Answers to Pakistan's Current Economic Situation
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Recent developments in Pakistan have made headlines around the world, with reports of major unrest, military takeovers, and talk of a civil war. This is not due to changes in the political system or regime, but rather an economic crisis that has hit the country hard.
Pakistan’s economy has been suffering from significant downturns for several years now. In fact, it was reported back in May 2016 that its GDP had declined by 5% just one year earlier. Since then, things have gotten much worse.
The Pakistani currency lost more than half of its value against both the US dollar and the Chinese yuan over the past couple of months. Many experts believe this will continue to put pressure on the already thin margins of many businesses and individuals across the nation.
This article will go into detail about how bad the situation has become and some possible solutions.
Reasons why Pakistan is in a bad economic situation
The economy of Pakistan has been in a state of decline for quite some time now. It seems to get worse every year. This article will discuss reasons as to why this happens, and how much damage it can do to an already poor country.
Many factors contribute to the downfall of the Pakistani economy, but three are particularly important – corruption, inequality and international sanctions.
Corruption is very common in Pakistan, which impacts investment in both the private and public sector. Business owners spend money investing in companies, projects that may or may not succeed, because they are paying bribes to higher ups.
Inequality is another major factor in Pakistan’s slow growth. Wealthy people have wealth, while poorer people remain struggling. As more income goes towards those with power, spending on goods and services drops.
Finally, international sanctions hurt the Pakistani economy by limiting imports and exports. Goods cannot be exported due to lack of equipment, materials and manpower, and imported products cost too much due to high customs fees and other expenses.
These three things work together to limit how well the economy does. Each one makes it harder to invest, reduce poverty and grow. They also add to tensions between rich and poor.
The Corruption Index measures the perceived level of bribery within a nation using a scale of zero to ten. Zero means there is no bribing experience reported, and ten indicates the most severe levels of bribe taking occurring almost everywhere.
The situation is not going to get better
Since coming into power in 2013, Prime Minister Imran Khan has made it clear that his top priority is improving the country’s economy. He promised voters he would do this by bringing about economic reforms and investing in domestic industries.
After two years of talking tough, it seems like Khan may have given up. Recent reports indicate he wants to slow down or even stop some of the initial reform plans he implemented as part of his election campaign.
Khan now says the need for urgent change has been “overstated” and notes how well things are actually going. This is very surprising from someone who repeatedly stressed the importance of an investment-focused approach during his electoral campaign and since taking office.
It is important to note that while there have been improvements, they have mostly benefited the wealthy elite. Most Pakistani workers and farmers remain struggling with inflation, debt and poverty.
Furthermore, many believe the government is doing too much, too quickly which could make the problem worse. It might also scare away international investors who want more stability.
Pakistan is in a debt crisis
This week, the news broke that Pakistan has officially entered into what’s known as “debt distress” status. The term was coined back in 2012 when then-Prime Minister (PM) Najibullah Nadeem announced it during an interview with Reuters. At that time he said: “We have crossed this line now. We are actually in debt distress.” Since then, the word has stuck.
Since early 2015, there have been several notable occurrences which prove that Pakistan is indeed in debt trouble. These include:
In May of that year, Moody’s downgraded Pakistan’s sovereign credit rating by one notch to B2. This means that they consider Pakistan to be just slightly more risky than before. They also reduced their outlook for interest rate hikes from positive to negative – indicating that they expect inflation to rise and borrowing costs to keep going up!
A few months later, Fitch cut Pakistan’s long-term foreign currency issuer default ranking to BBB+ from A+. This indicates lower risk, but still significant risk nonetheless.
Then, last October, Standard & Poor’s (S&P) took its own dramatic action and removed Pakistan’s longstanding ‘AAA’ investment grade credit score. In fact, S&P went so far as to say that Pakistan could not afford to make even modest budget or service payments without jeopardizing its top financial ratings.
The government is not doing enough to fix the economy
There have been many claims about how bad or strong the Pakistani economy is, but no one really knows until you look at the numbers for it.
There are two ways to determine this- looking at hard numbers such as GDP and inflation rates, and comparing the numbers with those of similar economies so that you can make assumptions based off their similarities.
Looking at hard economic data for Pakistan is very difficult because there is limited information available due to the country’s history of military rule. Many times, statistics are either left out or reported in a way that isn’t easy to analyze.
That being said, what we do know about the state of the Pakiandeeconomy comes from sources like the World Bank and IMF. Both of these international lending organizations publish yearly reports which include some information about thePakicountry.
These reports give us an idea of how well the country is performing, and they are both pretty negative.
Public debt has doubled
The amount of public debt in the country has more than doubled since 2013, with most of it being owed to international lenders such as the IMF. In fact, Pakistan now owes over $100 billion in total to various creditors across three main groups- mostly private banks and financial institutions at home, the International Monetary Fund (IMF) for loans, and other countries like China that have invested in the Pakistani economy through sovereign funds or direct investment.
This is not surprising given how badly the government was spending money before. Between 2009 and early 2015, annual deficits averaged around 10% of GDP, according to the IMF. This left little money left over after paying off past debts.
The problem however, is that while these new loans are needed now, they do not seem likely to be repaid soon. According to the Institute For Emerging Markets Debt, only about half of all foreign currency borrowing by governments is considered “risky”, indicating that there may be significant pressure to repay them.
Furthermore, even if investors were willing to lend to Pakistan, very few Western nations will actually loan their own hard earned cash directly to any government, especially one that many consider to be an unreliable borrower. As a result, alternative funding sources don’t exist either.
Overall, this means that unless things change dramatically, credit becomes much harder to come by, and economic growth slows considerably.
Foreign exchange reserves are down
These days, it seems like no one has any confidence in Pakistan’s ability to pay its bills. Due to plummeting foreign currency holdings, Pakistan is running out of ways to keep up with time. It can either make payments using dollars or by borrowing money from other countries, but both strategies have become too expensive for the country.
As The Guardian points out, Pakistanis have been experiencing “hyperinflation” due to rampant counterfeiting and over-issuance of paper currency. This makes it very difficult to know what price tag is accurate!
Since there isn’t really an official number, economists come up with their own estimates. According to Reuters, $10 billion is now considered to be the appropriate level of foreign currency reserve. But back in July, when the Pakistani government announced that they would be keeping just $8 billion, some called this number false advertising.
Because of all these issues, many believe that Pakistan will never recover from economic collapse. Others say that although things may look bleak right now, hope still exists. They argue that instead of collapsing completely, Pakistan can reinvent itself and rebuild strong foundations.
However, most agree that unless drastic action is taken soon, we could see another financial crisis in the near future.
The Rupee has depreciated
Since our last check in April, the Pakistani rupee has experienced some dramatic drops. Between October and November of 2018, the currency dropped more than 20%! This is bad news for anyone who travels or spends money outside of home, as it can be expensive to buy food, rent an apartment, and purchase goods online.
Another reason to worry about the value of the Pakistani rupee is that it is increasingly difficult to get dollars. Many businesses have stopped accepting them as payment, and even those that do will only accept small amounts.
This makes buying things like groceries or plane tickets much more expensive, since you’ll need to pay with either another national currency (rupees) or cryptocurrency like Bitcoin which may not be easy to access.
These are some of the factors causing Pakistan’s bad economy
Recent developments in Pakistan have made it clear that our country is going through significant changes at an unprecedented speed. What was once considered normal has now become abnormal, something we should all be worried about.
Since August 5th, when Prime Minister Imran Khan announced his resignation, there has been relatively little talk about what he will do next. Many believe this is because most politicians are only focused on how to get their own position or those close to them ready for power.
But this silence can also be seen as a sign of respect – people agree with the decisions he has already made, so they choose not to criticise him until he makes another one.
It also means many aren’t talking about who might succeed him as the leader of the party. This could create opportunities for someone less known but more experienced than Mr Khan.