Why the wheels are coming off Pakistan’s economy

Dwindling Forex ReservesThe immediate worry for Pakistan is finding enough dollars to fund its imports of oil and other essential items. Amid the double whammy of pandemic-related disruptions and the Ukraine war it is faced with what is called a balance of payments crisis. With earnings from foreign trade choked, the country has been draining its reserve of dollars to make international purchases. The State Bank of Pakistan reported in January that the country’s foreign exchange reserves were at a 10-year low of $3.1 billion, meaning money was available for just a few weeks of purchases. Pakistan runs the risk of defaulting on its debt repayment obligations, which would severely impact its ability to raise further loans internationally. Also listen: Why Pakistan's Economic Crisis Has Sparked Austerity Measures Pak Rupee In Free FallThe economic slowdown has weighed on demand for Pakistan’s exports, forcing it to spend more on trade than what it has been bringing in. That led to a depreciation in the value of the rupee which, in turn, drove up the cost of paying interest on the debt held by foreign lenders. The weaker rupee also raises the price of importing goods, prompting further drawdowns of reserves that only worsen the situation. Pakistan imports significant volumes of food and fuel and the sharp rally in the value of the US dollar last year piled pressure on its currency, which suffered a straight 26% depreciation against the US dollar in 2022. Runaway InflationHigh oil rates have supercharged prices, which has hit the common man hard. January witnessed an over 27% increase in inflation. Average inflation is projected at close to 20% in a year that has started with sharp hikes in the prices of petrol and diesel. People are suffering due to the massive floods that swept the country last year. Farmers who lost cotton, date, sugar and rice crops to flooding still need help. The bailout package that Pakistan is negotiating with the IMF would, however, mean the government would have to tighten its spending, thus limiting the scope for assistance to the public. Slow Pace Of Economic GrowthSince 2010, the Pakistan economy has clocked sub-5% GDP growth year-on-year in all but three years, with two of them coming in the pandemic years when the base was lowered after economic activity took a hit amid lockdowns. The projection for 2023 is 3.5% y-o-y. As it reels from the current crisis, its economic prospects look bleak. The country has had three finance ministers in less than a year and in the middle of 2022, Imran Khan became the latest in the unbroken line of PMs since the country’s inception to fail to complete a full five years in office. With incumbent Shehbaz Sharif – he faces elections in October this year – saying that the conditions set by IMF are “beyond imagination” but would have to be accepted, the public might not have much respite to look forward to in the near future.Graphic: Karthic R Iyer; Source: IMF, World Bank, OECD, Trading Economics, State Bank of Pakistan