Looming economic default

As of February 2023, Pakistan’s Consumer Price Index (CPI) has risen to half a century’s high of 35.1 percent, year on year, as stipulated by the Bureau of Statistics. This means that the price of a basket of consumer goods now costs 35.1 percent more than it did in the year 2015-2016. The Rupee has depreciated to a new high of 278.9 per dollar and foreign currency credit ratings like Fitch and Moody’s have downgraded, causing it to lose investor confidence. Moody’s for example has dropped the credit ratings from Caa1 to Caa3, hinting at a heightened probability of Pakistan’s default and meager chances for revival. Furthermore, the country is due for repayment of net external debt of $7 billion this year which includes a $2 billion loan repayment to China.
Amid the struggle to repay its debt, the country is currently scarred by a rapid depreciation of the dollar, low investor confidence, soaring inflation, and plummeting foreign reserves, all of which dampen the possibility of generating any finances which could repay the external debt. Hence, it is being forecasted, based on the aforementioned macroeconomic markers that Pakistan is on the brink of a national economic default. To find out how the 23rd largest economy in the world by Purchasing Power Parity (PPP) got to this tipping point, it is crucial to look at the events and factors that have led to the present economic disaster.
To begin with, it is evident from the available macroeconomic data that the Covid-19 Pandemic has toppled the global economies. The damage, although has not been homogenous across nations, with some economies hitting the rock bottom while others undergoing a rapid decline in growth rates, there surely has been a considerable tilt in almost all of the world’s economies. Not only did the pandemic give birth to high unemployment rates, wage cuts, supply chain bottlenecks, declined demand in many sectors like tourism, and soaring inflation rates, but it has also pushed many economies into recession. The recovery process, according to the World Development Report 2022 will not be homogenous, with developing nations like Pakistan needing much more time and effort to resuscitate their crippling economies.
Soon after the pandemic-driven lockdown phase receded, the Russo-Ukrainian Conflict emerged to threaten not only the geopolitics of the world but also, the fragile and pandemic-hit global economy. Since the onset of the war, the supply chain via Russia and Ukraine to parts of Europe and Asia has been obstructed, leading to increases in prices of intermediate products, raw materials as well as fuel and energy. So much so, the crisis has catapulted The European Union into an energy crisis driven by an acute shortage of fuel and natural gas. Apart from this, global oil prices have risen sharply, leading to high transportation costs and hampered supply operations.
Pakistan is not exempt from the ramifications of the conflict, as it had historically been linked with Ukraine for both imports and exports. It is important to note that pre-conflict Ukraine was a global exporter of fuel and staple foods and it was a punctual exporter of wheat and fuels like LNG, oil, and coal to Pakistan. With EU sanctions imposed on Russia and Russia’s subsequent blocking of Ukrainian ports, the supply of these exports has been impeded. As a result, Pakistan is now forced to import fuels like LNG at a much higher cost, and even domestically, it has to bear high utility bills and increased transportation costs. This seems to have cast a long spell of inflationary pressure on the energy sector of Pakistan.
The massive floods of October 2022 proved to be the last nail in the coffin of Pakistan’s Economy. These floods affected approximately 33 million people countrywide and consumed around 1730 lives. According to the World Bank estimates, the total economic loss triggered by these floods peaked at as much as $15.2 billion whereas around $16.3 billion is needed for the reconstruction of the demolished structures and the rehabilitation of those affected by the floods. Furthermore, the housing, transportation, and agriculture sector also had to bear losses worth billions of dollars. Considering the already sulking economy of Pakistan, these floods ought to have detrimental effects on the GDP growth rate, further reducing its ability to repay the debt.
The aforementioned factors are not the only reasons that Pakistan’s economy is facing challenges currently as even previously it was a target of problems like structural ones, lack of foreign funding and investment as well as low unemployment rates. Under such circumstances, the economic impacts of the pandemic have been especially hard on the developing economy of Pakistan, where these adverse impacts exposed the preexisting economic frailties of the country. Furthermore, the infighting among the political parties and hence an unstable socio-political setup of the country discourages foreign investment.
Another such issue in Pakistan’s economy is the import of luxury goods, cosmetics, automobiles, and even food items which Pakistan is highly capable of manufacturing on its own, given its agrarian abundance. This is not to say that imports are necessarily bad for the economy but if a country only imports and has a very low level of exports, the economy can sink into a trade deficit causing negative effects on the country’s exchange rate. This is precisely what Pakistan is faced currently with, given its chronically low levels of exports. Even as a nation, we are somehow more inclined to spend money on imported goods. Consider the recent obsession of Pakistanis with the Canadian Multinational Coffee Company, Tim Hortons. We should perhaps ask ourselves as a nation amid the worsening economic crisis, is it okay to line up in long queues outside of a foreign Coffee shop? In countries like China, buying foreign products amount to an economic sin, in countries like Pakistan it amounts to status-quo. And this is not vindictive of the fact that Pakistan has a scanty domestic enterprise which contributes greatly to this obsession of the Pakistanis with foreign brands. There is a dire need to stimulate and fund our domestic industry to provide quality products to the local markets. This would erase any need to buy foreign goods in the first place.
Whether or not the country will default is still an on-the-fence debate. Countries like India, are already convinced of a total demolition and end of our economy whereas the Federal Minister for Finance, Mohammad Ishaq Dar defies any chances of default, calling out on the anti-state elements, trying to spread fake rumors to stir panic in Pakistan. He made it clear that State Bank (SBP) Forex Reserves have been increasing despite the timely repayment of the pending external dues. The SBP forex reserves are $1 billion higher than they were four weeks ago.
The good news is that the rupee is appreciating against the dollar while the government is trying to secure a deal with the IMF and countries like China. The government has also adopted corrective policies like a ban on imports and luxury goods as well as increased taxes which tends to stabilize the price levels in the economy. The bad news is that the good news is not permanent. Even if we dodge this economic episode, we will face similar challenges in the future; taking loans and relying on foreign funding to stimulate the economy might help a country to skip an immediate economic downturn but in the long run, it is of little use, not to mention highly detrimental. To assure that we are never faced with such a situation of extreme economic dependency again, permanent measures need to be taken that aim at directing the use of these foreign funds for the energy, agricultural, industrial as well as foreign sectors to boost the growth rate of the country and hence get the country out of the debt trap that it has been stuck in for several decades.

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