Economy

Pakistan’s Economic Crisis: $36 Billion Is Required – Nidhi Razdan’s Hot Mic

Nidhi Razdan on the Hot Mic: Pakistan is in the midst of a severe economic downturn. Prime Minister Shehbaz Sharif’s new government is attempting to meet bailout terms set by the International Monetary Fund by repaying $6.4 billion in debt over the next three years.

Pakistan is teetering on the brink of a major crisis. There was the protracted political crisis in which Imran Khan refused to step down as prime minister until he had no choice and Shehbaz Sharif was sworn in. However, the country is now in the midst of a severe economic downturn. Pakistan’s new government is attempting to meet bailout terms set by the International Monetary Fund by repaying $6.4 billion in debt over the next three years.

Nidhi Razdan
Nidhi Razdan

Pakistan has gone to the International Monetary Fund (IMF) 22 times in the past seeking a bailout. However, genuine reform efforts have been lacking, which is why they keep returning. Pakistan’s foreign exchange reserves are rapidly diminishing. They’ve dropped by half in less than a year. And the country will require $36 billion in foreign financing in the coming fiscal year, which begins in June.

According to Bloomberg data compiled from 13 countries, Pakistan’s rupee has dropped nearly 8% in the last month, making it the worst performer in Asia. To keep its economy afloat and avoid default, the country is desperately negotiating a bailout package with the IMF and other countries. However, receiving an IMF loan comes with stringent requirements, which Pakistan has previously struggled to meet.

Reduce the budget deficit, improve banking and tax legislation, strengthen the social safety net for low-income households, phase out electricity subsidies, and reduce the federal bank’s foreign exchange market intervention. Pakistan’s current economic crisis is largely due to the country’s excessive spending on non-developmental and economically unviable projects.

Experts have cited failed infrastructure projects such as the Gwadar-Kashgar Railway Line Project, which were financed with long-term debt instruments and heavily reliant on external borrowing rather than domestic institutions. All of this has exacerbated Pakistan’s problems. The China-Pakistan Economic Corridor’s (CPEC) construction increased Pakistan’s debt burden, opening the door to ever-increasing external loans. CPEC also resulted in a $64 billion Chinese debt to Pakistan, which was originally valued at $47 billion in 2014.

The persistent depreciation of the Pakistani rupee against the US dollar has added to the country’s growing external debt. The need for an IMF bailout has become critical, as countries that have previously been generous lenders to Islamabad are now treading more cautiously. The issue is that countries that were previously willing to bail out Pakistan are no longer willing to do so unless Pakistan makes significant progress with the IMF. When Pakistan faced a similar economic crisis in 2018, the country was able to enlist the help of China, Saudi Arabia, and the United Arab Emirates before turning to the International Monetary Fund.

However, Pakistan’s finance minister admitted on May 28th that the country had sought assistance from Saudi Arabia, the United Arab Emirates, and other countries. While they were all willing to lend money to Pakistan, they all insisted that Pakistan first go to the IMF.

Last week, Pakistan’s government took a risky and unpopular step by raising local fuel prices to meet an IMF condition for reviving its bailout program. However, it sparked an immediate political backlash from Pakistan’s Prime Minister, Imran Khan, who claimed in a series of tweets that the fuel price hike was the highest in the country’s history and that the government had not pursued a deal with Russia for 30% cheaper oil. The government had been considering gas import agreements with a number of countries, including Russia.

As the economic crisis worsens, Imran Khan has become more confident in taking on the Sharif government. He demands that elections be held right away. Elections aren’t expected until the summer of 2023. The other major concern is what the all-powerful military will do. It is rumored that it may pull the plug on Shehbaz Sharif if he continues to impose the IMF’s unpopular demands on Pakistan’s people. As a result, the country’s political and economic situation will be tumultuous in the coming months.

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