Pakistan lands into a double-whammy disaster
Pakistan is still recovering from the devastating effects of last summer's monsoon flooding, which displaced 8 million people and cost the country $30 billion in damage and lost output.
The tug-of-war between the opposition and the ruling party has driven Pakistan into political instability at a time when the economy is in turmoil and all economic indicators are trending downward, creating a double-whammy disaster for the unity government of Shehbaz Sharif.
At a time when foreign exchange reserves are dwindling quickly and problems with the balance of payments are getting worse, the government has opened another door to conflict and political unrest, which is likely to hurt the economy even more.
Will Pakistan default?
The country is going through its worst economic crisis, and Islamabad desperately needs loans from the International Monetary Fund (IMF), Saudi Arabia, the United Arab Emirates, and China. However, the IMF is holding off on staff-level agreements until friendly countries give written commitments that they will assist Pakistan in overcoming its economic difficulties.
Saudi Arabia is believed to have declined any additional financial support, and even the Pakistani military chief, who was on a visit to Riyadh, was unable to convince Saudi Crown Prince Mohammed bin Salman to provide additional aid. Saudi Arabia has deposited $3 billion with the Pakistani central bank, which was recently rolled over.
The prices of utilities, oil and gas, food items, and consumer goods are skyrocketing, and the Pakistani rupee is trading at a lower rate, while the government is busy settling its political scores.
Pakistan is still recovering from the devastating effects of last summer's monsoon flooding, which displaced 8 million people and cost the country $30 billion in damage and lost output. It is believed that tens of thousands of individuals are still residing in temporary accommodations. Poor economic management and skyrocketing prices are making their situation worse. The highest level of annual inflation since 1975 occurred in January when it was 27.6 percent. According to the State Bank of Pakistan's latest report for February 2023, annual inflation in the country's consumer price index (CPI) reached 31.5 percent, while core inflation climbed to 17.1 percent in urban regions and 21.5 percent in the rural basket. The rupee is losing value. This week, it traded at an all-time low of 285 to the dollar, down from 230 at the beginning of January and 175 a year earlier. The nation is experiencing its worst balance of payments problem during peacetime as its foreign exchange reserves are decreasing.
Pakistan's External Debt reached $126.3 billion in December 2022 and is set to incur debt service costs totaling $26.3 billion during the next twelve months from November 2022 to October 2023. Before, it was expected that the country will repay $21.1 billion in the current fiscal by June 2023. It repaid $18.7 billion in foreign liabilities during the prior fiscal year 2022.
Pakistan already owes China more than $30 billion, or 30 percent of its total external debt. China remains Pakistan's largest creditor, and Beijing has invested almost $62 billion in the China-Pakistan Economic Corridor (CPEC). China continues to extend more loans to Pakistan, and pledged aid totaling $8.75 billion in November 2022, including a commercial loan, a currency swap, and loan rollovers. In the past two months, China has pledged further help and a $2 billion loan rollover, exacerbating Pakistan's long-term debt burden.
Since an IMF lifeline bailout is yet to be agreed upon, the government has barred all imports other than necessary food and medicine due to severely low US dollar reserves (IMF). Industries like steel, textiles, automobile, and pharmaceuticals are barely running, which has caused thousands of businesses to close and retrenched employees.
Abdul Rauf Ibrahim, the chairman of the Karachi Wholesale Grocery Association, alleged last week during a news conference in Karachi that 6000 containers of pulses have been stuck at the port due to dollar scarcity in the country. Shipping companies, he said, had received $48 million in detention fees from importers on stranded containers that were not released because of a currency shortage. In the upcoming months, he anticipated that there will be another crisis in the availability and cost of consumer items, especially pulses. Haris Agar, vice president of the Karachi Chamber of Commerce and Industry, expressed similar worries and claimed that import containers carrying food items like pulses and raw materials for regional industries were being stopped at the port, burdening importers with unnecessarily high demurrage fees. He claimed that although pulses worth $1.5 billion have already arrived at the port, the government is preventing their release because of a cash deficit.
The ban on the release of imported goods caused a shortage of scrap metal, which is needed to make steel bars by melting down, and has prompted the steel industry to issue a serious supply-chain warning. The price of the bars has risen dramatically in recent weeks.
Even though the economy is in shambles and negotiations with donor groups are hard, Pakistani leaders are not worried about going into a potential default. Of late, they took some unnecessary and irresponsible actions, which will worsen the economic landscape and hinder economic activity in the country. By using state apparatus to intimidate its opponents, including Pakistan Tehreek-e-Insaff (PTI) chief and former Prime Minister Imran Khan, they have destabilized the business environment, which will further harm the economy.
This week, Pakistani police spent hours breaking into Khan's home in Lahore to arrest him on a court warrant. Khan's supporters, however, fought back brutally, injuring more than fifty police officers, throwing gasoline bombs at security forces, torching public and private vehicles, and driving police away from Khan's residence. This event was replicated on Saturday when Khan and thousands of his admirers drove to Islamabad to attend a court hearing in a case concerning the sale of state gifts. The supporters again clashed with police, who blocked the roads leading to the court, insisting that only Imran Khan and his attorneys would be allowed.
The PTI workers are currently the target of a crackdown by the government, which has resulted in the arrest of a dozen party leaders and activists after conducting raids on their homes around the country. Economic experts predict that these policies would significantly slow down the nation's corporate activities.