Pakistan’s biggest concern the foreseeable future is the state of its economy, which continues to fuel instability in the country, and requires multiple injections of “external support” to remain viable.
In 2022, the country’s foreign exchange reserves hit dangerously low levels, inflation skyrocketed and growth stalled, as the central bank spiked interest rates in a bid to reverse the trend. Two years later, macroeconomic indicators are on the mend, but risks persist due to weak governance and frequent political instability, hampering investor confidence and contributing to corruption and bad politics.
A key reason for Pakistan’s economic crisis is its reliance on imported food, which facilitates record trade deficits, high consumer prices, and dwindling foreign currency reserves. To make up for its shortfalls, the government relies on friendly states such as Saudi Arabia or China to rollover loans, passing the buck to the future to pay for the present. This process has led to Pakistan having an absolute external debt of $131.2 billion, with $27.5 billion due this year. The bulk of this is owed to China, which routinely defers repayments. Unfortunately, the remainder still leaves Islamabad unable to cover both its expenditures and repayments, largely due to tax collection issues, as well as a raft of exemptions, including on the agricultural and real estate sectors.
Among the conditions imposed by the International Monetary Fund (IMF) ahead of inking a staff-level agreement with Pakistan for a $7 billion Extended Fund Facility was increasing the country’s tax-to-GDP ratio. While the government has taken some measures to achieve this, the bulk of the impact continues to be felt by the salaried class, while pressure groups within other sectors enjoy various concessions. Another key factor responsible for this crisis is Pakistan’s weak currency against the U.S. dollar, which inevitably boosts inflation due to the country’s reliance on imports. This has the unfortunate, but predictable, effect of putting further burden on foreign exchange reserves.
The incumbent government claims it is ready for “tough” decisions to achieve economic stability. Yet, as it continues to attempt various measures to appease various pressure groups, it remains unlikely that it would achieve its goals.