Pakistan Economic Crisis Explained

Pakistan has a GDP of $280 Billion as of 2021 but seems adamant about remaining on the path to economic failure similar to what Sri Lanka is in at the present moment. 

It hasn't always been the case. After its separation from India, Pakistan's economy grew 2% faster than any other South-Asian economy. But the status changed after Pakistan's economy was introduced to debt. Understand this debt itself is just a tool used to build or destroy, apparently, Pakistan's administration failed to recognise it and spent most of the borrowings on its military instead of infrastructure and has continued this trend to date. By 2022 Pakistan had borrowed 22 times from IMF and spent its budget's majority portion on debt repayment and military build-up.

PRESENT SITUATION

Pakistan's total national debt amounts to $246 Billion (84% of its GDP, External debt amounts to $122 billion, and the remaining is internal debt). Its current account deficit amount to $20 Billion. The Pakistani Rupee is as low as 175 per dollar. Current inflation is as high as 12.7% in Pakistan's economy. 

One litre of petrol that costs Rs97 in Delhi costs around Rs209 in Islamabad.

CAUSES OF PAKISTAN's ECONOMIC CRISIS

1) Pakistan's affiliation with terror groups had caused it to be isolated in the UN and listed on the Grey list maintained by FATF. As a result, it became difficult for Pakistan to avail of funds from AIIB, ADB, IMF, and World Bank. Even the aid by the US had stopped after the US pulled out of Afghanistan.

2) Illiteracy reigns high. 42% of the population is illiterate. Pakistan spends 2.5% of its GDP on education, when compared to what a developed nation spends (7% of GDP), the amount seems insignificant. Illiteracy is inversely proportionate to the efficiency of the workforce. Therefore, Foreign direct investment is low.

3) Political instability is another factor to consider. No PM had ever completed a 5year tenure. Such instability increases the risk for the investor.

4) Regional stability is a factor that governs Foreign direct investment, internal security and economic growth. Iran's involvement in Baluchistan province, Afghanistan's influence over Khyber Pakhtunkhwa and the issue of Pakistan-occupied Kashmir such conflict only discourage investors.

5) China and its debt trap policy have Pakistan in its clutches. Usually, loans by IMF are lent at a 3-4% interest, but China charges 6% with terms and conditions to its liking. That makes it a win-win situation for China as the projects under these agreements are led by Chinese companies, even the workforce comprises Chinese workers, for example, China Pakistan Economic Corridor.

SOLUTION TO THE PAKISTAN's ECONOMIC CRISIS

A change in outlook on economic policy paired with debt restructuring is imminent to avoid a full-scale crisis. Working on the pointer given by FATF and detaching Pakistan's military from politics will ensure stability and less corruption.

PAKISTAN's PAPER AND TEA SHORTAGE: BEGINNING OF THE PAKISTAN's ECONOMIC CRISIS

Pakistan is retracing Sri Lanka's steps as the chain of events shows similarity. Paper and Tea are two of the few commodities that Pakistan have to import, which also taxes foreign exchange reserves of the country. It costs about $600 million per/year to import Tea. Currently, Pakistan lacks paper to print books for the next academic session and is left with $9 billion in reserves. Unlike India, Pakistan lacks the industrial build-up to be self-sustained.

If all remains the same in the next five years, Pakistan's economy will visit the same events Sri Lanka is facing. Do share with friends!