Explained: Pakistan economy on the edge of collapse

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Explained: Pakistan economy on the edge of collapse - Why India is worried?

02 Feb 2023 Zinkpot 159

CNBCTV18 - Caught up in a vicious circle of debt, Pakistan has been spiralling deep into an economic crisis — reviving recent memories of Sri Lanka's financial-cum-political crisis. With the Pakistani rupee falling to record low to fuel prices shooting up, Pakistan has been struggling to fulfil the basic demands of its citizens, reports claim. But why is Pakistan in such a critical position? What is it doing to climb out of the hole and should India be worried? Read more

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Pakistan's economy has been pushed to a dangerous level due to numerous reasons:
- According to the World Bank, Pakistan's total external debt stocks increased to $130.433 billion by end-2021 from $115.695 by end-2020. The country's external debt reach $126.9 billion in September 2022, CEIC data revealed.
- Inflation in the country was at a 48-year-high in January as thousands of containers of food items, raw materials and equipment are stuck in ports after the cash-strapped government curtailed imports, Bloomberg reported. It worsened to 27.55% recently which is having a depressing effect on the value of country's currency.
- As per the country's Central Bank, the Pakistani rupee fell 9.6% against the dollar on January 26, the biggest one day drop in over two decades - in a slump that may persuade International Monetary Fund to resume lending to the country.
- In January this year, Pakistan's foreign exchange reserves dropped to $4.3 billion, the lowest since 2014.
- It is presumed that constant political chaos may undermine a coherent and timely policy response. Notably, no Pakistani PM has completed a full five year term in office. Maintaining the record Shehbaz Sharif took over, ousting Imran Khan in 2022 and the tiff between the two had sparked speculations about the split in the Pakistan Army.
- Pakistan is highly import-dependent, particularly with regard to energy, which renders it acutely vulnerable to hikes in global oil and gas prices. The recent massive outage has added to the woes. Pakistan has enough installed power capacity, but it lacks the resources to run its oil-and-gas powered plants that are heavily in debt and cannot afford to invest in infrastructure and power lines.
The only thing that Pakistan needs, at present, is an IMF deal. The sash-strapped country held its initial talks with the IMF on January 31 in a bid to unlock stalled funds from a $7 billion bailout to ward off an economic meltdown. Sharif is optimistic that the IMF will resume disbursements.
However, domestic analysts believe the government will find matters tough as the IMF is likely to demand significant belt-tightening that is bound to be unpopular, with voters already grappling with decades-high inflation and fewer job prospects.
Pakistan's requirement - The international community, including countries like Saudi Arabia and China, have pledged $9 billion to help Pakistan for flood recovery. But Pakistan would be needing an infusion of more than $9 billion to climb out of the crisis, much should come from the private sources.
The country needs $20 billion over the next 12 months to make payments arising from debt obligations. Just $500 million of interest or 'coupon' payments idea on Pakistan's international bonds this year, but the chief of the Central Bank has said $3 billion is needed to meet overall external debt payments.
IMF funds will help Pakistan avoid default on its international obligations, which could have profound consequences for its economy and its people. Replenishing foreign reserves is crucial in this regard. Aid programs will also help address the flood recovery, but this will be much more manageable if Pakistan's reserves rise to levels that instill confidence in its ability to pay its debts.
India - An activist recently told ANI that residents of POK (Pakistan-Occupied-Kashmir) are ready to join India. He spoke about the price of wheat, flour and rice. "People are fed up, people are protesting in POK", he said in a video. The influx, if it happens, can be leading to law and order issues in India.
Moreover, it is speculative that the deep economic crisis in Pakistan might increase Chinese influence in the country. This might directly or indirectly affect India, which has been loggerheads with China at the Line of Actual Control (LAC)lately.