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Pakistani economic crisis (2022–present)
 Inverted yield curve in 2019-2020 and 2022 20 year 10 year 5 year 1 year Pakistan has experienced an economic crisis as part of the 2022 political unrest. It has caused severe economic challenges for months due to which food, gas and oil prices have risen. As of 24 November 2024 Pakistan inflation rate was 4.9% lowest in 6.5 years. The Russian invasion of Ukraine has caused fuel prices to rise worldwide. Excessive external borrowings by the country over the years raised the spectre of default, causing the currency to fall and making imports more expensive in relative terms. By June 2022, inflation was at an all-time high, along with rising food prices.[1][2][3][4] Poor governance and low productivity per capita in comparison with other low to middle-income developing countries have contributed to a balance of payment crisis, where the country is unable to earn enough foreign exchange to fund the imports that it consumes.[5] Pakistan's economic crisis is the biggest crisis since its independence.[6][7] Background According to Indian strategic affairs specialist Sushant Sareen, Pakistan has doubled its national debt roughly every five years over the last 25-year period. Starting from a debt of ~Rs. 3.06 trillion (US$11 billion) at the beginning of General Musharraf regime in 1999, the debt stood at ~Rs. 62.5 trillion (US$220 billion) at the end of the Imran Khan government in 2022. While the debt grew at around 14 percent per year on average, the GDP was growing at only 3 percent per year on average. This led to an unsustainable debt burden. In the fiscal year 2022–23, the debt servicing obligations of Rs. 5.2 trillion exceed the entire federal government revenue.[8] In 2022, Pakistan experienced a trifecta of challenges, as political unrest, an economic crisis, and destructive floods gripped the nation. Economically, the country is grappling with severe inflation, a declining currency, and critically low foreign reserves, posing significant concerns for its financial stability.[9] In the 2010s Pakistan's high domestic consumption and demand, pegged rupee exchange rate, import-led growth, low inflation and increased government spending on infrastructure projects such as the China-Pakistan Economic Corridor (CPEC) led to a Balance of Payments Crisis, as the country's foreign exchange outflows increased rapidly.[10] This led to the Government of Pakistan approaching the International Monetary Fund (IMF) in October 2018;[11] where it raised interest rates, depreciated the rupee[12] and implementing tax measures in the 2019–20 federal budget to meet the preconditions of the IMF program.[13] In June 2019 the Federal Government and IMF agreed on a $6 billion bailout package in a 39-month extended fund arrangement.[14] Analyst Michael Kugelman called it a "political blow" for the government.[15] In January 2020 the IMF package was put on hold after Prime Minister Imran Khan "did not follow IMF recommendations to increase electricity prices and impose additional taxes."[16] In 2021 the bailout program was resumed after Pakistan agreed to the withdrawal of subsidies and tax exemptions, an increased petroleum levy, an increased energy tariff and the auditing of Covid-19 relief money.[17] After the government reintroduced fuel subsidies in February 2022, Financial Times said "analysts say this could undermine the IMF programme weeks after it restarted."[18] Business Standard reported Miftah Ismail said that the subsidy package was "announced as a 'bomb' to destroy the country's economy for the next administration".[19] Dawn reported that the IMF was not "convinced" with the government's "justifications" for the amnesty scheme and relief package,[20] lead to the stalling of the $6 bailout package program.[21] During the government of Pakistan Tehreek-e-Insaf (PTI) increasing double-digit inflation led to growing political issues and deteriorating economic conditions.[22][23] During the PTI period, Pakistan's total debt and liabilities increased by 80% while during three quarters of Fiscal Year 2021-22 the trade deficit rose 70% to $35.4 billion.[24] Due to high oil prices in the international market, Pakistan's oil import bill increased by 95.9% to $17.03 billion in the last ten-months of the PTI government.[25] In February 2022 Pakistan posted its highest ever monthly current account deficit of $2.55bn.[26] In 2021 The Express Tribune said that the country's circular debt "almost doubled within three years" to Rs2.28 trillion "due to the government’s failure to stem systemic losses".[27] According to Business Recorder, Pakistan's foreign reserves were built through a "flawed policy" of "heavier than ever reliance" on borrowing, equity and swap arrangements.[28] On 9 April 2022, Imran Khan was ousted in a vote of no-confidence,[29] as the National Assembly of Pakistan elected opposition leader Shehbaz Sharif as Prime Minister two days later.[30] New finance minister Miftah Ismail said Pakistan would approach the IMF to resume the bailout package for "balance of payment support."[31] Political instability worsened the country's economic condition; with rapid outflows from foreign reserves and currency devaluations soon after the arrival of the Shahbaz Sharif government, with the Rupee hitting an all-time low in May.[32][33] To qualify for resuming the IMF program, the government announced price hikes in fuel.[34] From June to October 2022, floods led to $40 billion in economic losses to the country,[35] 33 million individuals were affected by the floods, 7.9 million were displaced and 10.5 million people faced acute food insecurity. More than 1.2 million livestock was killed, 13,000 km of road and bridges damaged, 9.4 million acres of crop land flooded, while UNDP reported 9 million individuals "at-risk of being pushed into poverty on top of the 33 million affected."[36] Timeline2022Information Minister Maryam Aurangzeb told a news conference held on 19 May 2022, that Pakistan was committed to "controlling rising inflation, stabilizing foreign exchange reserves, strengthening the economy and reducing the country's dependence on imports". Import of unnecessary and luxury items was banned. Sharif had said at the time that the decision would "save the country's precious foreign exchange" and that Pakistan would have to "pursue austerity."[37] In late May 2022, the government lifted the cap on fuel prices - a condition for advancing the long-stalled bailout deal with the International Monetary Fund (IMF). IMF also insisted Islamabad to raise electricity prices, ramp up tax collection and make sizeable budget cuts.[38] Federal Minister for Planning and Development Ahsan Iqbal told reporters on 14 May 2022, that Pakistanis could reduce their tea consumption to "one or two cups" a day as imports were putting additional financial pressure on the government. "The tea we import is imported on credit," Iqbal said, adding that businesses should be shut down first to save electricity. According to the Observatory of Economic Complexity, the South Asian nation of 220 million is the world's largest tea importer, having bought more than $640 million worth of tea in 2020.[39][40] Inflation in Pakistan rose to 21.3% in June, the highest since December 2008 when inflation stood at 23.3%.[41] Finance Minister Miftah Ismail said that a loan of $2.3 billion from a Chinese consortium of banks had been credited to the Pakistani central bank's account in late June.[42][41] 2022 Pakistan floods in summer cause over $30 billion dollars in economic losses in Pakistan.[43] At the end of March 2022, the State Bank of Pakistan's reserves stood at $11.425bn, but they gradually tanked to an almost four-year low of $6.715bn on 2 December. Pakistan's foreign exchange reserves equal to just five weeks of merchandise imports.[44] The consistent depreciation of the rupee is said to be deepening the economic crisis.[45] At the end of March, the rupee stood at 183.48 to $1. On 9 December 2022, it closed at 224.40.[44] 2023In January 2023, Muhammad Aurangzeb, the CEO of Pakistan's largest bank, Habib Bank commented publicly on the prevailing economic situation that it could be a "big blow to the economy" if the stakeholders didn't make the right decisions swiftly.[46] In late January, Pakistan lifted the artificial cap on its currency, causing the rupee to plunge 20% against the dollar in a few days. The government raised fuel prices by 16%. And the Pakistani central bank raised its interest rate by 100 basis points to battle the country's highest inflation in decades, expected to be as high as 26% in January.[47] In February 2023, a Moody economist predicted that inflation in Pakistan could average 33% in the first half of the year 2023.[48] China lent Pakistan further 700 million dollars to shore up Forex reserves.[49] Pakistan's Consumer price index (CPI) further jumped to 31.5%, the highest annual rate in 50 years.[50] Also Fitch downgrades Pak's sovereign credit rating from CCC+ to CCC-. The New York-based ratings agency warned that a default could be a "real possibility".[51] In March 2023, the food inflation rate in Pakistan witnessed a significant increase, with urban areas experiencing a rate of 47.1 percent and rural areas facing a slightly higher rate of 50.2 percent.[52] Moody's downgrades Pakistan's rating to Caa3; changes outlook to stable from negative. Finance Minister Ishaq Dar said that China approved a rollover of a $1.3 billion loan for cash-strapped Pakistan, which would help shore up its depleting foreign exchange reserves.[53] The World Bank further recorded the Consumer price index (CPI) for food items on a year on year basis at 45.1%, the second highest in South Asia after Sri Lanka.[54] The Consumer price index (CPI) raced to 35.4 per cent in the highest annual rise in prices on record, driven mainly by skyrocketing costs of food, electricity, beverage, and transport. The inflation number was the highest annual rate since available data - July 1965 - according to the research firm Arif Habib Ltd, and is expected to rise in the upcoming months.[55] On April 4, the World Bank projected about 4 million Pakistani people falling below the lower middle-income ($3.6/day ) poverty line amid economic growth plummeting to just 0.4% against a target of 5pc.[56] In May 2023, Pakistan's inflation rate reached 38%, surpassing Sri Lanka to become the highest country in Asia.[57] In June 2023, the Pakistani government unveiled an "Economic Revival Plan" according to which, plans on investments in key areas of production such as on agriculture, mining, Information Technology, defence and the energy sector were discussed.[58] PM Shehbaz Sharif also lauded China for assisting his country in the current economic crisis.[59] 2024The United Nations report in January believed that Pakistan's economy to face global challenges in 2024, modest GDP growth expected.[60] Situation in Pakistan remains chaotic after the 2024 election, and economic data shows that Pakistan's economic crisis will continue. According to the Pakistan Bureau of Statistics, the inflation rate stood at more than 29% in January. Pakistan also has to manage roughly $30 billion in annual external debt obligations, as its foreign currency reserves continue to fluctuate. As of Feb. 9, total liquid foreign reserves stood at $13.15 billion, having previously fallen to just $4.1 billion in June 2023. According to State Bank of Pakistan data, Pakistan requires $6.1 billion for debt servicing before the end of the fiscal year (June 30). Its current account deficit stands at $269 million, which could further exacerbate the projected deficit of $6 billion that the government expects, thereby complicating Islamabad’s ability to fulfil its debt obligations.[61] Mid-2024 figures from the country’s central bank and international bodies like the IMF paint a cautiously optimistic economic forecast.[62] The Pakistani government predicts the inflation rate will remain between 12.5-11% in June–July. Inflation rate of Pakistan was 9.8% in August.[63] In 2024 Fitch Ratings upgraded Pakistan's credit rating to 'CCC+',[64] while Moody's Ratings upgraded Pakistan to Caa2.[65] In September the IMF also approved a $7 billion loan to Pakistan after an agreement.[66] In a September 30 article in Bloomberg, it was noted that "[f]oreign exchange reserves have strengthened from previously critically low levels, import and currency restrictions that hurt industrial activity have eased. Inflation has also cooled, helping monetary authority to lower borrowing cost by 450 basis points since June this year." While International bailouts "helped in stabilizing the country."[67] According to the Pakistan Bureau of Statistics (PBS), Pakistan's GDP grew by 3.07% in Q4, FY24, primarily backed by agricultural (6.76%) and services (3.69%) growth. While industry (-3.59%) continued to decline, despite a rebound in Large-Scale Manufacturing growth.[68] In 2024 the Pakistan Stock Exchange's KSE-100 benchmark rose almost 30%, reaching an all-time high of 82,003.59, drawing the highest foreign investment in the stock exchange ($87 million) since 2014. Attributed to SBP rate cuts and a IMF loan.[69] On October 1, it was reported that YoY headline inflation slowed to 6.9%, a 44-month low (since January 2021) as a result of "high base effect, declining global commodity and energy prices, and a stable exchange rate." As well as tight monetary policy.[70][71] The rupee (PKR) also started October with gains (appreciation) against "all of the other major currencies" the same day.[72] That month Pakistan also ended a four-year streak of outflows (totaling $1.4 billion) in Treasury Bills, earning $875 million. According to Bloomberg, Pakistan's stock became the "world’s best performer", increasing 73% in the past 12-months. Treasury Bill yields became some of Asia's highest, while foreign reserves rose to a two-year high.[73] Despite the decline in headline inflation, the Sensitive Price Index (SPI) continues to remain elevated at an average of 319.79 base-level in October, with marginal increases and decreases in consumer food-stuff prices.[74] Continued price elevation, high electricity prices and additional taxes levied by the government have contributed to growing dissatisfaction and protests. Weak purchasing power and weak income growth have also contributed to continuing economic pains. According to Ali Khizar "new taxes will help tame inflation" while "economic slowdown will continue."[75] Federal budgetOn 10 June 2022, the government unveiled a new 47 billion budget for 2022-23 to persuade the IMF to resume the 6 billion bailout deal, which was agreed upon by both sides in 2019.[76] However, the IMF expressed dissatisfaction with the budget for 2023-24 submitted by Pakistani authorities two weeks before the bailout expired, which indicated that Pakistan would not receive its bailout.[77] On June 25 a revised Budget featuring new taxes, a raised the Petroleum Development Levy (PDL), a lifting of all restrictions on imports and various expenditure cuts were presented to the National Assembly and accepted the next day. These came after talks between Prime Minister Shehbaz Sharif and IMF Managing Director Kristalina Georgieva.[78] Ishaq Dar, who presented the Budget claimed that the new budget would "make our fiscal deficit much better", adding “I hope, God willing, that we will have an agreement with the IMF."[79] The new federal budget included an expenditure of Rs14.46 trillion, supported by a net revenue of Rs12,163 trillion, of which Rs5,276 trillion was transferred to the provinces, leading to Federal revenues of Rs6,887 trillion.[80] The remaining expenditures were to be paid through privatization proceeds, external receipts, non-bank and bank borrowing (T-Bills, PIBs, Sukuk).[81]: 7 The budget saw Rs7,303 trillion earmarked for debt repayment.[80] The government in the revised budget would place the fiscal deficit at a targeted rate of 6.53% of the GDP or Rs. 7,505 trillion, with the Federal Government seeking to cover it with multilateral/bilateral sources, national saving schemes, government securities, commercial/Euro bonds, the GP fund and deposits and reserves.[81]: 8–9 Within the Federal Budget the raising of withholding taxes on supplies, contracts, services, commercial imports, increasing the rate of the General Sales Tax (GST) on Tier-1 Retailers from 12% to 15%, new taxes on cash withdrawals by non-filers, broadening of the Federal Excise Duty, and measures to stop the outflow of foreign currency were all included.[82]: 32–36 Five days after the Federal Budget was first presented to the National Assembly, the IMF would approve its $3 Billion bailout for Pakistan on 30 June. Analysts said that the deal averted the threat of default hanging over the country. This following politically risky measures taken by the Sharif government including raising taxes, reversing subsidies in power and export sectors, increasing energy and fuel prices, agreeing to a market-based currency exchange rate, cutting spending and revising the 2023-24 Federal Budget. Micheal Kugelman writing "Islamabad waited until the very final hour to take the (politically risky) fiscal policy steps that the IMF had been hoping to see for months. If it had taken those steps earlier, much of the drama and fraught negotiations of recent months likely wouldn't have had to play out."[83] The IMF would state that the FY24 Federal Budget was “in line with the goals of supporting fiscal sustainability and mobilising revenue, which will enable greater social and development spending”.[84] However the Budget has come under significant criticism from experts, analysts, and industrial figures, calling the targets in the budget unrealistic, with a lack of any real structural reforms while committing to populist election year policies during an economic crisis.[85][86][87] Impact on industryIn October 2022, the All Pakistan Textile Mills Association (APTMA) announced that 1,600 garment mills were closed across the country due to withdrawal of power subsidies and, as a result, five million people lost their jobs.[88] In December 2022, APTMA stated that mills across the country were running at less than 50% capacity utilization and textile exports could fall further from 2023.[89] A number of leading companies listed on the Pakistan Stock Exchange announced closure of plants. Car assemblers such as Pak Suzuki Motors,[90] Toyota Indus,[91] and Honda Atlas Cars,[92] whose production relies completely on parts imported from other countries, shut down assembly plants after they failed to secure letters of credit due to foreign exchange curbs imposed by the government.[93] Other notable companies to shut factories due to low demand and poor economic conditions include Millat Tractors,[94] Ghandhara Tyre & Rubber Company,[95] Nishat Chunian,[96] and Fauji Fertilizer Bin Qasim.[97] Shortage of foreign exchange reserves and depreciation in Pakistani rupee created difficulties in importing crude oil, leading to a temporary closure of Pakistan's largest petroleum refinery–Cnergyico, in February 2023.[98][99] Delays in securing letters of credit resulted in ships and containers of pharmaceutical raw material, medicines and healthcare devices imported from other countries to be stuck at seaports for prolonged periods. Several pharmaceutical companies shut down due to "unaffordable cost of production". As a consequence, a shortage of medicines and equipment was reported across the country, forcing hospitals to postpone surgeries and treatment.[100][101] In April 2023, almost all of the country's 30 mobile phone assembly units, including three run by foreign brands, shut down, affecting 20,000 employees.[102] In June 2023, Shell plc announced that it would exit the Pakistani market by selling its entire 77.42% stake in Shell Pakistan.[103] International opinionChinese officials blamed the West for Pakistan’s economic crisis,[104] and state media continues to talk about the strengths of the China-Pakistan Economic Corridor.[105] “Only China has given a full plan. From this perspective, it is the Western world that ‘abandoned’ Pakistan, and China is the one that extended a helping hand. And if Pakistan wants complete self-help, it cannot completely rely on China, it still has to fight for itself,” wrote Liu Qingbin, senior researcher at the China Digital Economy Institute.[106] The US has expressed serious concerns about Pakistan’s debt to China. “We have been very clear about our concerns not just here in Pakistan, but elsewhere all around the world about Chinese debt, or debt owed to China,” said US State Department Counselor Derek Chollet during his visit to Islamabad on 15 February 2023.[106] Since the Gulf Arab states that have traditionally supported Pakistan are now unwilling to continue to provide economic assistance, outside analysis indicates that Pakistan can only seek further loan support from China.[107] Even though Islamabad may rely heavily on its bilateral partnerships with Gulf countries to secure a routine rollover of bilateral debt (and is likely to see some success on this front), its vulnerable external position will sustain concerns about a potential default and make it challenging to secure multilateral financing.[61] See also
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