Pakistan’s economy is on the brink of collapse

Pakistan’s economy on the brink.

The South Asian country this week experienced a horrific bomb attack on a mosque that claimed at least 100 lives. On January 24, 230 million citizens of the country were affected by a national blackout. At the time of writing, the Pakistani Rupee is at a record low dollars.

It is just the latest shock amid a months-long crisis as endemic government corruption, low foreign reserves and crippling debt have plagued Pakistan’s economy.

“Do you want to know? How did a bag of flour, which is important here because we eat roti or chapati every day, more than double in price? How did the price of fuel almost double in less than a year?” Mohammed Usman, a photographer living in Pakistan’s capital, Islamabad, told CNBC.

“Almost every discussion among friends or family these days is about how everything is getting more expensive,” he said. “Add to that political instability and one is in a hopeless situation.”

International Monetary Fund officials landed in Islamabad on Tuesday for talks with the Pakistani government. The purpose of the discussion? Unlocking much-needed funds from the $7 billion bailout package.

And it couldn’t come at a more critical time: Pakistan has only enough foreign currency reserves to pay for imports for about three weeks.

Pakistan received a $6 billion bailout from the IMF in 2019, to which another $1 billion was added in August 2022, in the IMF’s 23rd funding program for the country in 75 years.

But the money won’t be locked away so easily this time, as IMF officials want to see the Pakistani government implement fiscal reforms. These include allowing a market-determined exchange rate for the country’s currency, the rupee, and reducing fuel subsidies, which have become more expensive amid rising global energy prices.

Pakistan’s Prime Minister Shehbaz Sharif refused to make the change for months, fearing a popular backlash.

But the prospect of national bankruptcy eventually forced them to bend — in late January, Pakistan lifted an artificial cap on the currency, causing the rupee to tumble 20% against the dollar in a matter of days. The government raised the price of fuel by 16%. And Pakistan’s central bank raised interest rates by 100 basis points to combat the country’s highest inflation in decades, expected to hit 26% in January.

The crisis facing Pakistan is long overdue, and goes beyond electoral politics, say people who study the country.

“Pakistan’s economic situation is a direct reflection of the country’s misguided priorities over the decades,” said Kamal Madishetty, a researcher at the Institute for Peace and Conflict Studies in New Delhi. He points to the military’s overwhelming control over all other institutions as a key factor.

“The country’s military establishment continues to allocate disproportionate resources to itself, at the expense of ordinary citizens,” he said, explaining that in 2022, while Pakistan is reducing spending in areas like infrastructure and education, military spending will increase by 11%.

“Public discourse can cause economic difficulties in a single government, but it is the class of people who are permanently in power that is responsible.”

Kamal Alam, a non-resident senior fellow at the Atlantic Council, describes a dysfunctional ruling class that for decades has misappropriated funds and prevented meaningful reforms.

“Mired in political, military, feudal corruption, Pakistan now exists as a country that only lives because of the largesse of the Saudis, China, the UAE and the US in that order,” he said. “But at the end of the day customers are also impatient because of the lack of transparency about the actual impact of their donations.”

Oil-rich Saudi Arabia has been a long-time ally of Pakistan, helping it financially many times. But now even the Saudis are demanding to see a serious improvement in governance and corruption before it loosens its purse strings.

More recently, Pakistan has become a victim of climate change: a catastrophic flood in June 2022 left one-third of the country under water, affecting 33 million people and causing billions of dollars in damages and economic losses.

That combined with existing economic problems and the ongoing impact of Covid-19 led the World Bank in early January to reduce the country’s growth projections from 4% last June to 2% for 2023, citing “unstable economic conditions, foreign exchange reserves that little. and large fiscal and current account deficits” are the main reasons.

Pakistan is also close to China – and heavily indebted. More than 30% of Pakistan’s total external debt is owed to China, according to the IMF. It is three times what Pakistan owes the IMF and more than loans from the World Bank and the Asian Development Bank combined, said Madishetty.

These Chinese loans, he said, “come with unclear terms, ignore long-term project viability, ignore environmental and social costs, and have interest rates that are typically 1-2 percent higher than those offered by OECD lenders. ”

Despite all this and the current financial situation, Pakistan continues to borrow from China.

“Most recently, it has sought a $10 billion loan from China for a major railway project, ignoring debt concerns. That decision will definitely push the country into defaulting on debt sooner rather than later,” said Madishetty.

Alam said China’s debt is “the least of Pakistan’s problems, because Pakistan’s alliance with China is mainly military and different from African countries or other Southeast Asian countries.” Both countries need each other for military and strategic purposes, so debt to China may not be as important a liability as other issues in the country.

For Usman, a photographer in Islamabad, the pressure to leave – for those with means, or relatives abroad – is increasingly real.

“Everything is a blur,” he said. “My brother called me the night after the blackout asking me to renew his parents’ passports. He wants them to leave Pakistan and come to Canada.”