Sight Magazine – Essay: Pakistan
- JUVARIA JAFRI
Pakistan’s current economic struggles illustrate small fires everywhere set the entire world economy on fire with a war during a pandemic. Like others in countries dependent on imported products – for example Ghana and Sri Lanka – Pakistanis see food and fuel prices skyrocketing. Foreign exchange reserves – used to pay for imports such as food and fuel – have shrunk.
Pakistan is depleting its foreign exchange reserves faster than expected as the prices of foreign goods rise. If the situation does not change, the country risks bankruptcy.
A shopkeeper uses a calculator to sell spices and groceries at a store in Karachi, Pakistan, June 11, 2021. PHOTO: Reuters/Akhtar Soomro
In April a liter of petrol cost around 150 rupees (£0.60), but by July 1 the price had climbed to nearly 250 rupees. And the price of increased cooking oil 40% between May and June alone. Currently, the country only has enough foreign currency to pay for five weeks of imports. Pakistan is heavily dependent on imports of fuel and cooking oil, but also machinery and cereals from overseas.
All of this made daily activities more difficult. Power outages are not uncommon in the country, even when the economy is strong – they become frequent and long when the economy is under strain. This happens because energy companies struggle to operate when the costs of generating electricity are higher than the revenues they collect. In recent weeks, residents of large cities have had to go without electricity at home for up to 10 hours a day – in rural areas even more so. Public unease is aggravated by an intense heat wave in many parts of South Asia which caused temperatures in some places to reach 51 degrees Celsius.
“In April, a liter of petrol cost around 150 rupees (£0.60), but by July 1 the price had risen to almost 250 rupees. And the price of cooking oil rose by 40% between May and June.”
rely on imports
Foreign exchange reserves with the Central Bank of Pakistan currently stand at $10.3 billion. This is down sharply from US$16.6 billion in January 2022. Although recently bolstered by Chinese bank loanReserve levels have been volatile since late April 2022, when a political crisis led to the dismissal of Prime Minister Imran Khan.
In Pakistan, imports are much higher than exports. To preserve foreign currency, a first measure taken by the newly appointed government in May 2022 was to ban many types of imported goods luxury items considered non-essential. The list included chocolate, diapers, pet food and tampons, but was amended. Initially, it was feared that pets and livestock would be malnourished because of this prohibition, and that the chocolate would be confiscated at international airports. And that menstruating women would not have access to sanitary napkins. Due to public pressure, the the list has been modified and clarified. Chocolate is no longer seized, pet food delisted, and sanitary napkins are made domestically.
A more recent intervention, intended as a placid but largely derided nudge, is that of a minister suggestion that individuals should drink fewer cups of tea. The drink is ubiquitous in Pakistan, which is the largest world tea importer by a considerable margin. It is considered one of the simple pleasures of life in a country plagued by power outages and expensive basic foodstuffs.
Consternation at the petty politics of “austere-teacan distract from larger, more compelling issues. These are recurrent and stem from the position of Pakistan and other fragile and externally indebted economies in a global context. system of monetary hierarchies.
Poor countries cannot borrow in their own currency, but must use one of the major currencies traded on international exchanges. The US dollar is the most widely used currency, while other dominant currencies include the British pound and the euro. These “hard” currencies are those that indebted countries must regularly buy to pay for their imports and to repay and service the loans they owe to private bondholders, international financial institutions and lenders.
Before being ousted, Khan attempted to retain public support as prime minister by resisting demands for the International Monetary Fund raise taxes and cut subsidies. Thus, by not taking measures such as making fuel more expensive, the Khan government delayed the inflow of external financing. This weakened Pakistan’s reserves and made it difficult to maintain the value of the rupee. As the chasm between the dollar and the rupee widened, the government’s popularity declined.
Global sanctions against Russia and Iran are complicating Pakistan’s economic situation. Khan was frustrated that he could not use a relatively cheap Russian oil supply due to international pressure on Ukraine. Faced with the need for drastic measures, from pakistan the government can now follow in the footsteps from Sri Lanka and look to Russia for cheap fuel.
Pakistan has also refrained from importing oil from neighboring Iran. Smuggled Iranian oil remains attractive to those living near the border. Fuel and energy cooperation between Pakistan and Iran is a particularly thorny issue given the opposition of the United States and Saudi Arabia, another nation that has often helped financially Pakistan.
To avoid bankruptcy – and continue to buy food and fuel – Pakistan is now waiting for help from the International Monetary Fund (IMF). This Washington DC-based institution has repeatedly rescued economies in crisis. In return, recipient governments must commit to political reformswhich are often unpopular with the public.
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Over the next few weeks, the The IMF should intervene and commit to a bailout of around $1.85 billion. If, and when, this happens, the exchange rate between the Pakistani rupee and the US dollar will stabilize. Given that the dollar has risen more than 15% against the rupee since January 2022, policymakers will welcome a stronger Pakistani currency to calm the price spike.
But the high costs of an IMF deal have already caused a cost of living crisis, as fuel subsidies have been cut sharply and have made food and transport unaffordable for many. Tax increases also added to daily pressures.
Monetary issues and cost of living crises in Pakistan are inextricably linked. A higher dollar makes fuel more expensive, and those price increases quickly trickle down to basic necessities. Since Pakistanis spend more than 40 percent of their income on foodinflation makes large segments of the population marginalized and vulnerable.
Unless exports increase significantly in the coming years, Pakistan’s economy will remain precarious and high prices will remain a threat. Faced with this situation, financial aid is the only way to overcome the crises. Unfortunately, this tends to come with financial or political strings attached.