Pakistan’s Economic Crisis
For a while now, Pakistan’s economy has been heading down a dangerous yet familiar path that leads to the doors of an IMF bailout. Pakistan’s shaky economy, uncalibrated spending and poor policy frameworks have driven their account deficit to rise to $18 billion in the year 2018. With the Pakistani Rupee (PKR) in free–fall (20 percent in the last year and a current standing value of PKR 131 to the US dollar),without the protection of robust exports and with a budget deficit of more than PKR 2 trillion, there is slim hope of an internally stimulated economic revival.Aggravating the fiscal problem is a circular debt of 2 trillion PKRfurther exacerbated by a trade deficit, which has widened by 15 percent to over PKR 335 billionlast year. It has since reached a record low of PKR 452 billionin June of 2018.
At the core of Pakistan’s current economic crisis lies a potpourri of factors that have had crippling effects on its ability to contain its rapid economic slide.
Since the beginning of the current fiscal year, Pakistan’s imports have risen to 549.7 billion PKR. While its exports grew by 22 percent to 214.4 billion PKR,its trade deficit during this period widened considerably. The growing trade deficit can be attributed to a surge in imports, which primarily comprises costly energy resources such as coal and oil to support ongoing power projects. In 2013, Pakistan’s former Prime Minister Nawaz Shariff approved 21 power projects to build Pakistan’s power generation capacity which would primarily be run on imported coal.These projects are estimated to cost approximately $35 billion. Oil prices have increased dramatically in the past year as well. Oil-using power plants comprise the largest source of electricity in the country. Naturally, the increase in costs of imported oil have consistently added to Pakistan’s trade deficit.
In comparison to its high value imports, Pakistan’s export basket comprises mainly products such as cotton, cloth, rice and other raw materials. In simple terms, these are sold for significantly less than the costs of energy imports, thereby skewing the trade deficit. Policy makers have also been lax in creating an environment that enables innovation and spurs the growth of high value and diverse industries that are internationally competitive. Doing so could have driven up the value of Pakistan’s exports vis-a-vis its imports and attracted greater foreign investment, which has lagged in recent times due to Pakistan’s fragile security environment and ensuing volatility of the economy.
CPEC (China-Pakistan Economic Corridor) has also emerged as a key causal factor in Pakistan’s economic crisis. Recently, a Chinese foreign ministry spokesperson rejected all claims made by the US that Pakistan’s economic crisis was a result of the financial costs of the China-Pakistan Economic Corridor. CPEC is essentially a joint venture between the two countries under China’s Belt and Road Initiative that aims to address Pakistan’s energy issues, build its transportation network and support the development of its industries through 22 projects. While 18 of these projects have been funded by direct Chinese investment and the remaining four are on concessional roles, the cost of CPEC is estimated to be a whopping $62 billionwith much of the financing through loans with prohibitively high rates of interest. The calculations clearly show a huge financial burden on the Pakistani government added to its preexisting debt. Additional to CPEC funding, China also provided 2 billiondollars in bilateral loans to Pakistan at the beginning of this fiscal year and over 3 billiondollars in commercial loans, all of which will have to paid back at some point in time!
Like many of its ill-conceived micro-economic policies, Pakistan’s recent economic vision appears to have been focused primarily on CPEC’s potential positive impacts while overlooking its short and long term negative consequences, both financially as well as politically. CPEC’s long term implications could be burgeoning loans on Pakistan even after its possible recovery from the economic crisis. It could also cripple the sovereignty of Pakistan’s newly elected government if the government were to become increasingly dependent on Chinese financing and loans.
Though on the one hand CPEC can be viewed as assisting Pakistan in its developmental needs, the huge financial commitments it has brought with it could be perceived as China exercising a ‘debt trap policy’.It is possible that should the IMF approve of a bail-out package, a large portion of that could somehow go towards repaying Pakistan’s loans from China. Becoming a client or vassal state of China is an argument that many analysts do not discount any more.
It will be a while before Pakistan’s economy is out of the woods. Support from the IMF and other global institutions will not suffice if Pakistan seeks a sustainable and stable economy that is able to compete with vibrant economies in South Asia like those of its neighbor, India, and a resurgent Bangladesh. To do that, Pakistan must address its fiscal crisis; avoid the looming debt trap; spur manufacturing and create an environment for innovation and technology driven industries to thrive. Only then will there be a revival of the industrial sector and the possibility of increased domestic and foreign investment in core sectors. While there is reasonable confidence within Pakistan that CPEC is a long-term value proposition and that Pakistan will not default on Chinese loans the way Sri Lanka did, the current economic crisis does not inspire much confidence unless critical economic reforms are instituted sooner than later.