Is Pakistan the next Sri Lanka?

Two of India’s neighboring countries, Sri Lanka and Pakistan, have been reeling from unprecedented economic crises in recent months. While Sri Lanka’s problems have increased due to dwindling foreign exchange reserves, huge piles of debt, currency devaluation and rising inflation, it looks like Pakistan is also heading for trouble. similar problems as he searches for a way out amid political instability and the emerging economic crisis. .

Strange as it may sound, Pakistan is relying on donkeys and asking people to drink less tea to get through the crisis. In addition, gasoline and diesel prices have skyrocketed in the country; people pay up to 230 PKR (Pakistani Rupee) and 260 PKR, respectively, for a liter of fuel.

Moreover, Pakistan is also reeling from a severe electricity crisis, with both urban and rural areas of the country facing prolonged power outages. This has led to protests against load shedding with citizens demanding that the Pakistani government take immediate action to ensure a steady supply of electricity.

This is reminiscent of the similar crisis currently facing Sri Lanka which has affected millions of people in the country.

Here is all about the crisis that engulfed Pakistan:-

Why is Pakistan facing an economic crisis?

The current situation in Pakistan is mainly due to a lot of political decisions and the political turmoil in the country. Several factors such as external debt, foreign exchange reserves, inflation, etc., are responsible for worsening economic crisis in Pakistan.

In June 2021, Pakistan’s external debt reached $86.4 billion. The country’s total external debt and liabilities rose to $128 billion in March 2022.

Excessive external borrowing has compounded Pakistan’s problems. The China-Pakistan Economic Corridor (CPEC) has created $64 billion in Chinese debt for Pakistan, initially valued at $47 billion in 2014.

The decline of the Pakistani rupee against the US dollar further contributed to the surge in external debt. Pakistan’s low ranking by international rating agencies and gray listing in the Financial Action Task Force (FATF) has kept foreign investors away from the country.

Pakistan has fallen into the “debt trap” after seeking new loans and repaying old ones. This, coupled with the inability to secure a rescue package from the International Monetary Fund (IMF), led the country to seek other options.

Inflation in Pakistan peaked in November 2021. This is mainly due to the global rise in crude oil prices resulting in higher transportation costs. Importantly, Pakistan is a net importer of essential food items such as pulses, wheat, edible oil and sugar.

Why are people being asked to drink less tea in Pakistan?

Could drinking less tea save a country from an economic crisis? In the case of Pakistan, it seems so.

“I call on the nation to reduce tea consumption by one to two cups as we import tea on loan.” Federal Planning Minister Ahsan Iqbal recently said so.

He added that Pakistan, one of the biggest tea importers in the world, has to borrow money to import it.

Tea is quite a popular drink in Pakistan. The country consumed tea worth $400 million in the financial year 2021-2022. It imported $60 million more tea than last fiscal year. Tea imports worth millions are straining Pakistan’s already cash-strapped economy. So, in a way, less tea makes more sense for the people and the country.

What have donkeys to do with all this?

It seems that donkeys can be useful in Pakistan in this crisis.

According to the country’s economic survey, Pakistan now has the third largest population of donkeys in the world. The country’s donkey population has increased to 5.7 million in 2021-22, from 5.5 million a year ago.

Meanwhile, neighboring China uses donkey skins as a key ingredient in ‘ejiao’, a traditional medicine. But the population of the animal is decreasing there. According to a 2019 report in The Guardian, the donkey population has declined by 76% in the People’s Republic of China since 1992, so it is dependent on imports from other countries.

Sensing an opportunity here, Pakistan decided to export donkeys to help China meet its demand. Pakistan is also planning to step up its donkey export business with the Punjab government which has established a farm in Okara district for breeding donkeys.

Interestingly, in 2017, the country expanded the global donkey skin trade to help China. The Khyber-Pakhtunkhwa government has reportedly announced a $1 billion project to increase the donkey population in the province.

From whom is all Pakistan seeking loans?

In 2018, Pakistan benefited from an IMF bailout, but it came with a series of conditions that proved costly for the country. The IMF loan is conditional on reducing the budget deficit, improving banking and tax legislation, strengthening the social safety net for poor households, phasing out electricity subsidies and reducing the federal bank intervention in the foreign exchange market. Pakistan could hardly meet IMF conditions.

However, this is not the first time that the economically beleaguered country has sought outside help. Also earlier in 2013, 2016 and 2018, Pakistan sought external financial assistance from the IMF, the United Arab Emirates and China to combat its economic crisis.

It was reported that in the same year, the country received $1 billion each from Saudi Arabia and the United Arab Emirates, as part of the bailout packages.

That same year, then-Prime Minister Imran Khan approached China for a loan, but it did not materialize. China has refused to grant new loans to Pakistan.

In 2021, he asked for another bailout, but the country failed to negotiate with the IMF.

Having no other choice, Pakistan asked for help from Saudi Arabia and China. Although the terms of its loans from Saudi Arabia are comparatively more flexible than those of the IMF, the interest rate is however much higher.

The UAE government has also offered to acquire 10-12% of shares of state-owned companies in Pakistan through its sovereign wealth funds.

Currently, Pakistan is requesting a $2 billion bailout from the IMF but has not received any confirmation due to the latter’s “difficult preconditions”.

The free fall of the Pakistani rupee

The Pakistani Rupee (PKR) is in “freefall” as it crossed 212 to the US dollar on June 21. As Pakistan’s foreign exchange reserves have depleted to a critical level and the country has less than six weeks of import cover.

The depreciation in PKR’s value comes as Pakistan struggles with a growing current account deficit, coupled with reserves held by the State Bank of Pakistan (SBP) hitting their lowest level since November 2019. struggling with a growing trade deficit due to its – rising import bill and falling exports. A growing trade deficit and falling investment led to a sharp drop in Pakistan’s foreign exchange reserves.

What options are left in Pakistan?

Pakistan has no choice but to accept tough IMF terms in order to reinstate the financial agency’s program to avert an economic default. The country must implement economic reforms in order to restore its credibility in the markets, in parallel with the continuation of the financing of the CPEC.

Reforms aimed at reducing high trade and current account deficits would require significant spending and import cuts. Economists believe that curbing unsustainable development projects, cutting import bills and relying more on its domestic companies may help Pakistan avoid a deepening crisis.

However, some are of the view that the resumption of the IMF program and emergency loans from friendly countries will not bring long-term relief to Pakistan.

Why and by how much have gasoline and diesel prices increased in Pakistan?

On Thursday, petrol prices in Pakistan were raised to PKR 233 per liter and high-speed diesel prices rose to PKR 263 per litre. It is the third time in the past month that fuel prices have risen, but the government did so to fulfill IMF “conditionalities” to reinvigorate the bailout.

Pakistani Finance Minister Miftah Ismail said the government had no choice but to “pass on the impact of international prices” to consumers. It comes after the IMF refused to relaunch the $6 billion program if the country fails to remove fiscally unsustainable fuel and electricity subsidies.

Is Pakistan facing a crisis similar to that of Sri Lanka?

The situation in Pakistan is similar to what we have seen recently in Sri Lanka. The country’s crisis could worsen with the shortage of foreign exchange reserves, food, fuel and medicine. Given the economy’s dependence on imports – for food and fuel, rising world prices have led to a colossal increase in the country’s import bill.

The Pakistani currency took a nose dive, just as the Sri Lankan rupee fell in March 2022.

The government of Sri Lanka has caused glaring economic policy failures as policy makers failed to develop a sustainable strategy to develop industrial infrastructure. Corruption and lack of political will have led to a huge crisis.

Pakistan has no choice but to accept IMF conditions and remove all consumer subsidies from the energy and electricity sectors in order to overcome its economic crisis. It has already raised fuel prices and is also preparing to remove remaining subsidies.

The country can also develop its industrial base to pursue a sustainable export economy to avoid the recurrence of the balance of payments and foreign exchange reserve crisis.

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