Pakistan's persistent economic problems have led to repeated negotiations on the nature of help to be given.
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Economic crisis in Pakistan - An analysis
- The story: Not long ago, a charismatic Imran Khan was reminding Pakistanis how useless the previous government was, and making the the promise of a new Pakistan. Pakistan is now facing its biggest economic crisis in history. The News International, the largest English language newspaper, says the country is in the throes of a deep financial crisis – with the Imran Khan-led regime ideally requiring gross external financing of $51.6 billion within a two-year period (2021-2023). Pakistan is again looking at IMF for help.
- The numbers: Pakistan's gross external financing requirement stands at $23.6 billion in 2021-22 and $28 billion in 2022-23. This is a conservative estimate by the International Monetary Fund (IMF). Authorities are now trying to make a last-ditch effort to strike a staff-level agreement with the IMF to bridge the gap of external financing requirements. Its total debt was more than $48 b, of which public debt was approx $40 b.
- The World Bank has noted that Pakistan has joined the list of top ten nations with the largest foreign debts.
- The International Debt Statistics 2022 indicates a “wide divergence” in the rate at which external debt is accumulated in individual DSSI-eligible countries – including the group's largest borrowers which include Pakistan. The World Bank report also pointed out that Pakistan's foreign debt increased by 8 per cent.
- With the suspension of programme loans from the World Bank and Asian Development Bank (ADB) now, Pakistan is further at risk of a crisis – with the headache of the gross external financing requirement upon it – to deal with which it needs to anyhow strike a deal with the IMF under the existing $6 billion extended fund facility (EFF).
- The WB and ADB are lending project loans but keeping in view the capacity to implement projects, the disbursement becomes low. The credit rating agencies may further downgrade the country's ratings, so generating funds through the issuance of international bonds will be expensive.
- Demands: The IMF is asking for the removal of distortions into the taxation system and has pointed out that different GST exemptions and rates should be aligned with the standard rate of 17 per cent. The standard GST rate of 17 per cent should be imposed on Petroleum Oil Lubricants (POL) products. The GST rate on fertilizer, tractors and other items should be brought at the standard rate of 17 per cent, as per the report. Pakistani authorities are opposing such proposals arguing that it would further marginalise the neglected agricultural sector.
- Chinese help: Pakistan's debt problems escalated also as it is all weather-ally China declined to restructure USD 3 billion in liabilities. Pakistan had requested China to forgive debt liabilities owed to China-funded energy projects established under the China-Pakistan Economic Corridor (CPEC). The debt load, owed largely for the building of independent power producers (IPPs) on take-or-pay power generation contracts, is substantially more than the USD 19 billion in total invested in the plants. China refused to budge on Islamabad's request to renegotiate the power purchase agreements, saying that any debt relief would require Chinese banks to amend the terms and conditions under which the credits were extended. The banks, including China Development Bank and the Export-Import Bank of China, were not prepared to revise any of the clauses of the agreement reached earlier with the government.
- Detailed numbers: The Pakistan government owes about USD 158.9 billion to domestic creditors, of which public sector enterprises owe about USD 15.1 billion. The foreign commercial loans of USD 3.11 billion and USD 1 billion from Chinese deposits helped the government to achieve the net transfer of dollar inflows in the current fiscal year. With the combination of foreign commercial loans and safe deposits, Pakistan received over USD 4.1 billion that was over 50 per cent out of the total received foreign dollar inflows from creditors.
- Economy of Pakistan: Its nominal GDP was $299 billion (Jun 2021), and PPP GDP was $1.36 trillion (Jun 2021). The economy is thus the 26th largest in terms of purchasing power parity (PPP), and 46th largest in terms of nominal gross domestic product. With a population of over 22 crore people (the world's 5th-largest), the GDP per capita (nominal) come at $ 1543 which ranks 181st, and GDP per capita (PPP) at $ 5,964 which ranks 174th in the world. Services account for 60% of the economy, and Agriculture and Industry equally for the rest.
- Pakistan's economy in the period 2008-2012 remained unstable and vulnerable to shocks.
- It did prove resilient during the 1998–2002 period when it faced the Asian financial crisis, economic sanctions, the global recession of 2001–2002, a severe drought – the worst in Pakistan's history, the post-9/11 military action in neighbouring Afghanistan, with a massive influx of refugees from that country and terrorism.
- EXAM QUESTIONS: (1) What are the various compulsions that the Pakistani regime is operating under? Explain. (2) What three steps can the Pakistani government take to end its economic crisis? (3) What is China's role in helping Pakistan emerge as an economic power? Explain.
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