Explained: What Is Wrong With Pakistan’s Economy?

As we write, Pakistan, which was teetering on the brink of a debt default, has averted a crisis, with reports suggesting that The International Monetary Fund (IMF) has reached a staff-level pact with Pakistan on a $3 billion stand-by arrangement. A crisis has been averted for now, or rightly put - the can has been kicked down the road. Pakistan has been facing numerous crisis from political to economic. Let's leave the political narrative aside for the time being and decipher what exactly is the problem with Pakistan's economy.

Low forex reserves

Consider this: India's foreign exchange reserves was a staggering $596.098 billion as on June 16, 2023 according to data released by the RBI. Pakistan on the other hand had $16.608 billion in forex reserves by the end of January 2022, which kept diving as the country had to pay back external debt. By the end of May, 2023, as per data from the State Bank of Pakistan, the liquid forex asset was just a meagre $8.52 billion. With such a low level of forex reserves, the nation will continue to face a payment crisis, as it has to service foreign debt on one hand as well as pay for imports on the other. When forex reserves are low, a crisis looks imminent.

Surging inflation of a whopping 38%

The nation's inflation numbers are truly frightening. In fact, Pakistan has left Sri Lanka far behind and has recorded the highest inflationary pressure in Asia at 38% in May 2023. Inflation in Sri Lanka has come down to 25.2 per cent after Pakistan overtook Colombo in April 2023. Soaring inflation means less money in the hands of consumers and in most cases no money at all. This also results in the central bank raising interest rates, which means debt financing becomes a huge issue.

Rising unemployment and low per capita income

Pakistan's per capita income remains one of the lowest, only after Afghanistan, which is actually a war-torn country right now. On the Human Development Index, which is a measure of a country's average achievements in three basic aspects of human development: health, knowledge and standard of living the country lags. In fact, Pakistan has dropped seven places in the recent Human Development Index, ranking 161 out of 192 countries in the 2021-2022 period, according to a UNDP report.

Structural problems in Pakistan's economy

Dr Zafar Mahmood, writing in the Hilal identified a new structural problems of Pakistan's economy. These structural problems include: disproportionately higher involvement of government in economic activities, large informal economy, agriculture remains a major employer of workforce, concentration on cotton-related production activities, policies biased toward import-substituting activities, neglect of services economy in public policies, low rate of savings and consequently inadequate investment to develop human resources and infrastructure, inability of the government to collect enough tax revenues, neglect of small and medium enterprises, ineffective governance and institutional structures, lack of accountability, etc.

Conclusion

Right now, it seems that Pakistan is facing a dire situation. Will the IMF bail out help the economy in the long run or is a debt default likely? This question will be answered only in the next few months. At the moment the nation's economic situation remains precarious.