Explained: Pakistan’s Dire Economic Crisis and its Impact

Context

Recently it is reported that the economy of Pakistan is in a dire economic and food crisis with very high inflation, dangerously low foreign exchange reserves, and global lenders like the International Monetary Fund (IMF) refusing to disperse further funds.

Probable Question

Pakistan’s economy is in dire straits with very high inflation, dangerously low foreign exchange reserves, and global lenders like the International Monetary Fund (IMF) refusing to disperse further funds. Critically analyze.(150 words, 10 marks)

About the current situation in Pakistan

• High Inflation: India’s neighbor Pakistan is currently facing high inflation of around 24.5% in 2022. This number was even higher in rural Pakistan, close to 29%.
• High Indebtedness: Pakistan’s current situation is not recent, the country has been facing various challenges for a very long time. This has resulted in the high indebtedness that Pakistan has taken from friendly nations and the International Monetary Fund (IMF).
• Weak External Position: In 2022 after many years Pakistan has been finally removed from the grey list of the Financial Action Task Force (FATF), which has affected countries’ position internationally and has put various economic sanctions on the country.
• The forex crunch: The country is in the midst of a severe cash crunch, with depleting foreign exchange reserves that are just about adequate to pay for three weeks of imports to the country.
• Food Crisis: Prices of perishable food items have soared by nearly 56%. The price of wheat flour in Pakistan has been hovering at uncomfortably high levels. 
• Rising Terrorism: Since 2022, there has been a rise in terror activities in Pakistan by Tehreek-e-Taliban Pakistan (TTP) in an attempt to break the country into two nations.

Related: Pakistan is off FATF's Grey List: What Does that Mean?

Causes that led to the Crisis in Pakistan

• Pakistan Floods of 2022: This has caused unprecedented damage to the country of $3 billion with critical infrastructure destroyed, 8 million people displaced, and pulled down the domestic yield.
• Uneven and procyclical economic policies: Many policies in Pakistan that aimed to boost growth cost rising vulnerabilities and lingering structural and institutional weaknesses. 
• Ukraine-Russia War: While the central and provincial governments have blamed each other for the crisis, experts say it has been caused by long-standing deficiencies exacerbated by the Russia-Ukraine war that disrupted the supply chain. 
• Local issues: As per the experts the problem in Pakistan is more of distribution than inadequate stocks that have caused shortages and price rises.
• Smuggling: There is already a shortage of food in the country and the smuggling of wheat to Afghanistan is another factor, which results in a shortage locally, pushing prices higher.
• Devalued Currency: The currency of Pakistan is devalued which makes imports extremely expensive and led to rising prices of other commodities as well.
• Other Causes: In agriculture, there have been no technological advancements, no land reforms either, canals are drying, the water table is dipping, diesel is very costly, power bills are high and fertilizer is also expensive. All these factors have caused inflation too.

Initiatives taken by Pakistan

• ICCRP meeting: Recently the International Conference on Climate Resilient Pakistan (ICCRP) that began in Geneva, Pakistan made a desperate plea for help.
• IMF funding: Pakistani representatives also met IMF officials regarding its currently stalled Extended Fund Facility (EFF) established in 2019.
• Austerity measures: Austerity measures of various kinds like sustaining energy consumption, and asking employees to do work from home to save various resources from consumption, have been taken by the government. 

International Support to Pakistan

Pakistan so far has received funding pledges from countries like the US, France, Saudi Arabia, China, and Japan, with the Asian Development Bank and Asian Infrastructure Investment Bank also promising help.

• US: Recently the US budget for 2023 has also approved a large sum to fund Pakistan to enhance its border securities.
• Saudi Arabia: Arab has already bailed out the country and now Pakistan has again proposed a second bailout from the Arab kingdom in less than a year and awaits final approval.
• China: It is Pakistan’s “all-weather friend” and help has not yet arrived but it could potentially come.

Pakistan Economic Crisis and India

• Pakistan is India’s next-door neighbor thus not only stability in the region is essential but also paramount for the smooth sailing of each nation in the region that has its own impact on India.
• The economic crisis in the country will increase its dependency on other countries which means even India has to live with increased Chinese influence in Pakistan.
• As India shares borders with Pakistan a foreign influence might also affect the border security of the country.

Way Forward

• Pakistan has already taken funds from the International Monetary Fund (IMF) and now its all hope is first to get further funds from IMF and to get concessions from the IMF on the Extended Fund Facility (EFF).
• Pakistan also has hopes from friendly nations in the form of long-term loans or donations.

News Source: Indian Express

https://indianexpress.com/article/explained/explained-global/pakistan-dire-economic-crisis-why-pm-shehbaz-sharif-geneva-explained-8372290/

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