Why Pakistan is having economic crises and how these crises can be resolved?
Answers
Answer:
Pakistan’s newly-elected government is already dealing with a balance of payments crisis, which has been a consistent theme for the nation’s newly elected officials. Pakistan’s structural problems are homegrown, but what is different this time around is an added component of Chinese debt. Pakistan is the largest Belt and Road (BRI) partner adding another creditor to its already complicated economic situation.
Pakistan’s system is ill-equipped to make changes which would avoid future excessive debt. A bailout from the International Monetary Fund (IMF) is probably the safest bet for the country although it is unclear whether the United States will support the program. How Pakistan decides to handle its debt crisis could provide insight into how the U.S., IMF, and China will resolve development issues in the future. Beijing is a relatively new player in the development finance world so much is to be learned from how it deals with Pakistan and how it could possibly maneuver in other developing countries in Asia, Africa, and Latin America
THE PULSE
Pakistan’s Economic Woes: The Way Forward
Pakistan’s economic crisis cannot be resolved overnight.
Pakistan’s economic woes – dwindling foreign exchange reserves, low exports, high inflation, growing fiscal deficit, and current account deficit – are nothing new, and once again, the country finds itself knocking on the doors of the International Monetary Fund (IMF) for what will be its 22nd loan. While the exact amount of this package has not been determined, Pakistan already owes the IMF billions from previous programs. Indeed, 30.7 percent of Pakistan’s government expenditure is earmarked for debt servicing, which cannot be supported by its decreasing revenues. Already on the Financial Action Task Force’s (FATF) grey list, and with the current Pakistan Tehreek-e-Insaaf (PTI) government enjoying internal institutional consensus on the national agenda, Pakistan must focus its attention on resolving its economic woes before it finds itself on the shores of bankruptcy.
Current State of the Economy
In 2019, Pakistan finds itself facing a dire macroeconomic crisis. It is spending more on imports than it receives on exports, with its current account deficit having risen from $2.7 billion in 2015 to $18.2 billion in 2018. The major driver of this rising current account deficit is an expanding trade deficit, which is mostly due to the rising imports under new China-Pakistan Economic Corridor (CPEC) projects and low exports in general. The previous government focused more on import-led growth strategy to finance large scale projects under CPEC. By the end of June 2018, the gross public debt of Pakistan reached USD $179.8 billion, showing an increase of $25.2 billion within a year. More than half of this increase in gross public debt was due to an increase in public external debt, which grew by 30.1 percent. In 2018, the depreciation of the Pakistani rupee against the U.S. dollar alone was responsible for an excessive USD $7.9 billion increase in public external debt.
Despite the massive depreciation in the rupee, Pakistani exports have remained almost the same. Meanwhile, the government’s external debt has also increased from $64.1 billion in June 2018 to $65.8 billion in January 2019. The inflation rate is now touching 9.4 percent, which is a record level high over the last five years mostly due to rupee depreciation and rising energy prices. In addition, increased defense spending and its ongoing fight against extremism only further burden the economy. Along with a depreciating rupee that has made imports costlier, low foreign investment due to Pakistan’s security and political challenges has also severely hit its foreign exchange reserves.
