The falling rupee, dwindling foreign exchange reserves, energy crunch, rising fuel prices and a complex external support highlight Pakistan’s contemporary economic crisis. Will Islamabad find a way?
The falling rupee, dwindling foreign exchange reserves, energy crunch, rising fuel prices and a complex external support highlight Pakistan’s contemporary economic crisis. Will Islamabad find a way?
Pakistan Rupee (PKR) continues to fall; 150 in April 2021 to 213 against the dollar on June 21, the lowest level ever. Pakistan’s foreign exchange reserves have been depleting during the last one year. According to the State Bank of Pakistan data, from $17.2 billion in June 2021, net reserves with SBP declined to $8.9 billion in June 2022.
The new government has already increased fuel prices in late May and early June. In addition, the new budget proposes to reintroduce the Petroleum Development Levy. This would mean an increase in the prices of oil and electricity, which have the potential to get people on the streets. Earlier this month, rating agency Moody’s turned Pakistan’s outlook negative, citing “increased external vulnerability risk” and “ability to secure additional external financing”.
Government-International Monetary Fund (IMF) talks remain complicated.
Will IMF give relief to Pakistan?
The immediate future of Pakistan’s economy will depend on the IMF resuming its support. Even after a heated argument between the two, no success has been achieved so far.
Pakistan’s relationship with the IMF remains complicated. Although Islamabad has been in frequent talks with the IMF, in recent years there has been an economic nationalism, mostly fundamentalist, against approaching the IMF. Former Prime Minister Imran Khan made the statement and fueled the sentiments against the IMF. After becoming PM in 2018, he preferred to approach friendly countries (China and Saudi Arabia) and avoid IMF. The new government is now back at the IMF; It hopes the IMF will release payments, expand the support program, and have a long rope to repay.
IMF is ready to support Pakistan but there are some conditions regarding comprehensive economic reforms. This was highlighted in the IMF statement after the last meeting in May 2022. The IMF wants Pakistan to “address high inflation and high fiscal and current account deficits while ensuring adequate protection for the most vulnerable.” The IMF also would not like there to be any deviation from what has been agreed, especially with regard to fuel and power subsidies. In addition, the IMF wants Pakistan to be transparent about its debt position, which Islamabad owes to China as part of the China-Pakistan Economic Corridor (CPEC).
Subsidies are politically sensitive; With further elections, it will not be an easy decision. It has also been proposed to reintroduce petroleum tax in the new budget. With the above, the new government expects the IMF to consider revisiting its package.
The IMF may agree to support after some more promises by the government. But the relief may be less than what Pakistan expected. Without macroeconomic reforms, the IMF is less likely to expand its support program, or to provide Pakistan with a longer rope, which Islamabad seeks.
Will Pakistan pursue comprehensive economic reforms?
It’s been a million dollar question. Economists in Pakistan and elsewhere have been arguing for broader economic reforms, including the independence of financial institutions. It is a political question that the governments led by the Pakistan People’s Party (2008-13), Pakistan Muslim League-N (2013-18) and Pakistan Tehreek-e-Insaf (2018-22) were unwilling to address. Instead, all governments continued to borrow from global institutions and friendly countries.
The budget remains populist; Corruption, lack of independence of financial institutions and declining exports led to a decline in economic governance. Subsidies in the energy sector – fuel, oil and electricity – remain high. With the current government headed by the PML-N and PPP coalition facing elections, they are unlikely to take any bold decisions ahead. Subsequent governments, particularly previous governments, would instead seek external bailouts and support from “friendly” countries.
Will the “friends” support Pakistan without any preconditions?
Saudi Arabia and China have been supporting Pakistan. Soon after becoming prime minister, Shehbaz Sharif visited Saudi Arabia to get a loan. In early May 2022, Riyadh agreed to provide $8 billion; In December 2021, Imran Khan secured support of $3 billion. A similar agreement was signed in October 2021 as well. However, Riyadh’s support was not unconditional. an editorial in dawn It was highlighted in November 2021 that Riyadh can ask Pakistan to “refund the money at any time if the two countries have different views about their relations or relations with any third country, or any other issue”. Huh.”
China has been another important source for Pakistan. Islamabad has been regularly seeking loans from China within and outside CPEC projects. While CPEC projects continued to expand and have been touted as a panacea for Pakistan’s economic and energy problems, the hidden costs remain in question.
After several terrorist attacks from Dasu in Kohistan to the Confucius Institute of Karachi University, Pakistan had to increase security for CPEC projects. Pakistan has created a special security division to exclusively provide protection for CPEC projects, adding to the cost. A big question is whether Pakistan will use external aid to pay off its debt to China? This has been one of the questions raised by the IMF in 2018 and is still relevant today.
During the latest meeting of the Financial Action Task Force (FATF), it was agreed that Pakistan has met its requirement. FATF has agreed to explore the possibility of removing Pakistan from the gray list.
However, when Pakistan was on the gray list, the IMF was in talks with Islamabad. The big two – China and Saudi Arabia – were not constrained by Pakistan’s listing in the FATF. Hence, the chances of relaxation opening the door for large investments are slim.
Will Pakistan follow the path of Sri Lanka?
The situation was similar in Sri Lanka too – falling rupee, falling forex reserves, differences with the IMF and rising fuel prices. All of them staged public protests in Sri Lanka against the government. The economic and energy crisis in Pakistan has not turned into a political storm, as it did in Sri Lanka during April-May. Will there be one?
Politically, unlike Sri Lanka, there is a coalition at the federal level; The main partners – the PML-N and the PPP – have a strong presence and control over the two major provinces, Punjab and Sindh.
Finally, Pakistan’s economic and energy situation is dire and calls for bold decisions. Things will get worse in the short term before they improve, but this has been the history of Pakistan in the last 75 years. With relief from the IMF, after a protracted negotiation, some band-aid, and US intervention, Islamabad could be embroiled in this time as well until the next crisis.
Prof. D. Suba Chandran is Dean, School of Conflict and Security Studies, National Institute of Advanced Studies (NIAS), Bangalore.
essence
Pakistan’s foreign exchange reserves have been depleting during the last one year and have come down to $8.9 billion in June 2022.
The IMF is ready to support but wants Pakistan to “address high inflation and high fiscal and current account deficits, while ensuring adequate protection for the most vulnerable.”
Pakistan’s economic and energy situation is dire which calls for bold decisions and the situation will worsen in the short term before it gets better, but this has been the history of the country in the last 75 years.