Pakistan's worsening economic crisis findoutabout.in

Table of Contents

INTRODUCTION

Pakistan is facing an acute financial crisis as its government rushes to tackle the situation with drastic measures. the country is struggling to cope with growing debt, inflated energy import costs, dwindling foreign exchange reserves, global inflation, political instability, and a slowdown in GDP growth.

The Prime Minister Shehbaz Sharif-led government is taking desperate measures like ordering shopping malls and markets to shut by 8:30 pm and restaurants by 10:00 pm in order to save energy consumption.

A few days ago, The crisis escalated to the extent that the government auctioned a Pakistani embassy property in the US.

Worsening economic crisis

Pakistan’s Lahore is facing a massive shortage of flour where the prices have shot up drastically with non-availability in most shops. With such a shortage, the price of a 15 kg flour bag went up to Rs 2,050, after an increase of Rs 300 in two weeks, said a Pakistani news outlet ARY News. The government also hiked the prices of sugar and ghee by 25 percent to 62 percent for sale through the Utility Stores Corporation (USC), reported The Dawn.

They are heavily dependent on imported fuel. The government has also ordered all central government departments to reduce energy consumption by 30 percent. These measures are directed to help the country save 62 billion Pakistani rupees ($274 million), according to a tweet by the country’s ruling party. The situation has prompted analysts to draw comparisons with a similar crisis faced by India’s other neighboring nation Sri Lanka earlier last year.

Pakistan’s foreign exchange reserves dwindling fast

Their’s total liquid foreign exchange reserves fell to $11.7 billion in December – half of that at the start of the year, said the central bank. The country’s finances are also suffering because of the differences with The International Monetary Fund (IMF) over a review process, which has delayed the release of a $1.1 billion bailout tranche. Pakistan had, in 2019, secured a $6 billion bailout package from the IMF, and the financial institution gave the country a fund of $3.9 billion till August last year. While the next tranche was expected in September, it was delayed due to a pending review by the IMF.

Devastating Flood that hit Pakistan in 2022

Another factor that has worsened the economic situation in the country. The flood, which affected nearly 33 million people, is believed to have led to damages worth over $30 billion.

In fact, the flood increased Pakistan’s dependence on imported goods other than oil, while the country’s exports slumped. According to the Pakistan Bureau of Statistics, the country’s trade deficit stood at over $2.8 billion in December 2022 as exports declined by over 16 per cent to $2.3 billion. A depreciating currency isn’t helping the economic situation either, with the Pakistani Rupee falling nearly 30% in 2022, compared to the US dollar.

What are the options for Pakistan?

Immediate solutions include financing and compressing demand for imports, but needs are rising after the floods.

However, with investors demanding a 26 percentage point premium to hold Pakistan’s international bonds over safe-haven U.S. Treasuries, Pakistan is locked out of international capital markets.

There have been some indications the next IMF disbursement could be quicker and front-loaded to help Pakistan combat the floods, but the program runs out in mid-2023.