Pakistan's Economic Crisis-Explained: Why is Pakistan's economy struggling?

            Pakistan is currently facing one of the worst economic crisis in its history. With the inflation being unbearable for the common man, and the political tensions intensifying, the country is facing numerous challenges at the same time. In this article, we'll look at Pakistan's economic crisis, its history, the reasons behind this, and the future possibilities. 

Pakistan is not only facing an economic crisis, but a political crisis too.

Challenges for Pakistan's Economy:

Following are the major challenges the Pakistan's economy is facing at the moment:

(1) Extremely Low Foreign Reserves:

            The foreign exchange reserves of Pakistan are currently at their lowest point in about a decade. This means the country has foreign currency just enough to import necessary goods for a few days only.

           "Foreign Exchange Reserves mean the money a country has in its reserves which it will use to pay for imports." 

            Since Pakistan's currency is so weak and has almost no demand in international market, the country needs to pay for its imports in the form of widely accepted currencies like US Dollars or Chinese YEN.

WHY ARE PAKISTAN'S FOREIGN EXCHANGE RESERVES LOW?

             A country usually earns foreign currency via its exports to the other countries. This foreign currency is then put in Foreign Reserves and is used to pay for imports. Unfortunately, Pakistan's exports are much lower than its imports which leads to Current Account Deficit. This is a situation in which a country's expenditure on imports is higher than its earnings from exports which eventually leads to a shortage of foreign currency required to pay for further imports, or in monetary terms, a Balance of Payment Crisis.

             To solve this problem, Pakistan often takes loans on high interest rates from other countries in the form of US Dollars. But due to recent economic collapse, no country is willing to give Pakistan a decent loan. This has created an acute shortage of US Dollar in Pakistan's Foreign Reserves.

(2) Inflation:

              The inflation in Pakistan has recently reached its highest point in the last 48 years. The current inflation rate in Pakistan is around a whopping 27%. Electricity prices are continuously rising as the nation struggles to import fuel. Food prices increased by about 43% in January as compared to the same month last year. This is making it hard for the people to afford even their basic needs like food and electricity.

              The reason behind this inflation in Pakistan lies in its low foreign reserves. Pakistan needs to import more grains this year because of the disastrous floods a few months ago that destroyed the crops in almost half of the country. Since Pakistan has extremely low foreign reserves, it is unable to import enough food to the country.
Thousands of containers carrying food items and raw materials are stuck at the ports as the Pakistani government has decided to reduce its imports because of the shortage of foreign currency. This has created a shortage of food in the country leading to a hike in the prices. The situation is so horrible that millions of people have slipped below the poverty line. Dealing with poverty is going to be a tough challenge for Pakistan in the near future.

(3) Currency Devaluation:

Pakistani Rupee has constantly been facing devaluation since 2018 but the rate of devaluation got really fast recently. On January 26, the Pakistani Rupee fell by 9.6% against the US Dollar. This is the highest one-day devaluation of Pakistani Rupee in over 20 years.
One of the major reasons behind the fast devaluation of Rupee is the increasing inflation in the country. When inflation increases in a country, it means that the purchasing power of that country's currency has decreased, which leads to the devaluation of that currency.

These were the main challenges the economy of Pakistan is facing at the moment, but before we move forward, it is important to discuss why Pakistan is a weak economy generally.

This illustration explains how all the problems of Pakistan's economy are interlinked.

Why Pakistan never became a developed country?

            It's been more than seventy years since Pakistan got freedom from British rule but its economic growth has been way lower than its potential. Following are the major reasons why Pakistan has never been able to become a developed country.

• Import-Driven Economy: As mentioned earlier, Pakistan is an import-driven economy or in simple words, a country whose imports are more than its exports. In this way, Pakistan needs to spend more money on its imports than what it earns from its exports. Pakistan's major imports are petroleum, gas, and crude oil while its major exports are textiles, rice, sugar, and cotton. Recently, the disastrous floods in the country caused a massive loss of these crops, which didn't only deprive the country of its precious exports but also caused a shortage of food items like wheat and rice in the country.

• Debt Burden: Pakistan is under a huge burden of debts with an external debt of about 126 Billion USD. The debt to gdp ratio of more than 70% shows how dangerous these debt levels are. Many other countries also borrow money but weak economies like Pakistan only get loans with very high interest rates. For the fiscal year 2020-21, Pakistan spent almost 85% of its total budget on repayment of debts, and the interests on these loans. This data shows how these debt levels are not letting the country move forward. 

• Regional Tensions: Pakistan shares its borders with countries like Iran and Afghanistan and is directly affected by the tensions in these countries. Over the years, Pakistan has remained involved in many wars and conflicts of other countries either directly or indirectly. After Soviet-Afghan war in 1979, and America's invasion of Afghanistan in 2001, millions of Afghan people took refuge in Pakistan. Almost 3 million Afghans still live in Pakistan and Pakistan's inability to manage a large number of refugees has promoted the crimes like terrorism, child labor, and drug trade.

• Relations with India: India is a rising economy but Pakistan has always had bad relations with India. In 1947, when British were leaving India after almost 300 years, united India was divided into two countries: India and Pakistan. However, during the division, the issue of Kashmir remained unsolved and till this day, both countries claim Kashmir to be the part of their territory. These tensions have given rise to many wars between these two countries. Because of the bad relations with India, not only Pakistan needs to spend a big part of its GDP on its defense budget but Pakistan has also lost an important trade partner. The bilateral trade between India and Pakistan stood at mere $1.35 Billion during April-December 2022. Tense relations with an economically developing neighbour is another reason why Pakistan has never been able to improve its economy.

• Weak Governance: Pakistan has always faced the issue of weak governance. Corruption culture is common in the country and the bureaucracy is mainly corrupt which is placing barriers in the way to prosperity. Political parties only focus on the ways to get back in power but none of them have a proper roadmap for solving the problems.

• Military Rule/Lack of Democracy: It's been more than 75 years since Pakistan got independence but Pakistan has never been able to get stable politically. Pakistan is a democratic country but not a single Prime Minister in the history of Pakistan has been able to complete its democratic term of 5 years. The main reason behind this is the intervention of military in the politics. Because of the regional tensions over the years especially with India, Pakistan's army has been funded more than any other democratic institution. This makes Pak Army more powerful realistically than even the Prime Minister and the constitution. In the past 75 years, three times the Martial Law has been enforced on the country.

Recent Shocks:

               Although Pakistan is a weak economy, the country has never experienced such a severe crisis. Following are some major factors behind Pakistan's current economic and political situation:

(I) COVID and Russia-Ukraine war:

         COVID pandemic resulted in the largest global economic crisis of the last 100 years. Like the rest of the world, Pakistan also suffered a major hit during COVID period because of global restrictions and lockdown.

         Pakistan's economy was stable in 2019 and an economic growth was expected for the next year but instead, Pakistan's economy faced a decline in the year 2020. According to IMF, Pakistan's economic growth was recorded at 1.9% in 2019 which decreased to -0.4% in 2020.

         Russia-Ukraine war has also affected Pakistan indirectly because of the continuous hike in gas prices since the start of the war. Gas and oil are Pakistan's major imports and Pakistan is extremely vulnerable to the fluctuations in gas and oil prices. The dramatic increase in the gas prices in the last few years has sent shockwaves through the Pakistan's economy. Also, the inflation rate in Pakistan mostly depends on gas prices and the recent surge in these prices has lead to an unbearable rate of inflation for a common man in Pakistan. 

(II) Political Instability:

           The economic disaster of Pakistan is also fueled by the political instability the country has been facing for over a year now. Pakistan is currently facing one of the worst political crisis in its 75-years history. This all started back in March 2022 when Imran Khan was dragged out of power via no-confidence motion by the opposition parties as the Khan's government was failing horribly to deliver, and to fulfill its promises.

Here's the timeline of Pakistan's political crisis:

•      After being ousted, Imran Khan blamed America and Pakistan's military (establishment) for being involved in his ouster. He addressed numerous power shows across the country where he succeeded to win public support and became the most popular leader of the country once again. The caretaker government that had taken charge after Khan's ouster also failed to deliver and the economic crisis worsened.
•       In January 2023, Imran Khan dissolved the two provincial assemblies governed by his party PTI in an attempt to force the caretaker federal government to hold general (national) elections. On the other hand, the caretaker government, led by Shahbaz Sharif is apparently finding the ways to avoid general elections (to be held in October 2023 according to the rules of Pakistan's constitution) because of Khan's immense popularity among the people of Pakistan.
•      This has led to a clash between the caretaker government and the Supreme Court of Pakistan where Supreme Court is ordering to hold elections on time according to the rules of Pakistan's constitution but the government is giving the reason of unavailability of funds required to hold these elections.

In this way, the political crisis in the country is deepening which will have negative effects on business community's confidence, and ultimately on the economy of Pakistan.

(III) Devastating Floods: 

            The struggling economy of Pakistan received a further blow as the country was hit by devastating floods from June 2022 to October 2022. These floods affected more than 33 million people and took 1739 lives. Almost half of Pakistan was affected by these disastrous floods and the estimated damage is around a whopping $15 Billion. International donors pledged more than $9 Billion for Pakistan flood recovery at Geneva conference but the rehabilitation and reconstruction may require more than $16 Billion. According to the PDNA Human Impact Assessment, the poverty rate in the country may increase by around 4 percentage points after these floods, pushing between 8.4 and 9.1 million people below the poverty line. 

(IV) Rising Terrorism:

          Pakistan has been seeing a fresh wave of terrorism since November 2022 when the terrorist group Tehreek-i-Taliban Pakistan (TTP) ended its ceasefire agreement with the government. Numerous violent activities against civilians and security forces have since been carried out by the extremist group TTP.

          TTP (Tehreek-i-Taliban Pakistan) was formed in 2007 to fight against Pakistan's military. This group considers Afghan Taliban as their role model and aims to enforce the government of Pakistan to implement Sharia law in the country.

          For this objective, this terrorist group started targeting Pakistan's military and civilians. This group also carried out the famous Army Public School Attack in 2014 in which 132 innocent children lost their lives. The activities of the group were then suppressed by the operation Zarb-e-Azb carried out by Pakistan Army against these terrorist groups. Since 2018, no major terror attack was carried out by the extremist group until last year.

           This violent group helped Taliban in fighting against American Forces especially after it was forced to stop its activities in Pakistan. But when America left Afghanistan, a large number of TTP militants returned to Pakistan because the Government of Pakistan agreed to carry out negotiations with them, and a ceasefire agreement was signed in June 2022. The group ended this agreement in November 2022 and started its violent activities again.

            The group seems to have become more organized and violent now because the group is now reportedly using advanced U.S. weapons which they reportedly brought from Afghanistan. Pakistan's military officials and Defense Minister visited Kabul in February 2023 where convincing the Afghan Taliban to stop their support for TTP was on Pakistan's agenda.

            The government of Pakistan has now decided to start another military operation against TTP. It is uncertain whether Pakistan would be able to control terrorism or not, but it is for sure that the military expenditures would definitely be a huge burden on the shoulders of Pakistan's fragile economy. 

What's next?

           Pakistan now looks forward to the IMF's $6.5 Billion bailout package and it has also asked its friend countries for help. Saudi Arabia has recently assured a $2 Billion fund for Pakistan which is a sigh of relief. However, long-term reforms and the economic future of the country depend on the general elections which are controversial already.

           A new hope for Pakistan's better future can be seen in Imran Khan's anti-establishment movement. Pakistan can get rid of military's virtual rule over the country if Imran Khan wins the general elections and finds success in carrying out proper legislation against military's unconstitutional activities to stop the Pakistan's military (establishment) from interfering in government matters and politics. For the long-term betterment, Pakistan must become a truly democratic country.

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