Understanding Pakistan’s ongoing crises: An analysis of the interconnected factors | The Financial Express

Understanding Pakistan’s ongoing crises: An analysis of the interconnected factors

Pakistan has been spiralling towards a severe economic catastrophe due to its debt problems, bringing back recent memories of Sri Lanka’s financial and political crises.

pakistan crisis
Men reach out to buy subsidised flour sacks from a truck in Karachi, Pakistan. (File photo: Reuters)

By Anadi

Pakistan is currently facing a series of interrelated crises that have threatened the country’s stability and progress. All facets of society have been affected by the crises, which range from social unrest and political instability to economic difficulties and security threats. Pakistan has been spiralling towards a severe economic catastrophe due to its debt problems, bringing back recent memories of Sri Lanka’s financial and political crises. Pakistan has been struggling to meet the basic needs of its inhabitants as a result of the Pakistani rupee hitting a record low and petrol prices skyrocketing. The coalition government of Prime Minister Shehbaz Sharif is dealing with several issues all at once as Pakistan is in a state of emergency. On the one hand, there is a serious economic crisis. On the other hand, since Imran Khan’s defeat in a vote of no-confidence in April of last year, there has been a political brawl. Adding to it, the ongoing terror attacks carried out by a resurgent Pakistani Taliban is a major cause of concern.

Present State of Affairs in Pakistan

The economic situation in Pakistan is getting worse as the country struggles to keep up with mounting debt, global inflation, greater energy import costs, declining foreign exchange reserves, political upheaval, and a persistent decline in Gross Domestic Product (GDP) growth. According to a Bloomberg report, the nation’s inflation reached a 48-year high in January as thousands of containers of food, raw materials, and equipment sit in ports as a result of the cash-strapped government’s restrictions on imports.Recently, it deteriorated to 27.55 percent. The administration is currently working against the clock to prevent a complete economic collapse of the country, which may have a disastrous impact on millions of people. The issue is so severe that the government had to put up for auction a Pakistani embassy property in the United States.

The government is taking even more drastic measures, such as ordering marketplaces, eateries, wedding locations, and shopping malls to close early in an effort to save the country’s 62 billion Pakistani rupees, or roughly $273 million, on energy imports. All government agencies are required to cut back on their usage of electricityby 30%. In addition, there is a severe lack of flour in Lahore, Pakistan, which has caused prices to skyrocket and non-availability in the majority of stores. Pakistan is intending to put in place a number of austerity measures in an effort to address the economic situation there, that will result in lower government employee salaries, fewer overseas missions, and a workforce reduction to minimise costs. About half of Prime Minister Shehbaz Sharif’s Cabinet members are anticipated to serve for no pay, with the remaining members receiving a 15% pay cut. Pakistan may limit grants and secret service budgets for the Inter-Services Intelligence (ISI) and Intelligence Bureau (IB) due to financial constraints.

Causes of Pakistan’s Current Predicament

Pakistan is currently dealing with a potent mix of political and economic difficulties. However, this is hardly a scenario that has arisen overnight. All of this is a result of years of poor political and economic management by several Pakistani regimes. The present crisis is largely viewed as a self-inflicted wound by the Pakistani elite themselves. This has been further accompanied by the Pakistan economy’s intrinsic structural vulnerabilities.There are several factors that have contributed to the perilous state of the country’s economy. These comprise:

Pakistan’s economy’s structural weaknesses

The textile industry and a few agricultural crops including rice, sugarcane, and cotton continue to be the two main economic drivers of Pakistan. Apart from this, it is primarily reliant on remittances from Pakistani expatriate workers who reside in Gulf Arab countries and earn a living there.Pakistan has not been able to diversify its economy in order to adapt to the changing circumstances. To make matters worse, a significant chunk of Pakistan’s GDP has always been consumed by the military. Since 2009, Pakistan has raised its military spending each year. Between 2009 and 2018, it increased by 73%, and between 2017 and 2018, it increased by 11%. In 2018, Pakistan’s military expenditure as a percentage of GDP was 4.0%, the highest level since 2004.Resultantly, little money was left over for other aspects of the economy.

Further, due to vested interests, governments have never directly tackled enduring issues plaguing the civilian economy like cronyism and corruption. Experts also claim that Pakistan’s fiscal health has been impacted by running a political economy that is dependent on grants and aid from strategic partners and international organisations. Governments in the past have come under fire for not doing more to expand the tax base and diversify revenue streams.Pakistan’s economy is in ruins as a result of extraordinarily high inflation, critically low foreign exchange reserves, and the failure of international lenders like the International Monetary Fund (IMF) to extend additional loans. Due to Islamabad’s lack of credit worthiness on prior loans, the IMF postponed its bailout package to Pakistan in 2020. Further, the invasion of Ukraine by Russia in February 2022 put tremendous pressure on world food and energy prices, which had a negative impact on Pakistan’s economy.

Devastating Flood of 2022

Further, the floods of 2022 left the country in terrible shape, even though the economy has been struggling for a long time. It destroyed crucial infrastructure and drove millions of people from their homes, wreaking havoc on the nation. According to a World Bank assessment released in October, the flooding not only caused 1,739 deaths but also $40 billion in infrastructural damage. The floods in the Sindh province nearly completely wiped away crops like wheat, dates, bananas, and onions, which are staple foods for Pakistan. Large portions of the country’s agricultural region, were severely destroyed by major flooding in June 2022. Analysts noted that as a result, the country was forced to import food commodities that it otherwise would not have. Moreover, the country was severely affected by the Covid-19 outbreak and the following lockdowns. The subsequent relief initiatives proved to be too much for the government budget to bear alone.

Imran Khan’s disastrous populism

Further, it is being argued that the crisis was set off, when the costs of essential goods were increased by Imran Khan‘s previous administration in order to generate additional funds to pay off Chinese debts. According to the IMF assessment, Pakistan’s total bilateral debt that is due in 2023 is close to $7 billion, or over 2 percent of the country’s GDP. Additionally, it owes China, a key ally, close to $30 billion, or almost 30% of Pakistan’s GDP. One of Khan’s most criticised decisions was to delay contacting the IMF, despite economists’ advice that the government seek a bailout package back in 2018. The welfare programmes that Khan implemented also drew criticism since it was believed that the state lacked the financial capacity to support them. The Pakistan Tehreek-e-Insaf(PTI) government was criticised by experts for refusing to hike fuel costs, even in early 2022 when the price of petroleum had crossed the $100 mark due to the conflict in Russia and Ukraine.

Lack of Fiscal Prudence

The fact that Pakistan’s power bills were heavily subsidised and that its retail rates for petrol and diesel were among the lowest in South Asia also potentially hurt the country’s economy. The tax to GDP ratio is significantly low in the case of Pakistan. Pakistan became more dependent on loans from China and friendly Gulf countries like Saudi Arabia and the United Arab Emirates as a result of the expanding fiscal imbalance to maintain its economy.The total external debt stocks of Pakistan rose from $115.695 at the end of 2020 to $130.433 billion by the end of 2021, according to the World Bank. According to figures from CEIC, the nation’s foreign debt rose to $126.9 billion in September 2022. Thus, the lack of fiscal prudence is one of the major reasons for the present crisis in Pakistan.

Fall of the Pakistani rupee

The Pakistani Rupee’s ongoing depreciation against the US Dollar has added to the country’s soaring external debt. Further, foreign investors stayed away as a result of declining confidence, low rankings by international rating agencies, and Pakistan’s inclusion on the Financial Action Task Force (FATF) grey list. According to State Bankof Pakistan data, Foreign Direct Investment (FDI) inflows into Pakistan over the last 10 years have never gone above 1% of GDP. Pakistan has fallen into the infamous “debt trap” due to the vicious cycle of applying for new loans and repaying existing ones.

Mounting trade deficit

Pakistan has been experiencing a growing trade deficit as a result of rising import costs and declining exports. In the current fiscal year, Pakistan’s trade imbalance increased to an all-time high of USD 48.66 billion, up from USD 30.96 billion in the previous fiscal year. Pakistan has one of the lowest trade-to-GDP ratios in the world, according to a February 2022 Asian Development Bank (ADB) assessment. The situation got worse after the Covid-19 pandemic broke out.


Pakistan must respond quickly because time is not on its side. Political stability in the country will be significantly impacted by the economic crisis, which is made worse by recent flooding and a security situation that is rapidly deteriorating. Shehbaz Sharif, the prime minister, is facing the toughest test of his political career and may need to accept the strict bailout terms set forth by the IMF in order to at least receive a temporary reprieve.Pakistan’s ongoing crises are complex and multifaceted, with interrelated challenges in the economic, political, security, and social spheres. Addressing these issues requires a nuanced understanding of the root causes and a comprehensive approach that tackles these challenges from multiple angles. Economic reforms are needed to generate revenue, attract foreign investment, and create job opportunities, which can contribute to reducing inequality and social unrest. While there are no easy solutions to these challenges, the government, civil society, and international partners must work together to identify and implement viable solutions.

The author is Research Associate, Centre for Air Power Studies, New Delhi.

Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.

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First published on: 29-03-2023 at 15:59 IST
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