The last 5 years have been devastating for global economic condition. Economic stress induced by the Covid 19 pandemic and the Russian invasion of Ukraine in addition to localized factors, have brought many nations to the brink of collapse. Following Sri Lanka's complete collapse, now Pakistan's economy is on the brink of complete disintegration due to rising Forex pressure, heavy inflation, severe debt burden, political instability and rise of extremist activities in the South Asian nation.
In this article we analyse what led to this devastating condition of the Pakistani economy.
A brief overview of the Pakistani Economy.
In order to understand the factors that brought about the current crisis of the Pakistani economy, we need to have a general understanding of the economic characteristics of the country's economy.
Pakistan is a nuclear state, home to 230 million people, with a GDP (FY 21-22) of $233 billion and GNP per capita of $1,094 (FY 21-22). Pakistan's public debt (internal + external) (FY 21-22) stood at $207.8 billion, giving a debt to GDP ratio of more than 89%. Such debt to GDP is completely unsustainable for Pakistan. The composition of government expenditure also played an important part in the collapse of Pakistan's economy. For FY 21-22, the Net Revenue Receipts (Gross Revenue Receipts less Revenue Deficit) of the central government stood at $15.9 billion of which $2.4 billion, i.e., 15% (or about 1% of the GDP) was spent on subsidies alone. The following graph shows Pakistan's spending on subsidies and grants as a percentage of GDP (from FY2000 to FY2014).
In comparison, for the same time period, India's GDP stood at $2.9 trillion while the total public debt (internal + external) stood at $1 trillion, giving a Debt to GDP of 34.7%. Inida's Net Revenue Receipts for the period stood at $423 billion of which $31.8 billion, i.e., only 7.5% was allocated to subsidies.
(Note: All figures stated above have been converted to USD from the domestic currencies according to the exchange rates prevailing as of the writing of this article. 1USD = 283.13PKR; 1USD = 81.87INR)
Now that we have a basic overview of the economy of Pakistan, we can now look at the factors that led to the collapse of Pakistan's economy.
Political Instability
Pakistan has always faced political instability ever since its independence. Pakistan has never witnessed a government complete its full tenure in office ever since its independence. Continuing this trend, amidst the Covid 19 pressure in 2022, famous Pakistani cricketer turned politician, former prime minister Imran Khan was ousted from office after losing a no confidence motion in April 2022 sparking mass protests against the move. Since then, Khan has led a popular opposition movement against the incumbent coalition government and the military, staging a series of large rallies across the country through the year. Imran Khan was later arrested from the Islamabad High Court on May 9, 2023 leading to a nation-wide protest by his supporters, with the protestors reportedly indulging in violence.
Amid the current economic crisis in Pakistan, in the form of high inflation, unemployment and financial instability, which is having a severe impact on the citizens, the political instability has worsened the situation. The coalition government led by new Prime Minister Shehbaz Sharif, is pushing for the arrest of many other politicians supporting Khan (generally from PTI) is sure to backfire as the opposing PTI ramps up its agitation. This will lead to increased violence in the nation as well as act as a distraction, not allowing the government to focus on the current economic crisis.
With national elections coming close there is sure to be a struggle between the two sides.
Covid 19 Pandemic
The Covid 19 pandemic was a hit to Pakistan's already struggling economy. Like every other nation, Pakistan reported a drop in GDP during 2020 and 2021 from pre-covid levels, with GDP growth rate falling from above 6% to below -1%.
Unemployment surged from 4.8% in 2019 to above 6.5% in 2020 and has maintained above the 6% level during 2021 and 2022.
At the same time, Pakistan's central bank, The State Bank of Pakistan, cut interest rates to ease the pressure on borrowers. However, this had a follow-on impact as interest rates on deposits fell from above 9% in 2019 to 7.5% in 2020 and 5.8% in 2021, leading to a significant loss in income for many depositors amidst high inflation and rising unemployment.
Russia Ukraine War
The Russia Ukraine War shook the global supply chain. Ukraine is one of the largest exporters of wheat while Russia is one of the largest exporters of energy and thus many countries are dependent on at least one of them for wheat or oil/power respectively. Among these nations, Pakistan is dependent on foreign imports for both its wheat supply as well as energy. In fact, Pakistan is the third largest consumer of Ukrainian wheat. With the war raging between the two countries there has been massive supply shortages of wheat and the sanctions on Russia has meant that oil prices in the global market have risen due to shortfall in supply of crude oil and natural gas. This has led to severe conditions in Pakistan with food prices skyrocketing as well as rise in the prices of petroleum.
Excessive Subsidies
Ever since independence, the Pakistani government has been issuing subsidies as a way to support the weaker sections of the society. In addition, to earn the favour of the voters during elections, every successive government has been issuing new subsidies and remittances to the public. The total spend on subsidies done by Pakistan is even higher than India in terms of proportion to total expenditure and revenue of the government, while the size of their economy is only a fraction of that of India.
This policy of issuing excessive subsidies has come back to bite Pakistan as these subsidies are not sustainable and have brought the Pakistani government in a pinch. Neither can they rescind the subsidies, since a majority of the public is dependent on them, nor can they sustain them.
This has led to the government to borrow heavily in order to cover the deficit caused by such expenditure sending Pakistan's economy into a debt spiral.
Unsustainable Debt
Pakistan has been following a debt backed growth policy which has massively backfired. Pakistan's total public debt amounts to about $207.8 billion or 89% of their GDP as of FY21. Such high levels of public debt is not sustainable, specially not for a country like Pakistan that is dealing with severe inflation, falling value of their currency, severe economic crisis as well as a shortage of Forex reserves. Pakistan spent about $7.5 billion in FY 21 on interest payments alone, i.e., nearly half of the entire budget for the year. With debt continuously rising, this figure will also rise, making it a real problem for the country's economy.
Natural Disasters
During 2022, Pakistan witnessed devastating floods lasting from June to October. Around one third of the total land of the country was flooded resulting in the death of more than 1700 people, damages worth $30 billion. Adding to the economic woes of the country suffering from the aftermath of the Covid 19 pandemic and the Russia Ukraine war, the floods affected more than 33 million people, created an even bigger shortage in the supply of food, halted economic activity and most of all created immense pressure on the government to respond quickly.
Inflation
Supply shortages of food and other resources as a result of the Covid 19 pandemic, Russia Ukraine war, the 2022 floods, etc. has created immense inflationary pressure in the Pakistani economy. The rise in food prices pushed inflation above 36% in April 2023.
In addition to this, the slow response of the government is driving up resentment among the masses who are suffering the most while the government is embroiled in a power struggle.
Extremist Sentiment (Terrorism)
Amid the rising political instability and the looming threat of an all-out economic crisis, Pakistan is now facing a rising threat from terrorism. During 2022 as reported by the Sydney-based Institute for Economics & Peace's Global Terrorism Index - 2023, there was an increase in terrorist threats by 120 per cent over the previous year. During 2023, in the first 5 months alone, Pakistan suffered from more than 25 terror attacks. The rising political instability accompanied by the economic turmoil has led to rising extremist sentiment among the lower strata of the society which has been suffering the most from the crisis, while the central government is embroiled in a power struggle.
Conclusion
All of these factors have stacked on top of each other creating severe economic conditions in Pakistan. This situation is of special concern because Pakistan is a nuclear armed state and a fall of the government or the economy might create a situation where the world might find these nuclear weapons in the wrong hands threatening global stability. In addition, the collapse would be a global humanitarian crisis affecting more than 230 million people. In addition it could spark conflicts among regional factions in the Pashtun and Baluchistan regions.
The collapse of Pakistan was a result of improper economic planning and unsustainable policies implemented by the government in a struggle for power. These policies accumulated and created a domino effect which was accelerated by the recent global Covid 19 pandemic, severe flooding and Russia Ukraine war. In truth, the collapse was long overdue as the economy was heavily dependent on debt, burdened by unproductive expenditure and severe political instability instigated by a constant power struggle. All of these factors together culminated in the current situation faced by Pakistan's economy.
References
The following material can be referred to for further reading and analysis:
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