People jostle to buy subsidized sacks of wheat flour from a sales center in Quetta, Pakistan. People in Pakistan are suffering due to the recent increase in the prices of wheat and flour. , Photo credit: AP/Arshad Butt
Pakistan’s economy is on the verge of collapse. The country has asked the International Monetary Fund for relief from the impending default. Pakistan is in its 13th bailout from the IMF since the late 1980s. It’s battling widespread blackouts, runaway inflationdepreciated currency and Decline in foreign exchange reserves. Its economic woes have worsened after last year’s devastating floods. In January 2023, retail inflation reached a 48-year high of 27.6%. Urban food inflation stood at 39% while rural food inflation rose to 45.2%. Food inflation, both urban and rural, has remained in double digits for the last 10 months. chart 1 Shows general retail inflation and food inflation (in %) in urban and rural areas.
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Rising inflationary pressures have pushed up the prices of essential commodities like wheat, onions, milk and eggs. The average price of a 20 kg bag of wheat flour in January 2022 was Pakistani Rupee (PKR) 1,164.8. It increased by 50% to reach PKR 1,736.5 in January 2023. Similarly, the price of one kg of onions increased from PKR 39.4 to PKR 231 in a period of one year. chart 2 Shows the prices (in PKR) of essential commodities during January in the last five years.
Meanwhile, news reports suggest that thousands of containers of essential food items, raw materials and medical equipment are stuck at ports due to lack of dollars. Foreign exchange reserves with the State Bank of Pakistan declined to $3.08 billion in the week ended January 27, 2023. Foreign exchange reserves in Pakistan have come down to a nine-year low and are enough to cover three weeks of imports. chart 3 Shows week-wise foreign exchange reserves (in billions) held by the Central Bank of Pakistan.
A depreciating currency and depleting foreign exchange reserves are bound to make imports costlier, which is worrying for Pakistan as it is heavily dependent on imports. While the country’s imports have seen significant growth, exports have remained largely stagnant in recent years, widening the trade deficit. According to the Asian Development Bank working paper, Pakistan did not produce the machinery needed for manufacturing and infrastructure development, making them dependent on imports. Pakistan’s exports mainly consist of textiles and agriculture-related goods and lack technical sophistication. However, in the last few months, due to the shortage of dollar, imports have also come down. chart 4 Shows year-wise value of merchandise exports and imports in $ million.
Pakistan’s expenses are also increasing while the revenue is not keeping pace. Interest payments comprise a major chunk of expenditure, leaving little room for development expenditure. Also Pakistan has not been able to generate tax revenue due to narrow tax base and concessions. In FY22, total revenue as a share of GDP declined to 12%, while total expenditure as a share of GDP was close to 20%. chart 5 Shows the share of total revenue and total expenditure in GDP.
The high level of borrowing led to total debt and liabilities reaching PKR 59,697.7 billion (89% of GDP) in FY22. The total debt has steadily increased over the years and has reached 93.8% in FY20. China accounts for about 35% of the total bilateral debt outstanding by Pakistan as of March 2022. Furthermore, the sector-wise share of foreign private debt shows that 92% was used for the power sector. chart 6 Shows Pakistan’s total debt and liabilities in billion PKR (left axis) by fiscal year. It also plots the share of total debt as a % of GDP (right axis).
Source: State Bank of Pakistan, Department of Economic Affairs of Pakistan, Pakistan Bureau of Statistics and Asian Development Bank
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