Pakistan's Economic Crisis: Causes, Consequences, and Potential Solutions

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Asif Masih, a daily wage worker in a garment factory, finds himself unemployed in Lahore after his factory shut down. Every day, in the dim light of his room, he wonders how he will feed his family of seven. Since losing his job, Asif has tried manual labor and driving an auto-rickshaw, with some help from his wife, Shamim. However, their combined efforts are insufficient to sustain their three daughters and two sons. The situation wasn’t always this dire. Asif recalls a time when daily expenses were manageable. Now, the cost of preparing just one meal has skyrocketed to ₹1,500, with a single piece of bread costing ₹25.

Rising Costs and Economic Hardship

The plight of workers like Asif reflects a broader economic crisis in Pakistan. The prices of essential commodities such as flour and rice have more than doubled. During the last Ramadan, onions were priced at ₹200 per kilo, tomatoes at ₹200, and milk at ₹150 per liter. Last year, videos surfaced showing people scrambling for food packets, highlighting the severity of the situation. Pakistan’s economy is in intensive care, operating on borrowed funds. The country has even considered selling its sole airline, PIA, to manage its debts. How did Pakistan, once considered a leader in Asia during the 1960s, reach this state?

Current Economic Indicators

Currently, Pakistan is in a severe economic crisis, with everyday items becoming increasingly expensive. The government’s foreign reserves stand at only $14 billion (₹1.66 trillion). The last installment of a $3 billion relief package from the International Monetary Fund (IMF) was received just last month. To continue running the country, the government, led by Prime Minister Shahbaz Sharif, is considering privatizing state-owned companies, including the national airline.

Unemployment in Pakistan is around 8%, and inflation reached 29.6% in the financial year 2023, peaking at 37.7% in May last year. According to the State Bank of Pakistan, external borrowing reached $131.2 billion in December 2023. The country relies on imports for over 40% of its energy supply, making it vulnerable to global disruptions like the Russia-Ukraine war or the Israel-Hamas conflict.

Key Issues Behind the Economic Crisis

1. Debt Trap

Domestic debt is a significant problem, constituting about 60% of the total debt, with interest payments consuming 85% of government revenue. External debt is also substantial, with Pakistan owing nearly $69 billion to various lenders by November 2023. The IMF has provided financial assistance 23 times since 1958, and Pakistan’s debt-to-GDP ratio remains above 70%, one of the worst among major economies. Short-term debt repayment pressures have exacerbated the situation, with $77.5 billion due between April 2023 and June 2026.

2. Political Instability

Political instability is a recurring issue in Pakistan, with no elected government completing its term in the country’s 76-year history. Military involvement in governance is an open secret, hindering economic reforms. For example, political turmoil following the fall of Prime Minister Imran Khan’s government in April 2022 paralyzed economic activities for months. Frequent changes in government and policies deter long-term investments, as investors are uncertain about the future.

3. Natural Calamities

Pakistan is highly vulnerable to natural disasters, particularly floods, which severely impact infrastructure, agriculture, and economic production. The 2022 floods alone caused $30 billion in damages, displacing people and increasing unemployment and poverty.

4. Macro Issues

Fiscal deficit and current account deficit are major macroeconomic issues. Fiscal deficit occurs when government expenditure exceeds revenue, while current account deficit happens when the value of imports exceeds exports. Persistent fiscal deficits are due to the government’s failure to broaden the tax base, while political instability hinders human capital development, affecting the country’s ability to produce value-added goods for export.

5. Labor Productivity

Between 1990 and 2018, Pakistan’s labor productivity grew at an average rate of only 1.33%, compared to Bangladesh’s 3.88%, India’s 4.72%, and China’s 8.12%. This low productivity is partly due to inadequate sectoral reforms and a lack of transition from low-productivity sectors to high-productivity sectors.

6. Trade Imbalance

Pakistan’s imports have consistently exceeded exports, resulting in a trade deficit. The worst deficit was in 2018, amounting to $37.7 billion. Limited variety in exports and an underdeveloped industrial sector exacerbate this issue.

Historical Context and Path Forward

Pakistan’s reliance on agriculture in its early years, significant external aid during the Cold War, and subsequent industrialization laid the foundation for its economy. However, economic mismanagement, political instability, and reliance on external borrowing have led to its current predicament.

Solutions

To address the economic crisis, Pakistan needs a comprehensive plan focusing on:

Debt Management: Implementing effective debt reduction strategies.
Political Stability: Ensuring stable governance to attract long-term investments.
Disaster Preparedness: Developing infrastructure to mitigate the impact of natural disasters.
Economic Reforms: Broadening the tax base, investing in human capital, and improving labor productivity.
Trade Balance: Enhancing export capacity by diversifying and upgrading industrial output.

Pakistan must act swiftly to stabilize its economy and regain its geopolitical standing. Only through a concerted and sustained effort across all fronts can it hope to overcome the current crisis and pave the way for a prosperous future.