Centralized Access to Crisis
During the economic crisis and surging prices in Pakistan, the government implemented a distribution program in March-April 2023. The program aimed to provide affordable and free flour to citizens nationwide, easing their financial burdens. However, this well-intentioned effort resulted in unforeseen consequences as stampedes occurred in multiple locations, leading to fatalities and injuries.
These incidents highlighted the extreme measures Pakistanis are willing to take to obtain even the most basic necessities, like a sack of flour. The rising costs of essential goods have created a sense of desperation and hardship among the population. With inflation surpassing 30 percent, reaching its highest point in 50 years, the poorest segment of Pakistan’s population, accounting for one-third of its people, now faces unprecedented challenges in affording food.
The food stampedes gained significant attention on social media and raised deeper concerns about the underlying causes of Pakistan’s economic crisis. People have begun to question how the country reached such a dire situation and the implications it holds for the majority of Pakistanis and the nation’s international projects. Specifically, there are concerns about the impact on Pakistan’s collaboration with China through the China-Pakistan Economic Corridor (CPEC), which is vital for Pakistan’s future economic growth.
Compared to its neighboring countries, Pakistan has the lowest GDP, per capita income, and GDP growth rate. Only war-ravaged Afghanistan has a weaker economy. Additionally, Pakistan faces higher rates of unemployment and inflation compared to other countries in the region.
As of 2022, Pakistan’s Human Development Index (HDI), which measures a nation’s progress in health, knowledge, and living standards, ranks the country at 161 out of 185 countries. This places Pakistan among the 25 nations with the lowest human development globally. Essentially, the country lags significantly behind many other countries around the world in terms of overall development and well-being.
Pakistan’s Economic Crisis
Pakistan is currently grappling with a complex crisis that spans multiple dimensions. The economy teeters on the brink of collapse due to a potential political crisis, a sharp decline in the value of the rupee, soaring inflation at levels unseen in decades, devastating floods, and a significant energy shortage.
According to Professor John Ciorciari, an expert in public policy and international relations at the University of Michigan, the economic crisis in Pakistan, particularly after the floods, is severe. The country urgently requires external support as its foreign exchange reserves are alarmingly low, barely sufficient to cover a few weeks’ worth of imports. The high inflation and sluggish growth further exacerbate the economic challenges, and the floods have only worsened the nation’s plight.
The economic crisis in Pakistan has deep-rooted causes, including weak governance and political instability, which have eroded investor confidence and led to corruption and fiscal problems. Additionally, Pakistan’s heavy dependence on imports, especially energy, leaves it vulnerable to fluctuations in global oil and gas prices. The COVID-19 pandemic and strained relations with India have also contributed to the economic struggles.
The international community, with major contributors like China and Saudi Arabia, has pledged $9 billion in aid to Pakistan. While explicit conditions may not be imposed, these donors are likely to seek favorable development opportunities and geopolitical support from Pakistan in return for their assistance.
However, more than $9 billion will be required to help Pakistan rebuild and recover from the crisis. Private sources of funding are crucial, and the IMF funds aim to restore confidence to encourage private investments.
Pakistan’s vulnerability to climate-related disasters cannot be fully mitigated by its efforts alone. While the country needs to enhance domestic preparedness and resilience, its future largely depends on global efforts to address the underlying drivers of climate change.
Although some aid will undoubtedly go toward flood recovery, the IMF funds will primarily assist Pakistan in avoiding default on its international obligations and replenishing its foreign reserves. Restoring confidence in its ability to meet its debts is vital for effectively managing the flood recovery process.
Reasons behind Pakistan’s dollar crisis
Pakistan is currently in the midst of a severe dollar crisis that has resulted in a complete halt in food and beverage imports. This has led to thousands of containers being stranded at ports, causing traders to face fines and additional expenses.
The root cause of this issue lies in the inadequate supply of foreign exchange, which the Pakistan State Bank (PSB) has been unable to provide. This scarcity of foreign currency is worsening the country’s existing economic challenges.
The economic situation took a turn for the worse during a political crisis in April 2022 when Imran Khan was removed from office. The new Prime Minister, Shehbaz Sharif, faced difficulties in securing loans, leading him to make frequent trips to Saudi Arabia and the United Arab Emirates (UAE) in search of essential bailout packages.
As a result of the dire economic conditions, Pakistani civilians are now lining up at government distribution centers to receive free wheat flour in an effort to alleviate the burden of rising prices and food scarcity.
High inflation and economic challenges
Pakistan is currently facing significant economic challenges, with inflation reaching its highest level in 50 years. This surge in prices has pushed nearly one-third of the population to the brink of poverty. In an attempt to ease the burden on people amid these soaring costs, the government established distribution centers to provide free wheat flour in April. Sadly, these centers saw tragic incidents of stampedes, resulting in loss of life.
Pakistan’s economic situation is one of the weakest among its neighboring countries, with only war-ravaged Afghanistan having a more fragile economy. The country is grappling with high unemployment and inflation rates, surpassing many others in the region. Its low ranking of 161st out of 185 countries on the Human Development Index reflects the challenges faced in terms of health, knowledge, and living standards.
Adding to these difficulties, Pakistan has also been burdened by food shortages and transportation issues due to devastating floods and disruptions caused by the Ukraine war. These factors have contributed to the ongoing inflationary pressures in the country.
Pakistan’s reliance on foreign loans
Pakistan’s economic model heavily depends on foreign loans, which has resulted in a significant reliance on external assistance and the risk of potential bankruptcy. From February 2023 to June 2026, the country faces the daunting task of repaying nearly $80 million in debt, with around 30% of the foreign debt owed to China, a consistent supporter of Pakistan. To address immediate financial needs, Pakistan recently secured a $1 billion loan from China, but the sustainability of such aid remains uncertain.
While the China-Pakistan Economic Corridor (CPEC) offers promising prospects for Pakistan’s future economic growth, immediate actions are necessary to bolster foreign exchange reserves and resume imports to jumpstart economic recovery.
The Economic Crisis Unraveled: Pakistan’s Dire Straits
Pakistan’s economy is currently in a deeply concerning state, with several factors contributing to its precarious condition:
Escalating Inflation: In 2022, Pakistan experienced a staggering inflation rate of approximately 24.5%, with rural areas facing an even higher rate of around 29%.
Burdening Debt: Pakistan has long struggled with various issues, leading to heavy indebtedness to friendly nations and the International Monetary Fund (IMF).
Weak External Position: After spending years on the Financial Action Task Force (FATF) grey list, Pakistan was eventually removed in 2022. However, this situation had far-reaching consequences on the country’s global standing, resulting in several economic sanctions.
Food Crisis: The cost of perishable foods has skyrocketed, with prices of essential items like wheat flour rising significantly, posing a challenge to affordability.
Escalating Terrorism: Since 2022, Tehreek-e-Taliban Pakistan (TTP) has intensified its terrorist activities, aiming to divide the nation into two separate entities.
Underlying Causes of the Crisis:
2022 Floods: The devastating floods in 2022 caused unprecedented damage of $3 billion, destroying vital infrastructure, displacing 8 million people, and severely impacting domestic output.
Inconsistent and Procyclical Economic Policies: Pakistan’s growth-oriented initiatives often overlooked vulnerabilities and long-standing structural and institutional weaknesses, resulting in an imbalance in economic development.
Distribution Challenges: The country faces more pressing issues with distribution rather than insufficient supply, causing shortages and price hikes.
IMF Bailout Package for Pakistan:
The term “bailout” refers to providing financial assistance to a business or a nation on the verge of bankruptcy. Seeking an IMF loan indicates a severe economic crisis for a nation, characterized by a lack of sufficient foreign currency reserves to pay for imports and debt repayments.
The IMF offers financial aid to address immediate financial obligations, allowing the nation to use the funds to meet its urgent requirements. However, the IMF imposes certain restrictions, necessitating spending cuts both domestically and internationally.
In November 2022, the IMF withheld a pending payment of $1.18 billion due to the Pakistan government’s reluctance to meet specific demands, including raising energy rates, imposing additional taxes, and relinquishing artificial control over the exchange rate.
The Extended Fund Facility (EFF):
The EFF was established to assist nations facing severe payment imbalances due to structural barriers, weak economic growth, and inherent balance-of-payments issues. It provides support for comprehensive initiatives, including necessary regulations to address long-term structural inequalities.
The EFF supports national economic plans aimed at achieving macroeconomic stability and sustainability while promoting poverty reduction and enduring growth. Additionally, it may encourage international aid.
Eligibility and Application:
All member nations that meet the requirements of the Poverty Reduction and Growth Trust (PRGT) and suffer persistent Balance of Payments (BOP) issues are eligible for the EFF.
The assistance under an EFF agreement is provided for an initial period of three to five years, with a maximum overall duration of five years. Furthermore, additional EFF arrangements may be approved after the expiration, cancellation, or termination of a previous agreement.
Focused Conditionality:
To receive support under the EFF, member nations commit to implementing a series of measures that promote long-term, stable, and sustainable macroeconomic positions. These commitments are detailed in a letter of intent, along with any additional terms.
Inflation Trends in Pakistan: A Glimpse into 2028
During the year 2018, Pakistan experienced an estimated average inflation rate of approximately 3.93 percent, a slight decrease from the previous year, yet significantly lower than four years prior. Projections indicate that in the coming years, inflation is expected to stabilize at around 6.5 percent.
Pakistan’s Economy: A Delicate Balance
As one of the most populous nations globally, Pakistan has a substantial Muslim population with a relatively low urbanization rate, indicating that the majority of its citizens reside in rural areas. Despite this demographic distribution, the services sector remains the dominant contributor to the country’s GDP and employs the largest portion of the workforce. Currently, Pakistan’s economic growth appears stable, but its path has not always been smooth.
Navigating Economic Stability
Similar to numerous other economies, Pakistan faced adverse impacts during the 2009 financial crisis, and although it has since recovered, inflation rates remained high, surpassing 10 percent in 2012. The nation’s GDP also experienced a decline during that period, but it has shown considerable growth over the past decade. While the services sector now drives a significant portion of GDP, Pakistan still remains an exporter of agricultural commodities such as cotton.
Lingering Challenges and Potential Hurdles
Despite progress, Pakistan encounters persistent challenges, notably an escalating trade deficit, leading to a rise in national debt. These two factors pose potential obstacles to future economic growth and warrant attention in the country’s economic planning. As the nation moves forward, carefully navigating these concerns will be crucial to sustaining and enhancing its economic prosperity.
In conclusion, Pakistan faced a severe economic crisis characterized by multiple challenges. The country grappled with high inflation rates, leading to significant financial strain on households and businesses. This inflationary pressure affected the cost of essential goods and services, making them less affordable for the general population.
One of the primary concerns during the crisis was Pakistan’s heavy indebtedness to international organizations and friendly countries. The mounting debt burden raised questions about the country’s ability to meet its financial obligations and sparked worries about long-term financial stability.
The economic crisis also had repercussions on Pakistan’s external position. The country’s standing on the global stage was impacted, leading to the imposition of economic sanctions and further exacerbating economic difficulties.
In addition to the financial challenges, Pakistan faced internal issues, including a food crisis. The cost of perishable foods and wheat flour surged, resulting in higher living costs and economic hardships for many citizens.
Moreover, the crisis was compounded by rising terrorist activities, particularly by groups like Tehreek-e-Taliban Pakistan (TTP). This posed security threats, disrupted economic activities, and added complexities to the already fragile economic situation.
In response to the crisis, Pakistan sought assistance from the International Monetary Fund (IMF) in the form of a bailout package. However, the IMF’s support came with conditions, including implementing economic reforms and austerity measures to stabilize the economy.
The economic crisis in Pakistan in 2023 highlighted the pressing need for robust economic management, structural reforms, and measures to address internal and external challenges to ensure the country’s long-term economic stability and growth.
Ali Hassan
(The author, ‘Ali Hassan’ is a bright and ambitious Person from Lahore, Pakistan. Ali is currently a graduate student and researcher at the prestigious Lahore University of Economics and Management (LUEM), where he is pursuing a Master’s degree in Economics. His decision to specialize in economics was an obvious choice, given his fascination with how it shapes societies and influences the world around us.
Ali’s true passion lies in macroeconomics, a branch of economics that deals with large-scale economic factors. He is particularly intrigued by how fiscal policies impact economic growth, especially in developing countries. With a keen eye on sustainable development, Ali’s research aims to unravel the most effective measures that can foster growth and bring about positive changes in economies like Pakistan.
Outside of academia, Ali has a thirst for knowledge and enjoys being an avid reader. His reading preferences mainly revolve around economic history and development, further nurturing his understanding of the subject. However, he’s not all work and no play! During weekends, you’ll find him on the cricket field, enjoying friendly matches with his pals.
Looking forward, Ali has set ambitious goals for himself. His ultimate dream is to pursue a Ph.D. in Economics, solidifying his expertise in the field. As he continues to grow in his academic journey, Ali aspires to become a reputable economist, making valuable contributions to Pakistan’s economy and society’s betterment.
Ali is an approachable and open-minded individual who loves engaging in stimulating conversations. Whether it’s about economics, research methodologies, or life in Pakistan, he’s always eager to learn from others and share his knowledge and experiences.)
References
- https://thediplomat.com/2023/05/pakistans-economic-crisis-what-went-wrong/
- https://news.umich.edu/pakistans-economic-crisis/
- https://www.dailyo.in/news/pakistan-economic-crisis-gets-worse-with-dollar-crunch-halting-food-imports-40188
- https://www.dandc.eu/en/article/climate-change-and-other-global-developments-are-severely-exacerbating-pakistans-home-made
- https://www.statista.com/statistics/383760/inflation-rate-in-pakistan/