How Pakistan is accessing other funds to run the economy

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What is Pakistan doing to stay financially afloat? An update.

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How Pakistan is accessing other funds to run the economy

Read more on - Polity | Economy | Schemes | S&T | Environment

  • The story: Pakistan has been a generally bankrupt state with a nuclear weapons arsenal. It also view itself as a ‘regional power’. The former head of Pakistan’s Federal Board of Revenue had said that it was a bankrupt nation, and “not a going concern”. How many nations have managed to do destroy themselves financially when not being part of any war?
  • Economic situation: The figures are quite discouraging, despite the State Bank of Pakistan (SBP)’s optimistic approach.
  1. Pakistan’s total debts and liabilities have crossed PKR 50.5 trillion, which is an increase of some PKR 20 trillion under the current Imran Khan government.  
  2. The SBP data shows that the current account deficit has increased to 4.7 per cent of GDP, far above the target of 2-3 per cent for 2021. The foreign exchange reserves with the State Bank moves from crisis to crisis, stabilising somewhat after a recent loan from Saudi Arabia of$3 billion,  part of a total of $4.3 billion in assistance.
  3. This should have improved Pakistan’s currency rate. It did not. The rupee plunged further to reach 179 against the dollar indicating bleak economic fundamentals.
  • What is the problem: The State Bank has blamed the strain on fiscal resources to high debt servicing, as well as imports of food including wheat, sugar and vegetables.
  1. High import of cotton to sustain Pakistan’s textile industry has also eaten away at forex reserves. Earlier, pressure from traders had led to Pakistan agreeing to import all of these from India, but politics came in the way.
  2. The former FBR chairman Syed Shabbar Zaidi has stated that debt figures are at levels that Pakistan can never pay. He has argued that ‘bankruptcy’ is a condition when loans cannot be paid from foreseeable earnings.
  3. The new Saudi loan charges a higher rate of interest, where Pakistan will pay $120 million interest on the loan – up by $24 million relative to the 2018 similar facility. Other clauses are even harsher. The loan will have to be returned within 72 hours of a written request by Saudi Arabia at any time. Any delay in interest payment or servicing public debts would be deemed as default on the agreement, as would a withdrawal from the International Monetary Fund (IMF).
  • Paying back China: Pakistan is reported to have paid China PKR 26 billion in interest for a $4.5 billion loan facility originally intended to promote trade, but diverted to repay the Saudis, among others. To pay China, Pakistan turns to the IMF to bail it out of loans that are three times more than what is borrowed. In other words, a classic debt trap of its own making, only getting worse over the years as Islamabad skips nimbly from one loan to the next. It’s beyond bankruptcy. It’s a state of collapse. And that is not good news for any of Pakistan's neighbours.
  • Rising remittances: The one source that the State Bank relies on for keeping its forex stable and the economy going is Pakistani workers’ remittances.
  1. Under pressure from the Financial Action Task Force (FATF) and the IMF, Pakistan has taken a series of measures to encourage the use of formal channels for remittances, rather than the usual hawala channels.
  2. this explains a rise in remittances to an extent, but cannot explain a year-on-year rise of  26.9 per cent in FY21, at a time when Covid-19 has decimated most economies. (Of course, India came on top with more than $80 b in annual remittances in Covid year)
  3. The largest amounts are predictably from Saudi Arabia, but the Kingdom had closed its borders to Pakistan last year, an issue which was discussed on priority with the first Saudi official visit in July after the political rupture in 2020.
  4. Pakistan own figures from the Bureau of Emigration and Overseas Employment shows that manpower export has come down drastically from 2019 figures of 6,25,876 to the present 223,156 persons abroad. It’s worth noting that remittances have long been used by organised crime cartels to launder money.
  5. Mexico is another country that has shown record levels of remittances into the US, in a pattern almost similar to that of Pakistan. A FATF report details how remittances are used by organised crime to launder money, including for drug cartels.
  • Is it the drugs: The UN Drug Report 2020 reported a 37 per cent increase in drug cultivation in Afghanistan, over the previous year. This is accounted to be the third-largest jump in cultivation since 1994. The south-western region remains Afghanistan’s major opium-producing region, accounting for 71 per cent of total production, which includes major areas like Helmand and Kandahar, bordering Pakistan. The curious thing is that this rise is occurring when dry opium prices in the market are at a record low, thereby defying business sense.
  1. Drugs are flowing outwards by sea and land routes, apparent in seizure after seizure.
  2. The Sri Lankan navy intercepted a boat carrying 250 kg of narcotics, part of a series of other recent seizures that includes a local fishing vessel caught with 290 kg in August, and two more interceptions of 336 kg and 170 kg of heroin in September.
  3. The Maldives has seen another such flood of heroin, all coming from Afghanistan through Faisalabad and Lahore in Pakistan, and then exiting from Balochistan.
  4. Gujarat in India has turned into a major landing point with not just Pakistanis being arrested, but as much as 2,988 kg of heroin being caught in just one massive haul.
  5. This is now a national security issue for India. Yet curiously, there is nowhere the kind of data available on drug cartels operating from Pakistan that was once available in the 1990s when, for instance, a Central Intelligence Agency report ‘Sowing the Wind’ brought out critical details of narco-political cartels in Pakistan. Today, the silence is intriguing.
  • Summary: Clearly, there is a web of criminal networks operating through and out of Pakistan that includes a variety of other activities including human smuggling, mostly of desperate Afghans fleeing the war. As starvation increases, Pakistan is trying to get the international community involved in fending off a looming refugee crisis. Even as the ISI strikes a pose in Afghanistan after its ‘victory’,  Pakistan has become one of the most heroin-addicted states in the world with an estimated 6.7 million drug users, most of them along the border areas.
  • EXAM QUESTIONS: (1) Explain the problem Pakistan has got itself into, on both the Afghan front and the drugs front. (2) What are the three ways Pakistan can escape from the financial troubles it is in, now? Explain. (3) What are the repercussions of the Pakistani economy's collapse, on India?
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                    PT's IAS Academy: How Pakistan is accessing other funds to run the economy
                    How Pakistan is accessing other funds to run the economy
                    What is Pakistan doing to stay financially afloat? An update.
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