Is Pakistan The Next Sri Lanka?

Table of Contents

What’s happening?

Two of India’s neighbouring countries – Sri Lanka and Pakistan have been reeling under unprecedented economic crises for the past few months.
Where Sri Lanka’s troubles have increased in view of diminishing forex reserves, huge piles of debt, devaluation of the currency, and rising inflation,
It seems Pakistan is also headed towards similar troubles as it looks for a way out amid political instability and burgeoning economic crisis.
As strange as it may sound, Pakistan is relying on donkeys and asking people to drink less tea to sail through the crisis.
Besides, petrol and diesel prices have skyrocketed in the country; people are paying as much as PKR (Pakistani rupee) 230 and PKR 260, respectively for a litre of fuel.
Moreover, Pakistan is also reeling under a severe electricity crisis with both urban and rural areas across the country facingextended power outages.
This has led to protests against load-shedding with citizens demanding the Pakistan government take immediate steps to ensure a smooth supply of electricity.

The current situation in Pakistan is mainly due to a large number of policy decisions and the political unrest in the country.
Several factors such as external debt, foreign exchange reserves, inflation, etc., are responsible for the deepening economic crisis in Pakistan.
By June 2021, Pakistan’s external debt touched $86.4 billion. The country’s total external debt and liabilities increased to $128 billion by March 2022.
The excessive external borrowing added to Pakistan’s troubles.
The China–Pakistan Economic Corridor (CPEC) created a Chinese debt of $64 billion for Pakistan which was originally valued at $47 billion in 2014.
The decline of the Pakistani Rupee against the US Dollar has further contributed to the ballooning external debt.
The low ranking by international rating agencies and grey listing of Pakistan in the Financial Action Task Force (FATF) has kept foreign investors away from the country.
Pakistan fell into the ‘debt trap’ after seeking fresh loans and repaying the old ones.
This, coupled with not managing to secure a bailout package from the International Monetary Fund (IMF) has led the country to look for other options.
Inflation in Pakistan touched its highest level in November 2021.
This is primarily because of the global rise in crude oil prices leading to costlier freight charges.

Tea is quite a popular beverage in Pakistan. The country consumed tea worth $400 million in FY 2021-2022.
It imported $60 million worth of more tea than the last fiscal
The imports of tea worth millions are putting pressure on the already-cash-strapped economy of Pakistan.
So, in a way, less tea makes more sense for the people and the country.
“I appeal to the nation to cut down the consumption of tea by one-two cups because we import tea on loan.” Federal Minister for Planning Ahsan Iqbal recently said.
He added that Pakistan, one of the biggest importers of tea in the world, has to borrow money to import it.

It seems donkeys can be of some help to Pakistan in this crisis.
According to the country’s economic survey, Pakistan now has the third-largest donkey population in the world.
Meanwhile, its neighbour China uses donkey hides as a key ingredient in ‘ejiao’, a traditional medicine. But the population of the animal is declining there.
According to a 2019 report in The Guardian, the population of donkeys declined by 76% in the People’s Republic of China since 1992, so it is dependent on imports from other countries.
Sensing an opportunity here, Pakistan has decided to export donkeys to help China meet its demand.
Pakistan is also planning to ramp up its export business of donkeys with the Punjab government setting up a farm in Okara district for donkey breeding.
The Khyber-Pakhtunkhwa government had reportedly announced a $1 billion-worth project aimed at increasing the donkey population in the province.

Pakistani Rupee (PKR) is on a ‘free fall’ as it crossed 212 per US Dollar on June 21.
Whereas, Pakistan’s foreign exchange reserves have depleted to a critical level and the country has less than six weeks of import cover remaining.
The country has been struggling with a mounting trade deficit driven by its ever-increasing import bills and falling exports.

Currently, Pakistan is seeking a $2 billion bailout from the IMF but has not received any confirmation due to the latter’s “tough prior conditions”.
Pakistan has no choice but to accept the tough IMF conditions in order to restore the financial agency’s programme to avert an economic default.
The country needs to implement economic reforms in order to restore its credibility in the markets, along with the continuation of CPEC financing.
Reforms to reduce high trade and current account deficits would require major cutbacks in expenditures and imports.
Economists are of the view that curbing unviable development projects, reducing import bills, and relying more on its domestic firms would possibly help Pakistan avoid the deepening crisis further.
However, some are of the view that the resumption of the IMF programme and emergency loans from friendly countries will not provide long-term relief to Pakistan.

The situation in Pakistan is similar to what we saw in Sri Lanka recently.
The country’s crisis could worsen with the shortage of foreign exchange reserves, food, fuel and medicines.
Given the economy’s dependence on imports – for both food and fuel, the rising global prices have resulted in a humungous increase in the imports bill of the country.
Pakistan’s currency has nosedived just like the Sri Lankan rupee declined in March 2022.
Sri Lanka’s government caused gross failures of the economic policies as the policymakers failed to develop a sustainable strategy for developing industrial infrastructure.
The corruption and lack of political will resulted in a huge crisis.
Pakistan does not have any option but to agree to the IMF conditions and remove all consumer subsidies from the energy and power sectors in order to tide over its economic crisis.
It has already increased the fuel prices and is moving towards removing the remaining subsidies as well.
The country can also develop its industrial base to pursue a sustainable export economy in order to avoid the balance of payments and the foreign reserves crisis’ reoccurrence.