Pakistan, a nation of over 220 million people, has faced its fair share of economic challenges in recent years. The nation has been grappling with a severe economic meltdown characterized by depletion of reserves and an overwhelming burden of ungovernable debt. The country is currently confronted with mounting challenges such as soaring inflation, political strife between different political parties, and a surge in terrorism. These factors along with Pakistan’s massive external debt obligations, have placed the nation at risk of default. In addition, the devaluation of currency has resulted in the highest inflation rate in the country since its inception which in return accelerated poverty, affecting human development which is ranked 161th in the current ranking of HDI.
The IMF has reached a Staff-Level Agreement with Pakistan on a $3 billion Stand-by Arrangement. Though, this deal has had some positive impacts, like the inflow of $2 billion from Saudi Arabia and $1 billion from the United Arab Emirates and it may help Pakistan in gaining investor confidence, but all of these are short-sighted. In the long run, it will not help Pakistan solve its economic crisis completely. Instead, it will worsen the country’s debt position. Therefore, the stability of Pakistan depends upon the outcome of the escalating economic crisis caused by the current political turmoil in the country.
Currently, Pakistan is under the stress of ungovernable debt. The Country has borrowed extensively from international sources to finance budget deficits, development projects and meet its financial obligations. The IMF has expressed dissatisfaction with Pakistan’s commitment and its ability to secure funds for meeting external financing requirements. Moreover, the country’s external debt was totaled $126.3 billion. Roughly, $45 billion owed to multilateral creditors including $18 billion to the World Bank, $15 billion to the Asian Development Bank and $7.6 billion to the IMF. This debt comes with a great repayment pressure, since Pakistan has to pay an external debt of $77.5 billion from April 2023 to June 2026. In 2024-25, debt repayment burden will be around $24.6 billion and by 2025-26, it will be $23 billion. Hence, almost 50% of the total budget is allocated in the repayment of the external debt which is Rs7.3 trillion out of Rs14.4 trillion. Thus, for a $350 billion economy, this is a huge financial burden.
One of the key factors contributing to Pakistan’s economic meltdown is the depletion of its foreign exchange reserves. Foreign exchange reserves, serve as a lifeline for any country, enabling it to stabilize its currency, fuel economic growth and meet its international obligations. Pakistan’s foreign exchange reserves have declined to $3.5 billion, marking the lowest level since February 2014 – an amount insufficient to cover even a single month’s worth of import expenses. This decline in reserves coincided with a period of political instability in Pakistan as former Prime Minister Imran Khan was removed from power through a parliamentary no-trust vote. The level of reserves is barely sufficient to cover the cost of imports for a month.
Owing to this, the depletion of foreign exchange reserves had a major consequence on the national currency, leading to the devaluation of over 21% throughout 2022. The US dollar closed at 226.43 against rupee in the interbank market on the last trading session of the year on December 30. After this, the Pakistani rupee experienced a decline of 3.02% in relation to the US dollar, reaching a trading rate of 299 in the interbank market. This decline in the currency has resulted in growing foreign debt, increasing the cost of imports for Pakistan. As the debt burden grows, there is a possibility that investors will worry about the country’s capacity to meet the financial obligations, leading to decrease in the demand of Pakistani rupee. Here again, the value of the Pakistani rupee relative to US dollar may decline. If we strengthen our foreign trade and encourage export, it can contribute in solving this problem.
Moreover, frequent changes in the government or shifts in political power can lead to economic crisis. The major cause of economic crisis in the country is the political uncertainty. The United States Institute of Peace (USIP), a US-based Think Tank, suggests that the prevailing political uncertainty in Pakistan has the potential to further worsen the economic crisis. As long as Pakistan’s political conditions are unstable, its economic conditions cannot get any better. The political stakeholders are continuously in a fight against each other, not paying heed to the worsening conditions of Pakistan. They have to sideline their personal interests and engage in a constructive dialogue to find common ground for collective gain against these issues.
It is argued that political uncertainty and economic crises has a negative impact on human development. The current economic crisis has put Pakistan on the 161st position out of the 185 countries, and it is among the 25 countries with the lowest human development in the world. This has led to an increase in poverty which is because of decline in income due to ever increasing inflation. All these factors have widened the gap between the rich and the poor. Due to the increased financial strain people have reduced access to healthcare and education, contributing in the decline of human development.
There is dire need of taking short and long term measures to curb with the current crisis. Pakistan needs to encourage domestic industries to produce goods that are currently being imported. This can reduce the reliance on imports, conserve foreign currency and boost local production. Restricting unnecessary foreign imports can reduce the demand for foreign currency and will help in revaluation of the currency. By prioritizing healthcare, education and skills development of the citizens of Pakistan, the level of human development can be improved. In the long run, Pakistan should work on enhancing its exports base in order to increase its competitiveness in the global market.
