Pakistan is near the top of the list of terrible economies that analysts believe may soon follow Sri Lanka into debt and economic crisis. Food and energy imports are a major source of dependence. Its current value has worsened, and real currency has been sucked away as commodities prices have risen. Pakistan’s foreign exchange reserves have decreased by more than half in the last year, to little over $9 billion, or roughly six weeks’ worth of imports. In 2022, the rupee, the country’s currency, lost 24% of its value compared to the dollar. Many people believe this crisis is unavoidable.
In Pakistan, 2022 has been a challenging year by most standards. The nation has experienced serious political and economic problems during the past four months, almost all of which were self-inflicted. The power over the government has already been transferred once, and it could happen again in the next months or weeks. Pakistan is being led by a completely irresponsible elite that cannot comprehend the magnitude of the issues the country is facing as the economy crumbles on the verge of collapse.
Pakistan’s economic state is awful by any standard. Undoubtedly, the economy under the unity government administration is burdened by rising price inflation, expanding fiscal and current account deficits, and declining foreign exchange reserves. Additionally, it is troubled by a difficult political situation.
The Pakistani rupee is among the worst-performing currencies in the world, the nation’s foreign exchange reserves are appallingly little, and it hasn’t been able to draw in the necessary foreign investment. The political elite in Pakistan is scattered. Its society has become even more politicized. The country is more isolated globally, and the economy is worse than it was four years ago.
According to the Express Tribune, Pakistan’s economic crisis has worsened, and the nation’s debt has reached a record high of 60 trillion Pakistani Rupees (PKR). Pakistan owes an unmanageable amount of money.
According to the State Bank of Pakistan (SBP), public debt increased by Rs 9.3 trillion over the previous fiscal year, but by June 30th, 2022, it would have reached a record high of Rs 49.2 trillion. The latest debt report from the central bank for the fiscal year 2021–2022 also showed that the total debt increased relative to the size of the country’s economy, which is a troubling trend. On Monday, the bulletin was made public.
Due to the significant external debt servicing, Pakistan’s foreign reserves have decreased by more than $2 billion in the first 5 weeks of the fiscal year. The nation is experiencing a severe economic crisis amid political unrest and instability.
If appropriate policy decisions and correct policy measures are not made, the country could experience a crisis and crisis similar to that in Sri Lanka, which would significantly affect employment, growth, inflation, and other vulnerable populations.
To revive the IMF program and avoid an economic default, Pakistan has no choice except to agree to tough IMF requirements.
We are all aware that the country has already participated in 22 IMF programs and that IMF policies and programs have not been able to solve all of the nation’s economic problems.
Pakistan has abundant natural and human resources, but its poor governance has made it difficult to utilize these advantages fully. Rule of law, appropriate institutional checks and balances, accountability and transparency, safety and security, a clearly defined and well-functioning federation, strong state institutions, and a convincing long-term national economic plan that, along with foreign affairs, is jointly approved by the major political parties and implemented by all authorities through transparent institutions are some of the key components of good governance that are lacking in Pakistan. To overcome the current economic crisis, good governance in each of these areas is a requirement.
Budget management is the root of most of Pakistan’s economic troubles, among the macroeconomic issues the nation faces. Fiscal policy is directly to blame for the low domestic financial rate, high inflation rate, sharp increase in external debt, and challenges with the balance of payments. The current spike in inflation is partly a result of SBP’s inability to fulfill the legislative obligations placed on it in 1997 to “define and enforce” government borrowing from it and to adhere to a monetary policy that promotes relative price stability and sustainable economic growth.
The most basic shift in economic principles necessary to address the current financial crisis is abandoning the long-standing practice of heavily subsidizing government operations through foreign borrowing and domestic money creation. It would be feasible if the government made a serious effort to boost domestic revenue, restrict existing public sector spending that is unnecessary, and provide a regulatory environment that encourages private investment and saving.
A serious reduction in current spending should be tried through efficient austerity measures. Development spending should be redirected towards power and water resource management, building infrastructure for agriculture and industry, and skill development for the younger population. Tax revenue needs to be mobilized on a war footing at all levels of government and from all sectors of the economy.
The nation must move toward improved economic management and macroeconomic stability through an independent monetary policy.SBP must be able to employ the rate of return as a tool for monetary policy and must have effective control over all sources of backup products, including the government. SBP cannot regulate the money supply by controlling private sector credit while enabling the government to take funds whenever it wants.
Thus, people who are privileged to hold leadership posts in SBP bear a tremendous responsibility to “establish and enforce” a limit on government borrowing from it as well as to develop and carry out a responsible monetary policy.
Any additional delay in implementing policies to encourage economic independence, boost domestic savings in both the public and private sectors, and begin a long-term economic development strategy while maintaining relative price stability will prove extremely costly for the nation in the long run. Weakening SBP autonomy while claiming it was being increased is equally detrimental to SBP and the nation.
