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Economic chaos in Pakistan: outlook is gloomy

Published January 18, 2023
Women displaced because of the floods wait to receive food handouts while taking refuge in a camp, in Sehwan, Pakistan. Photo: Reuters
Women displaced because of the floods wait to receive food handouts while taking refuge in a camp, in Sehwan, Pakistan. Photo: Reuters
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Pakistan is in the news but for all the wrong reasons. The events unfolding in the country are by no means unique given the economic backdrop the world is operating in. Such incidents will (and already have been) noted across the Global South.

From the default of Sri Lanka -- I warned even then that this will not stop at Sri Lanka -- to recent news of sovereign bankruptcy of Ghana, these economic events will continue to haunt lower middle income countries.

Pakistan is just another victim in the great scourge of monetary tightening, rising inflation and falling investments -— it is now time for a test of resiliency.

Pakistan’s economy grinding to a halt as dollars dry up

In Pakistan, official inflation figures stand at 24.5 percent in December - a slight improvement from 26.6 percent in November. However, the food inflation has surged 35 percent YoY basis.

Within that food basket, some essential products have increased more than 100 percent, for example, the price of onions has increased by 415 percent! Wheat, eggs, and rice rose 57.3, 54.4 and 47 percent respectively, while chicken prices have more than doubled.

Food price inflation has been exacerbated by recent floods that submerged one-third of the country in water, destroying 4 million acres of crops across the country. Overall, the economic toll of this recent calamity is estimated to be $35 billion.

In other news, cooking oil along with other essential items is becoming short in the country as banks have stopped issuing Letter of Credits (LCs) due to the restrictions imposed by the State Bank of Pakistan (SBP) to curtail imports as foreign exchange reserves have fallen to a 9-year low.

Crisis of food prices

Currently, SBP's reserves stand at $4.3 billion after debt repayments were carried out.

Given that Pakistan employs an import-led growth model (that is to say the GDP growth of the country is dependent on imports) a restriction can significantly reduce GDP.

The industry is suffering as a result of rising interest rates, soaring dollar, falling Pakistani rupee and a perpetual energy crisis that continues to haunt businesses. On top of that, political uncertainty only exacerbates the current dilemma.

The textile industry in Pakistan which comprises 60 percent of total export earnings, is in shambles.

APTMA bemoans raw material shortages

Recently, the sector has laid off 7 million workers as many factories have either shut down completely or limited production. Cement sales are down 21 percent from July 2022 to December 2022 while petrol sales declined by 14 percent on a MoM basis.

Shops, restaurants, malls and other entertainment centers have been asked to close at 10 PM.

In the coming days, the country will see an unprecedented increase in petrol prices which are expected to jump from $0.94 to $1.31 (roughly Rs300). Electricity and other prices have already increased more than 100 percent in the past year. If this trend continues, Pakistan could potentially face a threat to social cohesion and national integrity.

Government has to increase gas prices: Minister of State for Petroleum

If the situation becomes more dire, banks could begin putting caps on withdrawals and businesses/shops may only be open 3 days a week.

Banks and other countries have pledged to help Pakistan. The international community has promised to provide about $9bn to the country. However, China, Saudi Arabia, Asian Development Bank (ADB) and others who have pledged these amounts will only be able to release the funds once Pakistan gets approval from and an endorsement from the IMF.

World Bank projects 2pc growth

The country is in serious negotiations with the International Monetary Fund (IMF) as the latter wants to fund the “unfunded subsidy” the government doled out in the form of reduction in petrol prices and other rebates to industries.

All this hullabaloo will funnel down into the social domain creating social unrest, protests and political instability among the masses. This tornado of chaos will not only impact the socio-political landscape of Pakistan but has the potential to create havoc on a larger scale. All these developments mentioned above warn of potential consequences for the entire developing world.

Crisis of shortage of raw material in industries intensifies

The article does not necessarily reflect the opinion of Business Recorder or its owners

Osama Rizvi

The writer is an international energy and economic analyst. He works at Primary Vision Network — a US-based market intelligence and consultancy firm

Comments

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Syed Shoaib Ali Jan 18, 2023 11:06pm
Very well orchestrated article. Unfortunately Pakistan right now is in real crisis, Govt if agrees with the term and conditions of IMF will prove suicidal for coming elections. Nonetheless IMF is not willing to provide the funds unless govt raises the price of Fuel and electricity bills. $ 9 Bn raised recently by foreign donors is mostly for the projects to rehabilitate the flood affected people. So nothing seems in favour of Pakistan.
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Haroon Jan 25, 2023 04:20am
A bit of a non-article with some incorrect information. At current international rates, petrol cannot go to 300. IMF is requesting to impose more GST on petrol and even if the maximum rate of 17% is applied, petrol would go to about 250 rupees per litre. The only way petrol can go to 300 is if oil in the international market goes northward of $100 which is unlikely considering the global slowdown. Also, banks would never put a cap on withdrawals. Pakistan is not Greece. The only way our banks put a cap on withdrawals is if the government defaults on its domestic debt which is highly, highly unlikely. In Greece, the ensuing recession after austerity led to higher NPLs hence a run on banks. In Pakistan, private sector lending is marginal so NPLs will not shoot up unless government decides to default on DOMESTIC DEBT. Overall, this article is a bunch of whataboutism and speculation.
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