biggest economic crisis ever.

However, the administration has been bogged down in partisan politics, and the International Monetary Fund’s (IMF) $1.1 billion loan tranche has yet to be released since Islamabad has resisted the IMF’s requirements. The government has now turned to small-scale solutions that fall short of solving the issue, like banning imports and early mall and wedding hall closures.

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.

Worsening Economy under PDM Government

Even though Miftah Ismail had worked with the World Bank, the Asian Infrastructure Investment Bank, and the International Monetary Fund, he was not able to help Pakistan’s faltering economy. He thought the only way to avoid default was to remove subsidies and increase taxes and duties.

PDM relied on his economic plan and but he failed to reduce the fiscal deficit or avoid the balance of payment issue. Recently, he has been removed and the “experienced” Ishaq Dar is trying to avoid the default. Yesterday, he announced a 35-rupee hike in the prices of diesel and oil.

In some areas, including Khyber Pakhtunkhwa, Sindh, and Balochistan provinces, where the current prices are as high as PKR 7,000 per bag. Making things even worse, there has been a severe shortage of wheat flour. 

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?

Some economists such as Shabbar Zaidi believe Pakistan has already gone bankrupt. Yes, we still have $2-3 billion in reserves, but that is borrowed from the UAE, Saudi Arabia, and China.

On the other hand, many argue that Pakistan will not go bankrupt like Sri Lanka. At 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 but lockdowns during the COVID-19 pandemic have hurt tourism income.

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.

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.

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.

Will Pakistan Declare Bankruptcy?

Pakistan will not default despite the dismal economic situation in 2022. Firstly, Pakistan’s foreign reserves stand at around $3 billion, which is troubling, but 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, pulses, sugar, vegetables, meat, and other food items.

The prices have certainly increased, but the purchasing power has also increased to some extent. Yes, there is a wheat crisis, but it has a lot to do with the last year’s flooding which decimated the wheat warehouses.

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

Pakistan has the 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.

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.

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 were 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.

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 bring the government to 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.

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 on loans from local and international powers. 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 in foreign aid for the fiscal year 2023. But the question arises that, even if $41 billion for this year is paid from loans, Pakistan will need about 80 billion dollars in the fiscal year 2023-2024. It means Pakistan will have to become an export-oriented rather than a debt-driven country. Practically, there is no way to fix Pakistan economic crisis 2023.

What can we learn from the 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, and the local industries developed, which increased exports to the Philippines. Notably, the Philippines paid all its loans to the IMF in 2006, and never again did it have to go to the IMF for the bailout package. Therefore, Pakistan economic crisis 2023 calls for a charter of the economy to come out of the vicious circle of debt.

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