Pakistan’s Economic Crisis: Roots and Cause Explained

After the catastrophic economic downfall of Sri Lank, another populous South East Asian country is standing amidst an ever-growing financial turmoil. With the national currency hitting new lows, depleting foreign reserves, and political instability, Pakistan’s economic crisis is worsening with every passing day.

So, how bad is the crisis? What is the government doing to protect the economy? And is there a way out?

What Went Wrong in Pakitan’s Growing Economy?

With General Ayub Khan, ruling the country, Pakistan witnessed an array of political and economic changes in 1958. The fundamental changes in the constitution brought by the second president, lead the country to grow 2% faster than every other South Asian economy at the time.

This period witnessed the fastest growth in Pakistan. Manufacturing went up by 8% per annum. The construction industry builds huge dams and national highways. In this growing stage, the country was exemplified as a nation racing fast towards development.

But, where did the Pakistani government acquire the capital for this growth? The government opened a seemingly beneficial portal that would damage the nation’s economy later. And the portal was DEBT.

Debt Crisis in Pakitan

As of today, Pakistan has borrowed massive amounts from the IMF 22 times. And IMF is not the only source. Asian Development Bank and World Bank have also been the primary lenders of growing Pakistan.

But, it is crucial to understand that debt by itself is not harmful. Almost every country borrows from another country or financial institution. But, how and where the borrowed money is utilized decides the success or failure of the debt.

If used in the country’s development, it helps the country move forward. But, Pakistan didn’t invest the borrowed money in essential development factors like education, infrastructure, and skill development. Instead, the government poured vast amounts into strengthening its military.

If you review Pakitan’s national budget, it becomes evident. The country spends the majority on two things, first debt repayment and second defense, in particular, the army. Every year, Pakitan hikes the defense budget by a substantial percentage.

The Silent Drivers of Pakistan’s Economic Crisis

To date, no Pakistani PM has completed his entire term in office. Some of them were assassinated, while in some cases, the government was toppled internally. And political stability is a critical deciding factor in quality foreign investment.

Where a government can’t guarantee the next five years, why would companies invest for the next 50 years?

Furthermore, where developed nations spend well over 7% of the budget on education, Pakistan spends less than 2.5% on the education sector.

So, the lack of funding in development didn’t leave much room for income sources to scale. Even in 2022, the country’s literacy rate is just 58%. This led the country deeper into its own created debt crisis. And the only way out was by more debt.

China’s Role in Worsening Pakistan’s Economic Crisis

The economic downfall even worsened when Pakitan started borrowing from the most notorious lender, China. The Chinese government is known for diplomatically entangling countries in its debt traps. Where the world bank loans at an interest rate of 3% to 3.5%, China charges its borrowers up to 6%.

Furthermore, Pakistan’s development project conducted by China employed the Chinese as 50% or more of their workforce. The Chinese have also cornered many areas in Gilgit-Baltistan that are even off-limits to the locals.

Today, over 40 countries globally owe more than 10% of their GDP in loans to China. Unfortunately, these are the official stats by the government, and nobody knows the actual debt holdings.

Currently, Pakistan’s economy is a staggering $130 billion in loans. And, in the bid to repay the debt and sustain its crumbling economy, the Pak government is planning to borrow a $6 billion bailout from IMF.

Pakistan’s Economic Crisis: The Unusual Steps By the Government

At the beginning of June 2022, Pak reserves only had enough money to pay for two months of imports. Mohammad Hafeez, a former all-rounder for the Pakistan cricket team, highlighted the issues that the “ordinary man” in Pakistan faces amidst the economic turmoil.

Therefore, the government is encouraging its citizens to take some unusual steps in an attempt to combat Pakistan’s economic crisis. For example, businesses are asked to operate in broad daylight and close the shop early evening to save energy bills. Authorities are also discussing the plan to switch off street lights on alternate nights.

Government employees, on the other hand, are restricted to taking unnecessary trips, lunches, and hi-teas at the office to reduce expenses. Moreover, from now on, authorities will only be permitted to purchase utility vehicles like ambulances and school buses to cut down on private vehicle costs.

“I appeal to the nation to reduce tea intake by one or two cups daily because we borrow money for tea import as well,”

Federal Minister for Planning and Development, Ahsan Iqbal,

Even weddings will now have to wrap up the party at the latest by 10 pm.

The government is also encouraging companies to adopt hybrid or remote work formats to reduce fuel usage. The plans to restore a five-day work week are also in full rage.

The Way Forward: Band-Aid and Long-Term Solutions

Much like Sri Lanka, the economic turmoil of Pakistan is leading the nation towards the path of bankruptcy.

Therefore, it’s high time for the government to attract more foreign direct investment (FDI) by emphasizing an investment-friendly environment development. The most practical ways to achieve this are by improving security, easing custom laws and regulations, and rebranding the nations as desirable destinations for MNCs and tourism alike.

Furthermore, Pakistan should also focus on promoting the domestic industry and expanding its export portfolio. It can be achieved by modernizing its industrial sector by establishing manufacturing plants equipped with the latest technology and equipment for enhancing global integration.

Furthermore, authorities can also invest more in the R&D sector to promote innovation and labor productivity.

Can Pakistan Revive From the Current Economic Crisis?

The present Pak government will have challenges in the upcoming months as inflation will increase and the currency will continue to weaken. The economic crisis in Pakistan won’t go away overnight.

Support from the IMF and friendly nations like Saudi Arabia, China, and the UAE will only temporarily provide its collapsed economy some breathing room. Some of the most urgent actions the government needs to take care to address the expanding fiscal and current account deficit.

Before Pakistan finds itself digging the economy into another crisis, it must make the most of this moment of hard-won relief by focusing on creating a secure and sustainable economy.