With its foreign exchange reserves nearly depleted, Pakistan is having desperate talks with the International Monetary Fund (IMF) to try to avert a worsening economic disaster.
As a result of its skyrocketing foreign debt, the country has only enough cash to fund imports for less than a month at normal levels.
After 10 days of talks with the government, an IMF delegation is scheduled to leave the country on Thursday in the hopes of gaining access to crucial international financing.
The annual rate of inflation in Pakistan jumped to over 27% in January, a level not seen since 1975, causing widespread concern about the state of the economy during a crucial election year.
The Pakistani rupee hit a new low of 275 per dollar last week, down from 175 per dollar a year ago, increasing the cost of living there.
One of Pakistan’s biggest challenges is that it doesn’t have enough foreign currency.
The closure of factories like Jubilee Textiles in Faisalabad, Pakistan’s industrial hub, was not caused by the frequent power interruptions that have plagued the country for years, but rather by a lack of money to pay for the things they require.
“How can we produce anything if we can’t import the materials? This is a losing proposition for us at this point “Fahim, the company’s boss, told the BBC that all 300 employees had been sent home.
The printing presses at Jubilee only recently started up again after being shut down a month ago. While the BBC was there, a pile of white cotton sheets rested in an iron tub, dusted with brick dust, with the only sound being the steady drip, drip of an industrial washer.
As Fahim shuffled through the maze of stalled machines, he explained that the plant had just run out of the dyes they import from China not because they weren’t available but because their bank had taken weeks to clear the dollars to pay for them.
Analysts believe that the shortage of dollars is due to the government maintaining an artificially high exchange rate with the bank. They let it fall at the end of last month, which may be beneficial to some companies but will likely increase prices for consumers.
Karachi, like many other ports, has seen an increase in the accumulation of imported goods.
Companies and factories across Pakistan have reported slowing or stopping operations as they wait for imported supplies that have piled up in ports.
An official with the government told the BBC in late January that there were over 8,000 containers stacked in Karachi’s two ports. These containers contained everything from food and medicine. According to accounts from the local media, some of that has cleared, but a lot of it is still trapped.
a confluence of issues that cannot be avoided
Global gasoline prices have skyrocketed as a result of the coronavirus epidemic and Russia’s invasion of Ukraine, which has had a negative impact on Pakistan and many other countries. Pakistan imports a lot of fossil fuels, and the cost of importing food has recently skyrocketed.
If the value of the rupee drops, it will cost more to produce or ship items because of the higher cost of fuel. Fuel prices were recently raised by the government by almost 13%, although further hikes are not planned.
The United Nations estimates that flood damage last year cost more than $16 billion. Large swaths of Pakistan were flooded, washing away farms and damaging the country’s food supply. The cost of staples like wheat and onions has shot upward.
Shopping malls in Pakistan are closing early due to a fuel shortage, and the crisis in Sri Lanka should serve as a warning to other Asian countries.
An election is scheduled for later this year, adding to the already tense atmosphere in the political arena.
When it comes to bailouts, Pakistan is not a newcomer. The government has struggled for quite some time to wean itself off populist subsidies and stabilize its economy, despite having a big military budget and years of debt-driven infrastructure construction.
Pakistan has had the recurring balance of payments issues throughout its history, according to Dr. Sajid Amin Javed, deputy executive director of the Sustainable Development Policy Institute in Islamabad.
“For help, we turn to the International Monetary Fund. After two or three years of tough reforms, we roll them back because of the inevitable election year.”
He claims that subsidies have been employed in Pakistan for quite some time in an attempt to win over the country’s electorate.
Does Pakistan have the potential to become another Sri Lanka?
Imran Khan, who was deposed as prime minister of Pakistan in April, took office in 2018 on a platform of improving the country’s economic situation. Inflation skyrocketed, and the value of the rupee plummeted, despite his earlier promise not to ask the IMF for assistance.
After much back-and-forth with the IMF, he was able to get a $6 billion rescue package to help with the balance of payments crisis.
The upcoming $1.1 billion installment of this is the subject of ongoing discussions. As of now, it still hasn’t been made since it was supposed to be back in November.
With the country’s foreign reserves so low, both the government and Mr. Khan’s PTI party think an agreement with the IMF is necessary.
According to Pakistan, the negotiations have been challenging; Prime Minister Shehbaz Sharif claimed last week that the organization had given Pakistan’s finance minister a hard time.
Mr. Khan expressed concern in an interview last month that Pakistan would go the way of Sri Lanka, where a lack of currency made it difficult for the population to buy food, petrol, and other necessities, leading to a popular revolt that toppled the government.
Dr. Javed is not like the other examples.
First and foremost, he argues, “the magnitude of the economy is completely different.” Rollovers, refinancing, friendly deposits, and delayed oil repayments are only some of the ways that “friendly countries” like China, the United Arab Emirates, and Saudi Arabia have helped Pakistan weather the storms.
He does, however, have some worries.
To successfully emerge from this crisis, “the common ground that we do have is political instability.”
Mr. Khan’s PTI party and the current administration do not get along well at all. Mr. Khan, who retains substantial popularity, has been staging demonstrations and marches to back his contention that his removal from office was unjustified under the constitution.
His aspirations for an early election have been met with opposition from Pakistan’s new government, which claims it is prioritizing the economy over political stability.
Planning minister Ahsan Iqbal said on the BBC, “for one person’s personal benefit we cannot put the whole country into uncertainty.”
“Calling an election now would cause chaos for four or five months.”
This is one point on which the two camps can agree: political uncertainty makes economic stability difficult, and neither side can expect it while an election is on the horizon.
The International Monetary Fund is the current ace in the hole.
To what extent, then, does Pakistan have hope for an improvement? The country needs more money, and it needs it quickly if it wants to do anything, including keeping the lights on.
There will be an increase in demand for energy as people turn on their fans and air conditioners in anticipation of warmer weather, placing more stress on the system and on Pakistan’s nearly depleted foreign reserves.
The question is how much time the government could buy with this rescue plan.
“The Saudis and the UAE have pledged billions of dollars if the IMF plan resume is effective. If that happens, the possibility of a more serious issue with the balance of payments would be delayed “Pakistani business and economic journalist Khurram Hussain argues.
However, he continues: “The initiative will have negligible effects in the long run. Pakistan is struggling under an enormous debt load. The government will return to this precarious position of teetering on a balance of payments catastrophe unless drastic debt restructuring is implemented.”
If negotiators are serious about reaching an agreement, they may have to make difficult political concessions, such as eliminating energy subsidy programs.
Mr. Hussain argues that negotiating with the IMF will benefit the economy and the state but will come at the expense of the average citizen. His biggest concern is that the government would reach an agreement with the IMF, begin implementing the programs, and then back out.
“Pakistan will spin back firmly into where it is facing a balance of payments crisis” if the government “gets cold feet,” wants to suspend the adjustment process, and tries to renegotiate anew.