Prominent businessmen and around 50 representatives from the Pak business and industrial community at a recent emergency meeting have demanded Prime Minister Shehbaz Sharif to declare an economic emergency and take urgent steps to avoid a Sri Lanka-like situation. Pakistan Businesses Forum Senior Vice President Muhammad Riaz Khattak stated that “Pakistan is going through a severe economic crisis and unfortunately mainstream political parties have not come up with any effective measures to save the economy.”
While international investors operating in Pakistan welcomed the government’s ‘bold policy measures’ to finalise the IMF programme, they are increasingly getting apprehensive about deteriorating prospects of the Pak economy. They have also expressed doubt about the efficacy of Pak policy framework and responses to tackle the deepening economic crisis, especially the Central Bank’s monetary tightening amid steep depreciation in PKR.
Though Islamabad is scrambling to get loans from friendly countries and the IMF, global investors are fast losing confidence in Pakistan as the country is struggling with soaring commodity prices and tighter credit conditions. It is apprehended that Pak economy may follow the Sri Lankan footprints and drift towards foreign debt default. With its foreign exchange reserves dwindling to USD 7.83 billion on August 5, enough for just for 1.12 months according to State Bank of Pakistan (SBP), liquidity crisis in Pakistan is expected.
Islamabad is facing unprecedented upward pressure in the price level. It is fast losing policy options, yet it opted for a dear money policy to tame inflation. It increased the benchmark interest rate to 15% in order to save the economy from further troubles that might make all businesses unviable, particularly affecting exports. The surge in global energy and food prices since Russia-Ukraine conflict had fed to inflation, widened Pak trade deficit further squeezing the forex reserves. Added to this is the recent petrol price hike of PRs. 6.72 per litre, which would further push up the inflation which was around 25% in the month of July.
In the recent weeks, major credit rating agencies namely, Fitch, Moody’s and S&P, all have downgraded Pakistan’s outlook to negative or ‘junk’ category. This has eroded investor’s confidence. The smaller discount on the country’s bonds is another indicator of the deteriorating health of the economy. Meanwhile, Pak currency, PKRs, has tumbled more than 15% over the previous three months.
Pakistan has virtually gone bankrupt. The Finance Minister Miftah Ismail informed that Pakistan’s imports last year stood at USD 80 billion against its exports of USD 31 billion. Islamabad’s finances are in shambles – both on external and internal fronts as the country is facing increasing fiscal and current account deficits. Pak has no option, but to seek loans. In this regard the Finance Minister disclosed that he felt “ashamed” when he had to meet the ministers of other countries and “ask them for loans”. He acknowledged that the country could hardly sell any product to the outside world and was heavily dependent on imports.
While Pakistan has drawn on bilateral assistance from friendly countries in previous crises, analysts stated it would falter in its push to regain its monetary footing because of political instability, which attracted the attention of overseas investors. In spite of the IMF loan, Pak needs to make arrangements for USD 4 billion from other sources to meet external debt obligation of over USD 15 billion in the FY 2022-23. According to the SBP, the year-on-year growth in debt and liabilities was 24.8%. The interest accounted for about 25% of the principal. Pak debt has been among the worst performing this year so far, signalling investor’s concern over the pressures on the economy.
Another concern for investors is deteriorating security scenario in Pakistan. The Overseas Investors Chamber of Commerce and Industry (OICCI), an industry body of Pakistan, informed interior minister Sanaullah Khan that 70% of the CEOs whose firms operate in Pakistan hold security among their top concerns. Multinationals operating in Pakistan are worried and they think the deteriorating security situation in the country will further deteriorate and worsen the business climate.
OICCI’s Security Survey 2022 reveals that the confidence businesses hold in Pakistan’s law enforcement agencies has been undermined with the rising crime rate. Zubair Chhaya, CEO of Kite Ltd noted that unemployment and poverty had increased thefts and other crimes, which have made the process of conducting business difficult. The easy availability of drugs and weapons also remains one of the major reasons for the rise in street crime in Karachi.
Businesses in Pakistan are also dealing with a rising number of land grabbing incidents. Muhammad Idrees, President of Karachi Chamber of Commerce and Industry held that “whether public or private property, precious land is fearlessly being taken over by some highly organised and powerful groups of land grabbers.”
In fact Pak economic crisis is deep rooted and it is manifested in a variety of ways. Pakistan’s start-up industry is collapsing. Its once burgeoning start-up world was shaken-up recently with Airlift, an e-commerce fast delivery service, announcing closure citing the ‘devastating impact’ of the global economic recession and market downturn. Pak industries are also facing severe power shortage and rising commodity prices, eroding their economic viability.
The two silver linings in the Pak economy, viz., textile exports and remittances are also facing heat due to rising electricity tariffs and lack of transparency in policy along with unfriendly socio-economic environment. Remittances slowed down by 8.59% to USD 2.52 billion in July compared to the previous month. A major drop in remittances has been seen from Saudi Arabia and the UAE which are in trouble since the Russia-Ukraine conflict.
Pakistan is struggling to come out of the current account deficit, for which the government has drastically reduced imports. However, the massive import cuts slashed the economy and would result in large job cuts in the industrial sector. Thus, Islamabad has entered the trap of vicious circle of low level of exports, high current account deficit, lack of investments, low productivity and finally leading to forex crisis.
The IMF recently forecasted increasingly gloomy and uncertain outlook for the global economy as the world is reeling under the adverse effects of the pandemic and the ongoing Russia-Ukraine conflict. It predicted higher-than-expected inflation, especially in the US and European economies, triggering tightening of global financial conditions. Tightening global money supply along with the waning investor’s confidence might force Pakistan to go the Sri Lankan way unless the Pak policy makers take appropriate measures. Time is running out while political uncertainty is intensifying.