Pakistan economic crisis is getting worse: From debt to inflation to forex, here's what is happening

Pakistan's economy is in trouble and it is making some desperate moves to ensure it does not crash. The crisis is so bad that it has put its embassy property in Washington on sale, and directed shopping malls, wedding halls, restaurants, and markets to close early to conserve energy - which is generated mostly from imported oil. 

While the country's economy has not been in a good shape for the last few years, the crisis has worsened lately due to a combination of factors like faltering GDP growth, rising global inflation due to Ukraine war, plunging currency making the imports costlier, and bringing down the forex reserves. The lower economic growth means less spare money to service debts. 

Economic factors aside, Pakistan was also hit by an unprecedented flood, which caused massive destruction and affected 33 million people. The World Bank in its assessment statement published on 28 October 2022 said the flood damages and economic losses were estimated to be over $30 billion (damages $14.9 billion and economic losses $ 15.2 billion).    

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Pakistan's Forex Reserves 

Pakistan imports almost all its oil requirements. As inflation soared globally, almost all central banks scrambled to cool it down by hiking interest rates. This, in turn, put pressure on currencies, which fell significantly compared to the US dollar. 

In 2022, the Pakistan rupee plunged nearly 30 per cent compared to the US dollar, becoming one of the worst-performing currencies in Asia. As the currency depreciated, it made imports costlier - which further depleted foreign reserves.  

In December 2022, Pakistan's forex reserves fell to below 6 billion dollars - the lowest in eight years and enough to cover only one month of imports. 

Pakistan's GDP Growth 

In October, the World Bank said Pakistan's economic growth is expected to reach only around 2 per cent in FY23. Besides slow growth, the country is also facing a historic price rise with the global institution predicting 23 per cent inflation in the current fiscal due to higher energy prices, the weaker rupee, and flood-related disruptions to agricultural production. Pakistan witnessed a record 24.5 per cent inflation in December, as per the Pakistan Bureau of Statistics.  

Pakistan's External Debt 

The World Bank in its annual debt report published recently estimated that Pakistan's total external debt was at $130.433 billion by 2021. The country has to pay $33 billion debts by FY 2023. State Bank of Pakistan Governor Jameel Ahmad in a podcast on December 8 said that $20 billion had been accounted for but the country still needed to manage $13 billion during the rest of the fiscal year.   

Bailout Package from IMF

In 2019, Pakistan secured a $6 billion bailout package from the IMF (International Monetary Fund). Till August last year, the global financial institution gave the much-needed fund of $3.9 billion. 

On 29 August 2022, the IMF's Executive Board completed the seventh and eighth reviews and allowed Pakistan to draw $1.1 billion. The next tranche was expected in September but it was delayed due to pending review (IMF conducts a regular review to check how its bailout money is being spent).

Pakistan desperately needs the latest tranche of $1.18 billion. 

Steve Hanke, Professor of Applied Economics at Johns Hopkins University, in a tweet on 14 October last year said Pakistan was on the brink of a debt default. Its sovereign bonds, he said, lost more than 60 per cent of their value in 2022. 

IMF on Pakistan's Economy 

In a note in August, the IMF said Pakistan was at a challenging economic juncture as a difficult external environment combined with procyclical domestic policies fueled domestic demand to unsustainable levels. "The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers."