Two of India’s closest neighbours - Democratic Socialist Republic of Sri Lanka and Islamic Republic of Pakistan are reeling beneath unimaginable economic crises for the past few months. Sri Lanka’s troubles have increased due to depleting Forex reserves, huge debt, devaluation of the Sri Lankan Rupee, and rampant inflation. It seems Pakistan is following their path because it looks like Pakistan is having trouble for a way out amidst political instability and 'out of control' economic crisis.
It might sounds strange but Pakistan is relying on its donkeys and asking citizens to consume less tea to break out of this crisis. Petrol and diesel prices have increased immensely, people are paying as high as PKR (Pakistani rupee) 230 and PKR 260 respectively for a litre of fuel. Pakistan is also undergoing a severe electricity outage in both urban and rural areas resulting in extended power outages across the country which has led to many protests against load shedding, demanding government to take necessary measures to ensure smooth supply of electricity. This is something similar to what Sri Lanka is also facing currently, which has affected millions of people in the country. Political unrest and large number of policy decisions are result of what Pakistan is facing currently. Foreign exchange reserves, external debt, inflation are few factors which are responsible for economic crises in Pakistan.
By June 2021, Pakistan’s external debt was $86.4 billion which increased to $124 billion in just nine months i.e. by March 2022. The excessive external borrowing is another of the many Pakistan’s troubles. The China-Pakistan Economic Corridor (CPEC) has created leading to Chinese debt of $64 billion for Pakistan which was earlier in 2014 valued at $47 billion. The decline in the value of the PKR relative to the USD has also contributed to an increase in external debt. . Due to the nation's poor rating from several international rating agencies and its inclusion on the Financial Action Task Force's "grey list," foreign investors are also reluctantly staying away from the country.
Pakistan has fallen into a ‘debt trap’ after taking fresh loans, repaying old ones and this combined with the country's failure to obtain a package from the International Monetary Fund (IMF), has caused it to explore for alternatives. The price of crude oil has increased globally, and this has caused inflation in Pakistan to reach its all time highest level since November 2021. Moreover, Pakistan is net importer of food items like wheat, edible oil, pulses and sugar making the situation even more unsustainable.
The current situation in Pakistan is quite similar to what happened in Sri Lanka. The country’s crisis leading way from shortage of food, medicines, fuel to foreign exchange reserves. As Pakistan’s economy is dependent on imports of both fuel and food, rising in global prices has resulted in tremendous increase in bill of imports of the country. Value of Pakistan’s currency has also declined just like value of Sri Lankan rupee declined in March 2022. Sri Lanka’s economic crises is due to failure in economic policies which is required to develop a strategy for developing industrial infrastructure. Crisis is a result of corruption and lack of far-sighted strategy. Only choice left with Pakistan is to agree to IMF conditions and remove consumer subsidies from the energy and power sectors to save its economic crisis. Pakistan has already increased prices of fuel and has to remove remaining subsidies as well. Development in industrial base is one option to increase export economy and avoid the balance payments and save foreign reserves.
Pakistan has to agree to IMF conditions and remove consumer subsidies from the energy and power sectors to save its of the staring economic crises. Pakistan has already increased prices of fuel and had to remove remaining subsidies as well for survivalist needs. Development in industrial base is one option to increase export economy and avoid the balance payments and save foreign reserves.
Pakistan has no option left but to accept the IMF conditions to restore the financial agency’s programme to restore an economic default. Economic reforms are required to be implemented to restore its credibility in markets and continuity towards financing of CPEC. Major cutbacks in expenditure and imports would be required to reduce high trade and current account deficits. Good economists of the world are having a view that reducing import bills and relying more on domestic production firms would help Pakistan to avoid more deepening of multiple crises. By resumption of the IMF programme and emergency loans provided by the friendly foreign countries, it might provide some relief to Pakistan in long term.
If Pakistan declares bankruptcy after a few months, China would start exploring for alternative routes to ports in the Indian Ocean region. India has a window of opportunity to alter South Asia's geopolitics for its own national interests with the Indo -Pacific Economic framework for prosperity and establish itself as a potent commercial partner in the region for anyone willing to join hands.
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