Pakistan's Economic Woes Worsen; Worst Yet to Come

Pakistani rupees

The prolonged Ukraine – Russia conflict is hurting the very fundamentals of poor countries, especially countries like Pakistan. An analysts in JP Morgan Chase & Co. warned recently that global oil prices could reach a ‘stratospheric’ levels if the US and European penalties prompt Russia to inflict retaliatory crude-output cuts.

A daily cut of 3 million-barrel in supplies would push benchmark London crude prices to USD 190, while the worst-case scenario of 5 million could mean USD 380 a barrel, said the analyst. This would push Islamabad to a scenario much worse than the current crisis that Colombo is facing.

Islamabad is currently experiencing worst energy crisis even when the oil prices are hovering above USD 100 a barrel. The crisis deepened further with the State-owned Pakistan LNG Ltd scrapping recently a purchase tender for July shipment citing high price.

Islamabad’s growing economic challenges are many.

High inflation, sliding forex reserves, widening current account deficit and depreciating currency are the few to name.

Cash-strapped Pakistan’s trade deficit has surged to an all-time high of USD 48.66 billion in the outgoing fiscal year, a significant increase of 57% over the previous year on the back of higher-than-expected imports, despite a ban on more than 800 non-essential luxury items in May by the Shehbaz Sharif government.

The trade deficit is propelled by the highest-ever increase in oil prices and commodities in the international market due to the supply chain disruptions brought about by the ongoing war in Ukraine.

The much hyped China – Pakistan Economic Corridor (CPEC), instead of promoting economic growth in Pakistan has now become a big liability to the government.

Sovereign counter guarantee to Chinese Independent Power Producers are eating up government’s revenue, though the asset created was lying idle besides the country facing continued power outages.

The CPEC project’s implantation progresses has mostly remained tentative and stop start over the last 4 years though Pakistan is the largest recipient of Chinese grants and assistance across the world.

With soaring inflation rates in the month of June to over 20%, the highest in recent past, the implementation of International Monetary Fund (IMF) recommended PRs. 50 oil price hike has further added fuel to it. In just 33 days, the petrol price increased from PRs. 149 to PRs. 249 per litre.

In addition, the electricity and gas tariffs have also been jacked up but the country is reeling under power shortages. It is just unimaginable to foresee where the already northbound inflation would land in the coming days.

Meanwhile, essential imports are also denting on forex reserves. Pakistan’s imports of cooking oil spiked to USD 3.56 billion in the first 11 months of the fiscal year 2021-22, which was 44% higher from previous year.

It was equivalent to 60% of the three-year IMF loan programme of USD 6 billion. The price of cooking oil shot up close to PRs. 550 per litre in the domestic market compared to PRs. 200 per litre in January 2019.

According to State Bank of Pakistan, “Pakistan’s reliance on imports of edible oil and oilseed meals to meet domestic demand has been increasing over the past two decades. Some 86% of domestic edible oil consumption in 2020 came from imports, up from 77% in 2000.”

The imports are growing rapidly with the increase in the size of population and per capita income in Pakistan, while the pilot projects initiated for growing palm and soybean plants in the country has failed to deliver satisfactory results, notes an analyst.

According to renowned Pakistan banker Yusaf Nazar, Islamabad had got more IMF bailout packages than any other country.

This indicates that external sector has always been vulnerable since no government, civilian or military, has ever tried to address the fundamental problems in Pak economy.

The growth figures provided by the government are often misleading. Further, the growth is led by consumption and imports. Any growth not led by exports, investments and savings is bound to unravel.

Islamabad has now come to a stage where its friends as well as international lenders are no more listening to same old stories of bailout.

They realised that the country just wants to live on dole-outs. Further, the cycle of seeking financial bailout packages is also shrinking. For example, earlier if Pak sought bailout fund from its friendly countries at a duration of 5 - 10 years, now that period has shortened to just a few months.

The root causes remain inefficiencies and corruption in the system, besides structural weaknesses. The IMF also asked Pakistan to set up an anti-corruption task force to review all the existing laws that were aimed at curbing graft in the government departments.

In the last 13 - 14 years, losses in state-owned enterprises (SOEs), such as energy distribution companies, Pakistan Railways and Pakistan Steel Mills, have added the dead weight to the system.

The perennial decline in the export-to-GDP ratio has exacerbated the pressure on the forex reserves. The wealthy households and the rich are comfortable with rent-seeking attitude and investing in highly lucrative real estate instead of economic activity that could be generating income and employment.

The private sector in Pakistan is not creating enough jobs to absorb the labour pool, which is at the cusp of anger, immigration and criminal activities, point out critics.

The World Bank states in a recent report that Pakistan could be a victim of instability. Pakistan has been facing an average deficit of USD 16 - 21 billion dollars every year since the beginning of 21st century.

Hence, per capita income, after adjusting with inflation, during this period has come down by 2%.

The report also stated that national productivity capability has come down compared to past, highlighting structural deficiencies. In spite of current IMF bailout package, Islamabad faces much tougher road ahead, though mostly contributed by the external factors, but mainly due to the fact that the country was managed very badly over the last 70 years.