Inflation, loans, forex balance: The many crises for Pakistan's economy

Without a bailout package from IMF and support from others, India's neighbour will be pushed deeper into the abyss

Monday’s horrible blast in a Peshawar mosque that killed more than 80 people is the latest dismal news emerging from Pakistan. As the economy turns precarious, political tempers are flaring up in the country.
 

Imran Khan’s removal as Pakistan’s Prime Minister had a lot to do with soaring inflation rates. Consumer price index inflation has surged to more than 20 percent year on year. An S&P report noted inflation “will remain elevated for the rest of this fiscal year” (FY23). Pakistan, like India, follows an April to March accounting year. India has next to no trade or business ties with its Western neighbour. Leaving out India, every country in the subcontinent is now under an International Monetary Fund (IMF) bailout programme and they are unlikely to come out of it soon.

The S&P report was itself another bad news for Pakistan. In December, the ratings agency downgraded Pakistan to CCC+, deep inside the speculative grade. The definition, “currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments” is a succinct commentary on what is happening inside the country.

The State Bank of Pakistan has raised the benchmark interest rate for the economy to 17 percent, a 200 basis point rise within two months. The Pakistani rupee has been allowed to depreciate, abandoning a long-held conviction to manage the exchange rate. In two days the currency fell by 13.7 per cent. By itself this is not bad, as it brings the currency close to its actual exchange rate and could encourage expatriate Pakistani citizens to send in more remittances. These flows are a critical part of the economy’s forex balance. They were $7.6 billion in 2022, but dropped sharply by 19 percent in December as the gap between the rates offered by informal money changers and the official rates widened massively.

The devaluation is a part of the conditions for the resumption of talks for a stalled IMF loan. Without it, Pakistan seems certain to miss servicing its foreign loans, an action that can push the economy into an abyss. At Karachi port there are thousands of containers with badly needed food, medicines and industrial raw materials waiting unloading as the payments have not gone through. Ship agents in Pakistan have told the government that all exports could halt as foreign shipping lines are considering stopping services for the country after banks stopped remitting freight charges to them due to a lack of dollar availability.

A nationwide electricity blackout last week was partially caused by lack of fuel, mainly oil, at a power plant. Even as the electricity crisis is barely over, the petroleum ministry has sought support from the central bank that the stocks of petroleum products may dry up as banks are refusing to open and confirm Letters of Credit for imports.

This is Pakistan’s most immediate problem. Of its total debt, about 40 percent is denominated in foreign currency, which means a huge repayment cost. A good part of this is from the loans contracted to build the Belt and Roads Initiative sponsored by Chinese loans. The State Bank of Pakistan estimates the payout will be $8 billion in FY24. Without a quick conclusion of the IMF package and the contingent support from other countries, Pakistan has no other option.

For India, it will be a new terrain. There is no semblance of connectivity between the two countries. India has grid connectivity with Bangladesh, Nepal and Bhutan and is considering extending the same to Sri Lanka. Those overtures are out of the question with Pakistan.

Even if trade resumes either via land or sea, Pakistan has to find hard currency to pay for the imports, a seemingly impossible challenge. The only option will be to instead deal in Indian rupee. It will be an immensely high political cost to pay to secure supplies from India for any ruling dispensation at Islamabad.