The writer is an
analyst and the
President of All
The IMF is sending a team next week amid a standoff with the government over reforms. Pakistan’s economic crisis is worsening, with the rupee sinking to record lows against the dollar. Amid a rapidly tumbling economy, the writing on the wall for Pakistan’s future is clear – that the country faces another monumental crisis in its history. Following the State Bank’s removal of a cap on Pakistan’s foreign currency exchange rate, the steep drop in the value of the rupee is bound to add to an already high rate of inflation. The change came shortly after the State Bank of Pakistan (SBP) raised its interest rate to 17 per cent as it sought to battle inflation hovering around 30 per cent. Dar came to the job in his latest tenure, promising to oversee the appreciation of the rupee to a rate of 200 rupees to a US dollar. Last week, the Pakistani rupee lost close to 12% of its value after the removal of price caps that were imposed by the government but which were opposed by the IMF. Resultant, Pakistan’s currency depreciated to its lowest against the US dollar at 262.6 rupees. And the ultimate outcome in today’s forex market is nothing but a massive departure from that ambition. In a sharp departure from Finance Minister Ishaq Dar’s publicly repeated claims of keeping domestic fuel prices unchanged, Pakistanis must now brace for a hike in petrol and diesel prices in the coming days. So how is this crisis affecting Pakistan’s people and what does the future hold? As petroleum products are imported into Pakistan, the rupee’s devaluation must force not just a jump in domestic fuel prices, the resultant inflation is bound to hit a range of consumers from owners of private transport to public transport such as trucks and buses. Besides, a jump in the price of diesel will inevitably add to the cost of production in agriculture and industry. It is very surprising to observe that despite issuing statements of support by friendly countries and global financial institutions no concrete steps are visible aimed at ameliorating the fast-approaching economic meltdown. It appears that the institutions and personnel given the responsibility of managing the national economy are virtually paralysed and could not do anything to mount an appropriate rescue effort. Eventually, though not of direct consequence to ordinary consumers, airlines are likely to raise the cost of domestic and international rupee-denominated airfares. Besides, a delayed return to the IMF’s loan programme has cost Pakistan dearly in the past and is likely to do so in future. The reported planned hike in domestic gas tariff of over 70 per cent is not just a sharp hit to consumers. The added possibility of backdating the charge to July last year when the present financial year began, must translate into large arrears in the coming gas bills. Additionally, with a massive circular debt surrounding the energy sector, a substantial jump in electricity costs is likely to come soon. Other areas set to be hit include more expensive imported raw materials for daily use items notably medicines, food items and consumer goods. The central bank was accused of forcibly impeding imports in the country with the result that over 9,000 containers are stuck up at seaports threatening to break the supply chains of essential goods.
The future of Pakistan depends on the actions taken by the government and other stakeholders during the worsens economic crisis!
The import-dependent businesses are now teetering towards closure, which would trigger a breakdown of supply chains, as the country’s domestically manufactured goods are also based on imported raw materials. Goods such as wheat, fertiliser, cotton, pulses, onions, tomatoes, tyres, newspaper prints and electric bulbs are all imported to cater to the needs of the country. The financial situation is dire already with factories halting production that have started laying off workers, potentially precipitating an employment crisis. Hospitals have started running short of medicines while the cars may soon shut off on the roadsides on a rainy day due to malfunctioning of windscreen wipers or depleted fuel. Another substantial factor is galloping inflation and it is noted that the wheat flour crisis has taken a toll on human lives due to a massive surge in prices.
Inflation is raging in the country to the tune of 30% and the fast-approaching financial breakdown may seriously disrupt the national supply chain triggering hyperinflation with the price structure becoming almost impossible to contain. By the look of things, the disruptive stage is not very far and unfortunately, there is hardly any efforts witnessed that are aimed at rectifying the situation. Pakistan’s grim outlook for the foreseeable future has coincided with ruling politicians upping the temperature. In an election year, mounting and deeply unpopular reforms to overcome present-day economic challenges are neither within the capacity of the ruling structure nor other mainstream political parties. The stability and prosperity of Pakistan have been jeopardized by the current economic and political crisis, and the events that followed it has brought the country to the brink of bankruptcy. As a result, Pakistan is confronting a variety of concerns, such as exchange rate instability, declining investment, elevated inflation, alarmingly low foreign direct investment, and reduced remittances. High inflation rates, which have reached an all-time peak, are at the top of the list. The prices of commodities have more than doubled since April 2022. The recurrent increasing prices of essential goods are making it harder for the lower and middle-income classes to make a living. Many cannot even afford basic necessities. SMEs that form the basis of Pakistan’s economy are shutting down every day, due to factors such as increasing input costs, lack of access to credit, and overall economic instability. In addition, a shortage of dollars makes it even harder for businesses to import raw materials, machinery, and other necessary goods to operate. As a result, major industries heavily reliant on imports have shut down their plants and factories. Moreover, a decline in foreign investment has also been witnessed, as investors are hesitant to invest in a market where the currency is overvalued, and the value of their investment may decline. With the current economic crisis at hand, maintaining foreign exchange reserves is a major challenge for Pakistan. The reserves are at a dangerously low level and are not enough to cover even three weeks of imports. The situation is added to by the fact that foreign remittances are constantly declining. This is not only making it difficult for the nation to keep up with its bills and loans but is also putting immense strain on the economy. With the IMF holding the threat of taxes over Pakistan’s head, the situation has worsened.
The current economic situation is making it very obvious that the government is left with hardly any option but to comply with the loan conditions that include a market-based exchange rate, increase in electricity and gas rates, additional taxes to make up for revenue slippages in order to contain the budget deficit within the original programme targets and removal of import curbs. In the interim, the government is seriously mulling over introducing energy rationing but the political faction within in that is insistent to ward off the onus of responsibility for the financial meltdown from the ruling coalition. The current government is indeed failing to take timely and effective measures to address the crisis. However, it would not be fair to exclusively blame the government. Many stakeholders have played a key role in fostering the current political crisis, including the leaders of opposition parties. The recent drama in the Punjab Assembly and its dissolution has further aggravated the situation. To address the underlying issues of the current economic crisis, all stakeholders unanimously need to take joint action to create a comprehensive and sustainable economic reform plan. The reform plan should include implementing structural reforms, addressing the causes of current political and economic instability, creating an environment that is conducive to investment and growth, and implementing pro-business policies that can attract foreign and domestic investments. Options other than the IMF should be explored as opposed to hastily opting for a new loan programme from the IMF every time. This could include setting up a Pakistan Sovereign Wealth Fund. This may help provide the nation with a stable source of funding not reliant on loans from the IMF. Additionally, cooperation with other nations should be increased to gain access to new markets and investment opportunities, and to increase productivity, and competitiveness and create new industries, the government should incentivize investment in technology and innovation. All stakeholders must come together to take immediate and decisive action to address the economic crisis and make the necessary sacrifices for a better future. The future of Pakistan depends on the actions taken by the government and other stakeholders.