ECONOMIC CRISIS IN PAKISTAN: WHY AND HOW TO END IT? – By: Aisha Imran
Pakistan has been brawling with economic crisis for the past few years. Facing extreme inflation, declining currency and continuously increasing debt burden. The people are greatly affected by this economic crisis, which persists to this day. They are facing challenges to meet their financial obligations, with the poor living from hand-to-mouth and the middle class experiencing significant financial strain. Consequently, the standard of living has decreased considerably.
There are many reasons behind the economic crisis. The country is facing the risk of a default due to the colossal external debt burden. This burden have gotten worse because of the derailment of $6.5 billion International Monetary Fund (IMF) program initiated in 2019, as the international lender is dissatisfied with Pakistan’s lack of commitment to reforms and its inability to secure funds to meet external financing requirements, further worsening the economic challenges facing the country. As of June 2023, Total Public Debt and Liabilities of Pakistan is estimated to be about US $223.86 billion/ Rs.62.881 trillion which is 74.3 % of gross domestic product(GDP) of Pakistan. About Rs.24.309 trillion is owed by the government to domestic creditors, and about Rs.1.67 trillion is owed by Public Sector Enterprises (PSEs). Pakistan’s economic problems are caused by several things happening at once. COVID-19 pandemic messed up the whole world economy. There were disruptions in global supply chains, and geopolitical tensions. All these things together have put the nation into an economic disarray, marked by dwindling purchasing power, depleting foreign exchange (FOREX) reserves. This has led to escalating civil unrest.
The further devaluation of Pakistani Rupee (PKR) further complicates the economic situation. From hopes of becoming world’s best-performing currency in October 2022 to hitting a record low in February 2023, the devaluation has far-reaching implications, impacting essential imports such as fuel, edible oil and pulses. Pakistan’s foreign exchange reserves are currently around $4 billion, which is insufficient to pay for even one month’s worth of imports. Consequently, there is a chance that the nation will not be able to pay its debts. Pakistan is currently facing a decline in purchasing power of the population and an increase in poverty due to record-breaking inflation rate of over 25% .
The rising costs of food, fuel, electricity, and imported goods are the primary causes of this inflation. The government’s expansionary fiscal and monetary policies, which were implemented to boost the economy in the face of the COVID-19 pandemic, have further exacerbated the inflationary pressure. Pakistan depends heavily on buying petrol and oil from other countries, which are expensive and their prices can change a lot. Sadly, because of bad management, corruption, and not spending enough on renewable energy like solar or wind power, Pakistan doesn’t make enough of its own energy. This means there’s not always enough electricity. As a result, Pakistan frequently faces load shedding and power outages, affecting negatively many homes and businesses. Because of these electricity problems, Pakistan’s economy has shrunk by as much as 4% recently.
Political instability is another factor that cannot be ignored. Political stability in any country requires economic stability, which means that both go hand in hand. Pakistan’s financial instability is significantly impacted by its political instability. Frequent changes in government, governance, and political unrest have weakened foreign and domestic investor confidence. This has led to a decrease in foreign direct investment (FDI), causing capital flight and lowering the likelihood of economic growth. The political uncertainty has undermined the confidence of investors, creditors, and the public in the government’s ability to address the economic challenges. Pakistan’s stock market conditions also pose a severe threat to economic stability. The uncertainty surrounding investments has led to a decline in confidence in the Pakistani economy, leading to capital flight and hindering the country’s ability to attract much-needed foreign investment. The plummeting value of the Rupee, hitting an all-time low against the US Dollar at nearly 235 PKR, has further fueled concerns about the economy’s stability and raised questions about the Government’s ability to manage the financial crisis. And this list goes on.
Now the question is that how to end this crisis? What are the possible solutions? What can we do to overcome this crisis? So, to overcome this crisis a lot has to be done. Government is responsible for making policies and taking required actions to overcome such situation. But the current government’s position is weak and policy choices are limited. However, any further delay would aggravate the crisis and could prove to be very costly if the foreign exchange reserves continue to drop and the rupee continues to devalue. To fix the economic problems both the government of Pakistan and foreign community need to act urgently and comprehensively. There are some possible solutions like debt relief, structural reforms, political dialogue, international collaboration, monetary and fiscal policy, promoting exports, investment in human capital, long-term economic strategies, and so on.
Pakistan could ask lenders to ease debt repayment pressure, allowing use of resources for economic growth. Seeking IMF assistance to restart a paused bailout program would provide crucial financial support. Structural reforms are required to address the underlying causes of Pakistan’s economic problems. To decrease inflation, the budget deficit, and the national debt, the government should implement responsible monetary and fiscal policies. It is essential to improve tax collection and expense management to increase revenue production. To resolve its political crisis, government and opposition should engage in a peaceful and productive dialogue to end their confrontation and try to find a mutually acceptable solution. By seeking help from its friends and partners like China, Saudi Arabia, Turkey, Iran and the United States, Pakistan can strengthen its international relationships. This could bring financial aid, business chances, smoother trade, increased chances of exports, and new technological advancements. Pakistan needs to establish a comprehensive long-term economic development strategy with clear goals, timelines, and monitoring mechanisms for effective implementation and sustainable growth.
By implementing these essential reforms in the upcoming years, Pakistan can attain upper-middle-income status by its 100th anniversary in 2047. It has the human capacities and a proven implementation ability to reach this goal. Pakistan has significant potential to capitalize on this economic crisis, turning it into a pivotal moment in history. The year 2024 could signify “Pakistan’s defining moment.”
