Baba’s Explainer – Pakistan’s Economic Crisis

  • IASbaba
  • January 12, 2023
  • 0
Economics, International Relations
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  • GS-2: India and its neighbourhood
  • GS-3: Economy & challenges

Context: Currently, Pakistan sits on the verge of economic collapse with its hopes pinned on getting concessions from the IMF on the Extended Fund Facility (EFF) established in 2019, as well as getting help from friendly nations in the form of long-term loans or donations.

  • At the International Conference on Climate Resilient Pakistan (ICCRP) that began in Geneva Pakistan’s Prime Minister, Shehbaz Sharif, made a desperate plea for help.
What is happening in Pakistan?
  • Pakistan’s economy is in dire straits with
    • very high inflation
    • very low foreign exchange reserves
    • high indebtedness and a weak external position.
    • rising unemployment
  • While the Pakistan economy has been doing badly for quite some time, the floods of 2022 caused unprecedented damage to the country with critical infrastructure destroyed and millions displaced.
    • Deemed to be a consequence of climate change, the floods inflicted an estimated loss of $3 billion on the country, caused over 1,700 deaths, and displaced 8 million people.
  • Also, Global lenders like the International Monetary Fund (IMF) are refusing to disperse further funds.
    • In 2019, Pakistan had come to an agreement with the IMF about an EFF worth $6 billion, which was later increased to $7 billion.
    • In November 2022, the IMF refused to release a pending payment of $1.18 billion due to the government’s unwillingness to meet certain demands including assurances from Pakistan on
      • increasing energy rates,
      • imposing more taxes, and
      • artificial control over the exchange rate.
What is the forex crunch that Pakistan is currently in?
  • Currently, the country is in the midst of a severe cash crunch with its foreign exchange reserves in the State Bank of Pakistan (SBP) depleting to $5.576 billion during the week ended on Dec 30, 2022.
  • According to data released by Pakistan’s central bank, the reserves are less than half of what they were a year ago and at an 8-year low.
  • Along with another $5.8 billion held by commercial banks, the forex reserves are just about adequate to pay for 3 weeks of imports to the country.
  • As Pakistan still reels from the effect of the 2022 floods, servicing foreign debt and paying for crucial commodities such as medicine, food, and energy are among its chief concerns.
  • However, Pakistan is scheduled to pay $8.3 billion to external lenders over the first three months of 2023. Without any relief, the country is set to default on these payments.
What is the situation of the people there?
  • As its leaders try to rally global support, ordinary citizens have been suffering.
  • With massive spikes in prices of food products and other essentials, Pakistan recorded an inflation rate of around 24.5% in December. This number was even higher in rural Pakistan, close to 29%
  • Prices of perishable food items have soared by nearly 56%.
  • Wheat, a staple in the Pakistani diet, has seen prices increase by 57%.
  • The nation could no longer sustain its energy consumption. In order to save energy government has taken measures like
    • Ordering shopping centres to close at 8 pm local time, and marriage halls and restaurants by 10 pm.
    • 20% of government employees have been asked to work from home.
What is the way ahead?
  • Pakistan Prime Minister stated that the people of Pakistan were “doubly victimised” by climate disasters and “morally bankrupt” global financial systems. “This system routinely denies middle-income countries of debt relief and concessional relief needed to invest in resilience against natural disasters”
  • Currently, Pakistan has its hopes pinned on getting concessions from the IMF on the Extended Fund Facility (EFF) established in 2019, and getting help from friendly nations in the form of long-term loans or donations.
  • Pakistan has also received funding pledges from US, France, Saudi Arabia, China, and Japan, with the Asian Development Bank and Asian Infrastructure Investment Bank also promising help.
  • Help could potentially come from China, Pakistan’s “all-weather friend”.

Main Practice Question: Recent times have witnessed economic crisis in neighbouring countries of Sri Lanka and Pakistan. What do you think are the learnings for India from these crisis?

Note: Write answer his question in the comment section.

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