Struggling to Avoid Default: Pakistan’s Economic Crisis Deepens
Pakistan’s economic crisis has been deepening over the past few months, with the rupee recording a historic low of 275 to the US dollar, inflation rising to over 27 per cent and foreign exchange reserves dropping to the lowest level since 1998 at around USD 3 billion, which is not enough to cover even a month’s imports. In November 2022, the International Monetary Fund (IMF) had offered a $1.8 billion bailout package to Pakistan. But the condition was that the Pakistani government would have to withdraw subsidies, which the Shehbaz Sharif government refused.
In an effort to stave off an economic default, Pakistan has now tabled a 170 billion rupee ($643m) finance bill in parliament to secure funds from the IMF. This includes imposing taxes worth PKR 170 billion ($640 million) in February, despite the mounting inflation. The IMF has also proposed a three-year Extended Fund Facility (EFF) for Pakistan, worth about $6 billion, to support the government’s economic reforms and help the country overcome its balance of payments crisis.
However, Pakistan’s external debt stood at $126.9 billion dollars in September 2022. The amount of debt it holds in relation to its Gross Domestic Product (GDP) is alarmingly high at 70%. Approximately 50% of the income collected by the Pakistani government is allotted for servicing the debt. Of Pakistan's total bilateral debt of $27 billion, $24 billion is owed to China.
The country is now putting burden on its people to obtain IMF loan, avoid default and strengthen its fiscal position. This has triggered fears of further deterioration in the overall situation as the new taxes could accelerate the country's spiraling inflation.
In April 2022, a parliamentary vote of no confidence resulted in the removal of Prime Minister Imran Khan, leader of the Pakistan Tehreek-e-Insaf (PTI) political party, from government.
The increase of the financial and economic crises in Pakistan is also having a negative impact on the development of Afghanistan's economy. Afghanistan is in a humanitarian and economic disaster, as Pakistan’s main source of funding is gone. Moreover, since Pakistan’s rupee is falling against the dollar, it is becoming expensive for Pakistan to import goods, widening the trade deficit in the recent years.
These challenging times require strong political leadership.
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