Ten days of meetings, with a final meeting lasting 11 hours and ending on Thursday, have not led to a definitive solution on the possibility that the International Monetary Fund will release the 1.1 billion euro funds needed to avoid Pakistan’s bankruptcy. The Pakistani government and the IMF itself have shown themselves optimistic about a future agreement, but the economic situation of the fifth most populous country in the world (230 million inhabitants) remains worrying.
Since 2019, Pakistan has entered into a rescue program for its economy financed with loans from the International Monetary Fund: the package includes loans for about 6 billion dollars, increased to 7 in 2022. The granting of these loans, as always happens in these cases, is subordinated to profound economic reforms, which Pakistan has not always been able to comply with. In particular, the negotiations of recent months, which should unblock the portion of aid, seem to have stalled precisely on some reforms.
In this phase, however, Pakistan has an absolute need for financing and foreign currency: the deep economic crisis has severely affected the country’s dollar reserves, necessary to purchase goods from abroad, such as energy, raw materials and food .
The link with the dollar has always been a major problem for most emerging countries and a major obstacle to development. Very simplistically, currencies are the mirror of the economies they represent: strong economies have strong and stable currencies, such as the dollar for the United States or the euro for the Eurozone; Weak and unstable economies have weak and unstable currencies, which can rapidly lose value.
For this reason, emerging countries, such as Pakistan, use the dollar a lot and are often dependent on it. Consumers and businesses make many payments in dollars because the local currency is often not accepted or has depreciated so much over time that operators prefer to accept dollars. In addition, they hold part of their wealth in dollars, aware of the fact that it is a currency that will never lose value, unlike the local ones, and thus protect their purchasing power. A large part of the public debt is also in dollars and imports, such as energy and food, are paid for in dollars.
The funds currently available to Pakistan would only be enough for a month, for imports of necessary goods, such as energy, fuel and food. And a failed agreement with the IMF would make it impossible to repay part of the maturing loans with third states (China, Saudi Arabia and the United Arab Emirates, among others).
Pakistan’s economic crisis, which is already having serious effects on the population, is the result of a series of factors, some international, others specific. Like many countries, it is grappling with the consequences of the pandemic and the war in Ukraine: however, the effects of the increase in the cost of energy and food are felt more in a country that depends heavily on imports for fuel fossils and food.
The rupee, the local currency, has lost a lot of value in the last year, going from an exchange rate of 175 rupees for a dollar to the current 275, because the Pakistani economy is in crisis but also because the dollar has strengthened a lot in recent months, significantly disadvantageing countries with weaker currencies. This contributed to a further increase in the prices of goods purchased from abroad. Inflation climbed to 27 percent year-on-year in January, the highest level since 1975, but the price of food rose 39 percent in city areas and 45 percent in rural areas.
Unchangeable currency in Islamabad (AP Photo/BK Bangash)
The shortage of foreign currency is the most pressing problem, because it is blocking the entire manufacturing industry, especially that of cotton, which was one of the foundations of the Pakistani economy. The banks no longer have dollars to finance the purchases of raw materials to be processed by companies, which are thus forced to close. For the same reason, more than 8,000 containers with basic necessities were stuck in the ports of Karachi in January: there were no funds to pay for them.
Pakistan has a long history of economic instability, also caused by strong political instability and errors in economic choices: since 1980 it has resorted to bailout plans from the International Monetary Fund 13 times.
In recent years, the work of companies has also been complicated by frequent blackouts, due to a worn out or deficient infrastructure network, which easily gets into difficulty especially in the summer months, when the use of air conditioning systems increases the demand for energy. Even in the major cities of the country, such as Karachi and Lahore, the inhabitants are equipped with diesel-powered emergency generators and water tanks to deal with temporary blocks in the electricity and water networks. A grid outage on January 23 left much of the country without power for almost a day.
To this consolidated general picture are added the consequences of the disastrous floods of last August.
Large portions of the country have been submerged, around 1700 people have died, while tens of thousands are still displaced, hosted in refugee camps. The floods caused by the monsoons have destroyed farms and made cultivation impossible, severely affecting the country’s ability to produce food: the price of wheat and onions, for example, has more than doubled. The UN has estimated the damage of the floods at 16 billion dollars, but the figure rises to 30 billion if we also consider the impact of the lack of production. The emergency has created between 8 and 9 million new poor people, especially in rural areas.
A refugee camp in Jaffarabad after the floods (AP Photo/Fareed Khan)
In this context, with GDP (gross domestic product) growth revised downwards and expected at 2 percent for 2023 and without an agreement to release the funds, the risk of bankruptcy is real.
Shehbaz Sharif’s government said it was optimistic, admitting that “painful reforms” will be needed: the current conservative prime minister took over last April from Imran Khan, who had lost parliamentary support, a large part of the popular one and above all the support from the army, which always plays an important role in Pakistani politics. Khan himself has recently outlined a possible evolution of the crisis along the lines of what happened in Sri Lanka, where bankruptcy has led to the collapse not only of the economy, but also of institutions, with the storming of the presidential palace. According to the government, those of Khan would be only political speculation in view of the electoral campaign that anticipates the next elections, scheduled for October.
However, the situation for Pakistan is complicated. Strong internal tensions at the political level (Imran Khan was wounded in an attack in November) are another source of instability, as is the intensification of terrorist activity, especially in the north-west of the country. The return to power of the Taliban regime in Afghanistan has also strengthened the TTP group (Tehrik-i-Taliban Pakistan), the so-called Pakistani Taliban, authors of the attack that caused over 100 deaths in Peshawar at the end of January.
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