Pakistan goes bankrupt, more economic deterioration expected
The fears of Pakistan going bankrupt have come true after the top minister Khawaja Asif admitted that the country had defaulted. Pakistan is fast losing dollar reserves as the external debt servicing surged to 70 per cent in the first half of 2022-23.[1]With only USD 3 billion in foreign reserves held by the central bank, Pakistan now can afford imports of just three weeks. Pakistan is already witnessing unprecedented inflation, with people struggling to even get daily meals. There are difficult days ahead for Pakistan as the economic situation is to worsen further due to debt liabilities and dwindling foreign aid.
After the devastating floods in 2022, Pakistan’s frail economy took a downturn. International finance organisations had started forecasting Pakistan going bankrupt. All this is turning true. The Islamabad government is finding it difficult to tame double-digit inflation, fulfill loan repayment commitments, and even feed its population. Many experts believed economic disaster was imminent though Islamabad expected to survive economic problems. However, there seemed no way out. “You must have heard that Pakistan is going bankrupt or that a default or meltdown is taking place. It (default) has already taken place. We are living in a bankrupt country,” Khawaja said.[2]
The inflation rate reached a whopping 38.42 per cent in mid-February as the prices of essential commodities spiralled up.[3] Wheat, tomato, edible oils, fuel, and onions have become very expensive– unaffordable to a major share of the population. Economist Yousuf Nazar said the current flood inflation was the highest in the world and it would get worse due to the sharp devaluation of the Pakistani rupee. “It is a killer and has pushed millions into poverty and the bottom 20 per cent of the population into near starvation or begging,” he said.[4]The majority population have stopped spending on anything that is not a part of basic need.[5]The situation is getting worse due to frequent and intense power outages across Pakistan.[6]Many are forced to dig into their savings or take loans to meet their basic needs. Higher power and food cost are contributing 35-45 percent to the overall inflation.[7]
Industrial shutdown continues to hurt Pakistan’s economy. Fertilizers, steel, and textiles are among the sectors where factories are shutting down indefinitely or operations are being suspended frequently.[8]In July-December 2022, the output of the Large Scale Manufacturing Industry sector declined by 3.68 per cent year-on-year.[9] The decline was steep for crucial sectors such as textile (21.24 per cent), automobiles (36.22 per cent), pharmaceuticals (12.72 per cent), and iron and steel products (8.12 per cent).[10]As the economic crisis crippled every sector, the unemployment rate continues to go up. Over 6 million people were found without a job in January, which is over 8 per cent of Pakistan’s total workforce.[11] Every day thousands of Pakistanis are losing their jobs.[12]
Agricultural output too has gone down thanks to floods earlier and now higher crop input costs.[13]Pakistan is the fifth largest cotton producer. However, half of the cotton was destroyed in the floods, hurting the textile sector, which is Pakistan’s strong export commodity.[14]Overall exports fell by 15.4 per cent in January year-on-year.[15] Pakistan has been seeking external aid to overcome the economic crisis. On contrary, it is obliged to pay up massive foreign debt, especially, those from China procured to build infrastructure projects under China- Pakistan Economic Corridor. Pakistan’s debt-to-GDP ratio has already reached a danger zone of 70 perc ent.[16]Moody’s has called the external debt payment of Pakistan “worrisome”.[17]
International Monetary Fund (IMF) has projected a slowdown in Pakistan’s GDP and reduced the growth this year to 2 per cent from the previous forecast of 3.5 per cent.[18]A few days before the Pakistani minister’s confession, Fitch Ratings agency had claimed a “real possibility” of default by Pakistan.[19]Kathryn Exum, analyst with distressed debt specialist fund Gramercy too had forecasted Pakistan slipping into bankruptcy if they failed to get external aid, possibly from IMF.[20]However, IMF appears averse to supporting Pakistan owing to instability in its politics and governance.[21]
[1]https://www.dawn.com/news/1737751
[2]https://tribune.com.pk/story/2401896/pakistan-has-already-defaulted-says-defence-minister
[3]https://www.businesstoday.in/latest/world/story/pakistans-weekly-inflation-increase-to-384-amid-severe-economic-crisis-370720-2023-02-18#:~:text=According%20to%20the%20latest%20statistics,YoY)%20in%20the%20previous%20week.
[4]https://www.theweek.in/theweek/cover/2023/02/17/pakistan-economic-collapse-reasons-situation-explained.html
[5]https://timesofindia.indiatimes.com/world/pakistan/what-life-is-like-in-crisis-hit-pakistan-as-inflation-soars/articleshow/97824609.cms
[6]https://www.business-standard.com/article/international/pakistan-s-power-crisis-lingers-paralyses-economic-activities-123012701230_1.html
[7]https://www.nation.com.pk/26-Jan-2023/inflation-and-unemployment-in-pakistan-an-empirical-analysis
[8]https://www.livemint.com/news/world/pakistan-economic-crisis-many-firms-closed-inflation-high-forex-reserve-falls-11676865352420.html
[9]https://dailytimes.com.pk/1063782/lsmi-output-falls-by-3-8-in-1st-half/
[10]https://www.dawn.com/news/1737462
[11]https://www.dawn.com/news/1733141
[12]https://www.dawn.com/news/1733141/the-explosion-of-unemployment
[13]https://www.brecorder.com/news/40224292
[14]https://timesofindia.indiatimes.com/world/pakistan/what-life-is-like-in-crisis-hit-pakistan-as-inflation-soars/articleshow/97824609.cms
[15]https://www.thenews.com.pk/print/1036823-pakistan-s-exports-plunge-15-4pc-in-january
[16]https://www.reuters.com/world/asia-pacific/pakistan-moves-toward-deal-or-default-endgame-2023-02-01/
[17]https://dunyanews.tv/en/Business/698123-
[18]https://www.ndtv.com/world-news/imf-projects-slowdown-in-pakistans-gdp-from-3-5-to-2-3745407
[19]https://www.dawn.com/news/1737219
[20]https://www.reuters.com/world/asia-pacific/pakistan-moves-toward-deal-or-default-endgame-2023-02-01/
[21]https://tribune.com.pk/story/2398899/pakistans-debt-to-gdp-ratio-in-a-danger-zone-of-70
