Economic crisis in Pakistan: an urgent need for 36 billion dollars
Hi, this is Hot Mic and I’m Nidhi Razdan.
Pakistan reels from one crisis to another. There was the long political crisis with Imran Khan refusing to leave the prime minister’s chair until he finally had no choice and Shehbaz Sharif was sworn in as prime minister. But the country is now facing a huge economic crisis. Pakistan faces $6.4 billion in debt over the next three years as Prime Minister Shehbaz Sharif’s new government attempts to meet bailout conditions set by the International Monetary Fund.
In fact, Pakistan has gone to the IMF 22 times in the past to ask for a bailout. But real reform efforts have been lacking, which is why they keep coming back. Pakistan’s foreign currency reserves are currently running out. They have halved in less than a year. And the country desperately needs $36 billion in foreign funding over the next fiscal year which begins now, in June.
According to data from 13 countries compiled by Bloomberg, Pakistan is the worst performer in Asia, with its rupee falling nearly 8% last month. The country is desperately negotiating a bailout with the IMF and others to keep its economy afloat and avoid a default. But obtaining an IMF loan comes with strict conditions, which Pakistan has struggled to meet in the past.
This includes reducing the budget deficit, improving banking and tax legislation, strengthening the social safety net for poor households, phasing out electricity subsidies, and reducing federal bank intervention. on the foreign exchange market. The current economic crisis in Pakistan is mainly attributed to its heavy spending on non-development and economically unviable projects.
Experts, for example, have cited futile infrastructure projects like the Gwadar-Kashgar railway line project through long-term debt instruments and relying heavily on external borrowing rather than domestic institutions. All of this has compounded Pakistan’s problems. The rollout of the China-Pakistan Economic Corridor, CPEC, has increased Pakistan’s debt burden, opening the doors to ever larger external loans. Notably, the CPEC also created a $64 billion Chinese debt to Pakistan, which was initially valued at $47 billion in 2014.
The persistent decline of the Pakistani rupee against the US dollar has further contributed to the surge in external debt. An IMF bailout has become critical as countries that have traditionally been generous lenders to Islamabad are now proceeding more cautiously. The problem is that the countries that were ready to bail out Pakistan earlier are no longer willing to do so until Pakistan has made solid progress with the IMF. When Pakistan went through a similar economic crisis in 2018, the country was able to enlist support from China, Saudi Arabia and the United Arab Emirates before going to the International Monetary Fund.
But on May 28 this year, Pakistan’s finance minister admitted that the country had asked for help from Saudi Arabia, the United Arab Emirates and other countries. And while they were ready to give money to Pakistan, everyone was saying that Pakistan should go to the IMF first.
The Pakistani government took a bold and unpopular step last week, raising local fuel prices to fulfill a key condition set by the IMF to restart its bailout program. This, however, provoked an immediate political reaction from Imran Khan, who said in a series of tweets that the fuel price hike was the highest in the country’s history and that the Pakistani government had no concluded an agreement with Russia for 30% cheaper oil. The government was already considering gas import agreements with several countries, including Russia.
Now, as the economic crisis worsens, she encouraged Imran Khan to confront the Sharif government. He wants the elections to be called immediately. However, the elections are only scheduled for the summer of 2023. The other big question is: what will the all-powerful army do? There is speculation that he could unplug Shehbaz Sharif as he implements the IMF’s unpopular demands on the people of Pakistan. The next few months will therefore be politically and economically turbulent for the country, once again.