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Pakistan Economic Meltdown! But Why?

There is no respite in sight as the economy has become solely dependent on external debt and the country is tantalizingly close to a default. It’s in a perfect debt trap.

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pakistan flag waving in wind

The Pakistan Economy seems to be going down a never-ending spiral. Loss of foreign investor belief as reflected by its sky-high 5 Year Credit Default Swap rate of 52.8%, a GDP-Debt ratio of 75%, an inflation rate of 26.6% and rising unemployment. Its currency has depreciated further and foreign reserves only provide import cover less than 90 days.

The economy is in a melt-down, its politicians meanwhile absorbed in a political brawl with the military­­­–the only functioning institution in the country–focused on preserving its status-quo in Pakistan’s polity.There is no respite in sight as the economy has become solely dependent on external debt and the country is tantalizingly close to a default. It’s in a perfect debt trap.

But how did it find itself here?

Covid-19

Pak Economy was already faltering before the pandemic but it was no where close to a total collapse as it now is. When Covid-19 struck, the world went into a lockdown. For Pakistan it meant a drastic decrease in its exports, increase in imports and worsening fiscal deficit due to more public spending. In fact, public debt has become the largest part of fiscal expenditure.

Not to mention, the inflation and unemployment caused by the pandemic made it even worse for Pakistan.

Catastrophic Floods

The phrase “Sone par Suhaga” does not even begin to do justice to the destruction and havoc caused by the floods to infrastructure, livelihoods and more importantly the economy.

Agriculture, which constitutes 1/4th of the economy, was the worst affected by the catastrophic floods. 70% of the onion harvest along with rice and corn were destroyed. Pakistan exported large amounts of rice to China and Africa. 800,000 cattle were washed away which make up a large source of income for the population.

According to officials, the unprecedented floods costed Pakistan USD 40 billion.

The government unable to cope with such a disaster took even more loans from credit institutions such as Asian Development Bank, Asian Infrastructure Investment and World Bank amounting to USD 4 Billion. It also took debts from Qatar, Saudi Arabia, United Arab Emirates; in total USD 5 Billion.

These natural disasters forced the already debt-ridden country to take on even more debt.

Faulty Economic Policies

There is another pattern that plagues the economy. Even more debt is taken to finance debt repayments. this pattern is called a Debt trap. On top of that all of the conditionality that these institutions put for receiving credit proves detrimental for economic growth.

For example, one of the conditions IMF put on Pakistan for receiving a bailout is increasing taxes and cutting subsidies. Both of which lead to further inflation according to experts.

What Now?

All of these factors have culminated in Pakistan experiencing very unfortunate economic circumstances. The only way to get Pakistan out of this situation requires a coordinated international response. Debt relief measures such as restructuring, suspension of debt payments and internal debt audits need to happen to put Pakistan on a track of sustainable economic growth.

A collapse of our South-Asian neighbor would spell major trouble for us. Pakistan is home to terrorist organisations and has nuclear weapons. If the state were to fall these nuclear weapons may end up in the wrong hands.

Although, a total failure of state is unlikely to happen due this very fact. Pakistan is just too nuclear to be allowed to fall apart.

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