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Sunday, April 14, 2024

How Pakistan’s economic crisis is getting worse

Pakistan is struggling to overcome an acute economic crisis that is deepening every day. The country’s fiscal deficit is accelerating while its exports are slumping. As a result, its currency is weakened, and its foreign exchange reserves are depleting fast.

The International Monetary Fund (IMF) recently extended its funding facility to June 2023 for Pakistan. But it warned that the country’s financial situation could deteriorate even more if multilateral lenders do not show commitment. Top economists say this would put more pressure on the already stressed economy. Moreover, Pakistan can only progress on several domestic issues if it can overcome its fiscal crisis.

Pakistan is facing a growing trade imbalance, a dwindling forex reserve, an overvalued currency, low foreign direct investment, and less than projected inflows. As a result, its account deficit is six times larger than last year, signaling that the country is amidst a long-running balance of payments crisis.

In addition, Pakistan is facing increased global inflation and high oil prices. It also faces increasing pressure on its currency from increased demand for imported goods. A significant part of its debt is owed to China, which has offered few concessions to help alleviate the country’s financial woes. If China were to buy more Pakistani goods, its debt problem could be eased. Chinese SOEs have already invested heavily in Pakistan.

The floods that hit the country last month are a significant cause of concern. Over 30 million people in Pakistan were affected by the floods, which killed over 1,700 people and caused estimated $32 billion damage. In addition, power cuts and rolling blackouts were caused due to the watery inundation. Although the government has made progress in dealing with the crisis, Pakistan still has much to do.

Pakistan’s currency depreciated over a third of its value in the first seven months of 2022. As a result, its exports slumped 16 percent in the period. As a result, the country’s trade deficit jumped to $2.8 billion. And as the floods hit, the price of perishable foods soared, leading to increases in wheat flour, onions, and tea. All of this has contributed to an inflation rate of 24.5%.

Despite the IMF’s extension of its fund facility, Pakistan’s fiscal crisis remains unresolved. The country’s government is trying to figure out how to avoid a full-blown collapse, but the people will feel the pain of this decision.

For instance, Pakistan is still grappling with its fuel subsidy decision. The government is considering removing the subsidies, but this would be highly unpopular. Moreover, with limited time in office, the government is reluctant to change its policies. So far, the government has ordered businesses to close early and reduce electricity consumption by 30%.

The government is working on improving the economy, including a plan to revamp the power sector. But the country’s financial problems are likely to deteriorate further in 2022. The government will have to find a way to pay for its large external debt.

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