Pakistan is slowly heading towards Sri Lanka-like crisis situation due to the worsening domestic political and economic situation, which can be turned around through political dialogue and prudent economic policies.
The US dollar reached the startling milestone of Rs200 when trading closed on Thursday afternoon, gaining Rs.1.00 from the previous day’s close of Rs199. Market confidence erodes amidst weak macroeconomic stability and continued political uncertainty.
Some analysts say that Pakistan may go bankrupt as the current government has decided to continue subsidies instead of increasing the price of petroleum. The question is, what if the country goes bankrupt?
Economic situation
In recent weeks, rising oil prices have already doubled the country’s oil import bills and the overall imports are also at a record high. In April, imports increased by 72pc, leaving no room for the government to improve its external balance. Moreover, foreign exchange reserves of the central bank have touched $10.3bn, lowest since June 2020.
Similarly, Pakistan Stock Exchange (PSX) has declined almost 11% (or over 5,000 points) to 43,486 on Friday as compared to 48,726 points in the mid of June 2021 ahead of the then budget presentation in the parliament.
According to the International Monetary Fund (IMF)’s World Economic Outlook, the growth of Pakistan’s economy is projected to slow down to 4% in 2022 from 5.6% in 2021 before registering a slight uptick at 4.2% in 2023.
Increasing Dollar
The Pakistani rupee surpassed the much-feared Rs200 against the US dollar in intra-day trade in the inter-bank market on Thursday. The rupee lost Rs2.41 to Rs200.80 at around 1:45 pm compared to Wednesday’s close at Rs198.39.
The domestic currency has maintained the trend of making and breaking records for the eighth consecutive working day as it cumulatively lost 7.7% or Rs14.31 in the last ten sessions.
The currency hit a record low of Rs188.66 on May 10. It then plunged to Rs190.02 on May 11, fell over Rs191 on May 12, reached Rs192.52 on May 13, sank below Rs194 on May 16, down to Rs195.74 on May 17 and closed at Rs198.39 yesterday (May 18).
Since the beginning of this fiscal year (July 1, 2021) to date, the rupee has collectively dropped by a massive 26.95% (or Rs42.46) compared to the previous fiscal year’s close at Rs157.54.
The example of Sri Lanka
Pakistan is another Sri Lanka in the making if it is not stopped by taking actions the defaulting island nation failed to, a report by Institute for Policy Reforms (IPR) warned. With foreign debt growing by 200 percent in the last six years and exports increasing by just 3 percent, what could NOT go wrong?
On April 12, 2022, having run out of dollars, Sri Lanka even defaulted on its external debt and sought the IMF’s assistance. Protests started across the country due to skyrocketing inflation and sudden disappearance of essential commodities.
The government declared a state of emergency and handed over responsibility to the army. The prime minister had to resign. Protesters set fire to official’s houses. The government later announced that the rioters should be shot at sight.
Is Pakistan on the verge of bankruptcy?
It appears that Pakistan’s new government is also facing similar economic challenges. There remains an urgent need to examine and understand the reasons that led to the Sri Lankan economic catastrophe so that such pitfalls may be avoided by Pakistan’s policymakers.
Institute for Policy Reforms (IPR) recommends that each year, the government of Pakistan must set targets for fiscal and current account deficits and cut its coat accordingly. The government may also earmark a part of the $ 30 billion remittances for repayment of external debt, by limiting imports.
In addition to indirect taxes, GoP must increase direct taxes and reduce exemptions. And we may have to go for debt relief from international creditors. To convince lenders we want to avoid future crises, we must go with a sound plan for economic growth and correction of elite privilege.
Until exports can grow substantially from production of more goods, the government must make an item-wise study of what export could increase quickly, possibly with incentives.
