Pakistan’s economy is on the brink

Islamabad/London
CNN
—

Muhammad Radaqat, a 27-year-old greengrocer, is concerned. He doesn’t know how much an onion will cost next week, let alone how he will be able to afford the fuel he needs to heat his house and keep his family warm.

“All the government tells us is that things are going to get worse,” Radaqat told CNN.

Their anxiety reflects the mood of a nation racing to avoid economic collapse. Given the shortage in the US dollars, Pakistan only has enough foreign currency in its reserves to pay for three weeks of imports.

Thousands of shipping containers are piling up in ports and the cost of essentials like food and energy skyrockets. Long lines are forming at gas stations as prices swing wildly in the country of 220 million.

A Power outage across the country last month it made people even more alarmed. He brought Pakistan to a standstill, plunging residents into darkness, shutting down transit networks and forcing hospitals to rely on backup generators. Authorities have not identified the cause of the blackout.

Pressure is mounting on the government of Prime Minister Shehbaz Sharif to unlock billions of dollars in emergency financing from the International Monetary Fund, which sent a delegation to the country this week for talks.

Pakistan’s currency, the rupee, recently fell to new lows against the US dollar after the authorities relaxed currency controls to meet one of the IMF’s credit conditions. The government had been resisting IMF-requested changes, such as easing fuel subsidies, as they would trigger further price increases in the short term.

“We need to get the IMF deal done as soon as possible so we can save the ship,” said Maha Rehman, an economist and former director of analysis at Pakistan’s Center for Economic Research.

Pakistan is experiencing what economists call a balance of payments crisis. The country has been spending more on trade than it has taken in, depleting its stock of foreign currency and weighing on the value of the rupee. These dynamics make interest payments on debt from foreign lenders even more expensive and drive up the cost of importing goods even further, requiring even larger drawdowns in reserves that add to the angst.

The country is also dealing with rampant price increases. The country’s central bank raised its key interest rate to 17% in a bid to rein in annual consumer inflation of nearly 28%.

Some The problems facing the country are specific to Pakistan. Political instability and efforts to prop up its currency, for example, have weighed on investment and exports, according to Tahir Abbas, head of investment research at Arif Habib, the country’s largest securities brokerage.

Historic flooding last summer also generated huge bills for reconstruction and relief, adding to pressures on the government’s budget. The World Bank has estimated that at least $16 billion is needed to address damage and loss.

However, global factors are making the situation worse. The economic slowdown has affected demand for Pakistani exports, while a strong rally in the value of the US dollar last year it has heaped pressure on countries that import significant volumes of food and fuel. The prices of these commodities had already skyrocketed due to the pandemic and Russia’s war in Ukraine, requiring further outlays.

The IMF has repeatedly warned that this could stress vulnerable economies. While he forecasts that emerging market and developing economies will see a modest pick-up in growth this year as the dollar depreciates peaks, global inflation falls and China’s reopening stimulates demand, the ability to manage the debt burden remains a concern.

It was estimated this week that 15% of low-income countries are already burdened with debt, while another 45% are at high risk of struggling to meet their obligations. An additional 25% of emerging market economies are also at high risk. Tunisia, Egypt and Ghana have sought billions of dollars worth of IMF bailouts in recent months.

“The combination of high debt levels from the pandemic, lower growth, and higher borrowing costs exacerbates the vulnerability of these economies, especially those with significant short-term dollar financing needs,” the IMF wrote in its World Economic Outlook this week. .

For Pakistan to avoid default, talks with the IMF to restart its stalled aid program must succeed, according to investors and economists. The IMF delegation arrived on Tuesday and will stay until February 9.

“The availability of the IMF loan is critical,” said Ammar Habib Khan, a nonresident senior fellow at the Atlantic Council.

But Farooq Tirmizi, chief executive of Elphinstone, a start-up targeting Pakistani investors, said that even if the IMF program is resumed, it will not solve all the problems, as Pakistan’s main problems are “not economic, but political.” , with a government that is not willing to make structural changes.”

Pakistan’s economic crisis was at the center of a political standoff between Sharif and his predecessor, Imran Khan, last year. khan was expelled by a vote of no confidence in April after Sharif accused him of financial mismanagement.

The situation has remained turbulent ever since. Pakistan has gone through three finance ministers in less than a year. The latter two were part of the current government, raising questions about whether Sharif can stay in power. The country is expected to hold general elections this summer.

The melee comes as Pakistan faces a new wave of militant attacks. Earlier this week, a suicide bomber ripped through a mosque in the city of Peshawar, killing at least 100 people. It was one of the deadliest attacks in the country in years.

People are suffering meanwhile. Farmers who lost cotton, date, sugar and rice crops to the floods still need help. The World Bank predicted in October that up to nine million Pakistanis could be pushed into poverty without “decisive relief and recovery efforts to help the poor.”

High inflation is only adding to the pain for households struggling to make ends meet. Food prices in January rose 43% year-over-year, according to data released this week.

Attention recently focused on a man from the southern province of Sindh who lost his life in a fight to get a bag of subsidized flour handed out by local authorities. He was crushed to death by the crowd next to him.