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Pakistan’s unprecedented economic crisis – IMF conditions for bail out and more

by Tavaga Invest

Necessity becomes luxury

We all have been hearing about Pakistan’s rising debt levels and that a default is imminent. Looks like it has already happened. The country’s Defence Minister, Khwaja Asif, made headlines when he declared that Pakistan has gone bankrupt. Pakistan is facing an acute economic crisis. Milk and chicken prices have crossed Pakistani Rupees (PKR) 210/litre and 780/kg already, and diesel prices have soared to PKR 280/litre. Kerosene has crossed the PKR200 mark, and sales tax on food has increased from 17% to 18%. The country’s inflation is at its highest since 1975. 

Never-ending nightmare

Pakistan is in a severe cash crunch as it faces one of the worst balance of payment crisis. 

– Its foreign exchange reserves have dropped to less than $3 bn. 

– Inflation has surged to nearly 40%, and with no money left for imports, there is a shortage of essential items like food grains, medicines, and fossil fuels. 

– Industries like carmakers, fertilizer, and steel manufacturers have also come to a grinding halt as they cannot import raw materials. 

– Pakistan’s National Assembly approved a mini-budget to help garner revenues of PKR 170 billion, but these new hikes will further increase the burden on the masses. 

– Pakistan’s rupee crashed and traded at an all-time low of 275 to the US dollar earlier this month. 

– The country is still suffering from the devastating effects of last year’s floods that displaced eight million people and cost an estimated $30 billion in damage and lost output. 

-Pakistan desperately needs funding to survive for the next few months. IMF, however, is playing hardball this time and not ready to dole out more funds. One can’t blame them either as this is the 23rd time in 75 years that Pakistan has begged for a bailout.

What went so wrong?

Pakistan has an external debt of ₹10 lakh crore. The Defence Minister blamed the country’s bureaucracy and the politicians for bringing the country into this sorry state. The lack of reforms and no focus on growth has stunted the economic conditions. On top of it, rampant terrorism and the focus of past governments on military power have further deprived the country of any strong foundation for growth, according to Mr. Asif.

The absence of modernization puts their textile industry behind Bangladesh and Vietnam. The IT industry is dead. The country depends on imports for basic amenities and medicines. While the country’s irrigation and roadways are in order, a lack of manufacturing prowess has forced the country to depend on imports for even the essentials. Pakistan is plagued by natural disasters which have further deepened the crisis. 

IMF in a logjam 

IMF had agreed on a $7 billion package back in 2019 on certain conditions but has suspended the payout of $1.1 billion due to a lack of progress on promised reforms. 

The IMF came up with two suggestions for the country. The first is raising tax revenues from firms and individuals making “good money” and a fairer distribution of wealth, starting with taking subsidies for scarce resources from those who do not need them. Pakistan has until the 1st of March to implement these changes to unlock the funding tranche of $1.1 billion from the IMF. The imposition of new taxes and hike in gas and electricity prices have all been done to placate IMF.

Another Sri Lanka?

Trouble seems to be constant around India’s border. Just last year, Sri Lanka witnessed a total collapse of their system. While Pakistan is a much bigger country than Sri Lanka, the economic crisis in both countries share the same origin stories. Both are up to their necks in debt and have a lot of military expenditure. The similarities do not end there. Pakistan and Sri Lanka heavily rely on remittances, low exports, a diminished manufacturing base, political instability, a colonial institutional framework, and are prone to natural disasters.

Will IMF come to the rescue one more time?

Pakistan needs to rethink its policy and bring about lasting changes to revive its economy like India did in 1991 when it faced similar issues. Pakistan is no stranger to trouble and has been able to raise funds in the past. Countries like China, UAE, and Saudi Arabia have been long-standing allies and stepped in whenever things got out of control. The IMF has also come to its rescue several times in the past. When Pakistan called, the world has been forced to respond to avoid a nuclear power running itself into disarray. Pakistan may be able to hash out a rescue deal with the IMF this time again but it will definitely come at the cost of widespread pain.

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