Pakistan and its Trajectory
Inflation, Poor Economic Policies, Terrorism: Pakistan’s Economic crisis decoded- Pakistan, India’s neighbour, is in the middle of a severe economic crisis. Inflation combined with poor economic policies has led to the crumbling of the economy. Most of the reasons of the crisis are due to deliberate policy mischoices and had been predicted earlier by experts. The country has been denied funds from the International Monetary Fund (IMF).A delegation from the IMF arrived in Pakistan to attempt last-ditch negotiations to restart crucial financial aid that has been frozen for months. Let us delve deeper into the reasons which has brought the Pakistani economy to a standstill.
WHAT LED TO THE ECONOMIC CRISIS IN PAKISTAN?
The Pakistani economy is in dire straits as explained below.
High Inflation and food crisis Pakistan experienced a very high inflation of about 24.5% in 2022. Inflation was 29% higher in rural Pakistan. The prices of essential items have shot up. Milk costs Rs. 250 per litre, and chicken prices have gone up to Rs 780. Pakistan recorded a new high in inflation as it touched 38.42% in the outgoing week.
High Indebtedness: Pakistan is heavily indebted to several countries and the International Monetary Fund (IMF). China holds roughly USD 30 billion of Pakistan’s USD 126 billion in total external foreign debt. Pakistan’s current account deficit was recorded as import restrictions continue to persist combined with a balance of payment crisis.
Rising Terrorism: In an effort to split Pakistan into two countries, Tehreek-e-Taliban Pakistan (TTP) has increased its terrorist activities there since 2022. War and terrorism has consumed a big chunk of the government’s financial resources, thus widening the fiscal deficit and slowing economic growth. Terrorism is a major contributor to the ongoing economic crisis faced by Pakistan.
Industry shut-down due to shortage of raw material- Some of the biggest companies have paused their operations due to shortage of raw materials or foreign exchange which has added to the woes of Pakistani economy. A local unit of Suzuki Motor Corp extended the shutdown of its manufacturing plant due to shortage of parts. With production coming to a halt in major sectors, Pakistan has landed in grave trouble.
2022 floods: The floods in Pakistan in 2022 cost the nation an unprecedented $30 billion in damages, uprooted 8 million people, destroyed essential infrastructure,, and reduced domestic output. The flood affected around 33 million people and has largely contributed to the ongoing economic crisis in Pakistan.
Economic policies that are inconsistent and procyclical: Many of Pakistan’s growth-enhancing initiatives contributed to growing vulnerabilities and structural and institutional shortcomings. Pakistan’s economic crisis has numerous causes. Political instability and weak governance has weakened investor confidence in the country. This has caused Pakistan to lose out on several lucrative deals. Pakistan is highly import-reliant in terms of energy and is thus very vulnerable to hikes in global gas and oil prices. Pakistan’s hostile relations with several nations had an impact on Pakistan’s standing globally and led to the imposition of several economic sanctions.It also deprived it from collaborating with potentially transformative trading and investment partners.
- Local problems: According to analysts, Pakistan’s distribution challenges and insufficient supply levels have led to shortages and price increases. Its low foreign exchange reserves have hindered the inward supply of certain commodities causing a rise in demand and massive increase in price. Devastating floods have further disrupted the already inefficient supply chain.
What is an IMF Bailout Package and what relevance does it hold in the Pakistani scenario?
When a country or business receives a “bailout,” it means that they are receiving financial support because they may soon go bankrupt. When a country requests a loan from the IMF, it is experiencing severe economic difficulties. It lacks enough foreign currency (or “dollars”) to cover imports and debt repayments in particular. In essence, the country is unable to pay its foreign loans. Thus, a bailout is necessary. The assistance offered by the IMF will be “cash” in the sense that it can be applied to any need. It can use this cash to cover its expenses. But, the IMF will impose some limitations. Spending less is a basic demand, both domestically and internationally.
IMF had previously declined to make a $1.18 billion is still owed since Pakistan’s government is unwilling to comply with several requests, such as promises from the nation on:
rising energy costs
increasing taxation
artificial exchange rate management
B. The Pakistani government’s desperation to attain the next instalment of the IMF loan is highlighted in their act of increasing taxation charged on many high end commodities. The government has already stopped most imports, with the exception of food and medicine, due to critically low foreign exchange reserves, but it intends to increase revenue with the sweeping tax increase. Pakistan’s economy is on the verge of collapse as a result of years of financial mismanagement and political unrest, which have been made worse by the global oil crisis and disastrous floods that would submerge a third of the nation in 2022. The administration is hesitant to be very strict though because an election is scheduled for the end of the year, and it doesn’t want to risk being penalised there.
What is an Extended Fund Facility (EFF)?
It was developed to assist countries suffering with significant payment imbalances caused by structural impediments, slow growth, and an innately precarious balance-of-payments position. It provides backing for broad-based measures that cover the laws necessary to end structural inequality once and for all. It helps national economic programmes that are meant to achieve macroeconomic stability and sustainability in accordance with strong and enduring poverty reduction and growth. The Extended Credit Facility (ECF) could spur the creation of further foreign aid.
Eligibility:It is available to all member countries that meet the Poverty Reduction and Growth Trust (PRGT) conditions and have a recurring Balance of Payments (BOP) problem.
Consistency and regular use:
Help is provided for an initial period of time under an Extended Credit Facility (ECF) agreement for a duration of three to five years, with a maximum aggregate duration of five years.
If an ECF arrangement has expired, been cancelled, or been terminated, new ECF arrangements may be approved.
Concentrated conditionality
Members of the ECF agree to implement a number of policies that will move them closer to a long-term, stable, and sustainable macroeconomic position.
These commitments are fully described in the nation’s letter of intent, along with any other conditions.
Conclusions:
It is highly possible, especially given favourable relations between the two, that China will deliver aid to the distressed Pakistan. However the conditions that shall come with the deliverance of such aid will attract much attention, especially given previous Chinese tendencies that have been seen by the means of their debt financing.
The party in power in Pakistan has already put several measures in place to secure the aid of IMF, with ministers being asked to surrender perks and restrain from using the likes of luxurious commodities such as luxury cars. It will also be extremely interesting to see how the government goes about implementing changes in taxation structure, assuming any changes are implemented in the first place, given the IMF’s prescription of increasing taxation on the rich and subsidising for the poor, but the nearing elections will keep the government wishing not to anger the Pakistani elite.
Curated By: Ishika Goswami and Shreyansh Singh
(Ishika Goswami is a 1st year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.
(Shreyansh Singh is a 1st year student pursuing BMS at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.