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Why is Pakistan’s economy collapsing? Explained in the graphics – Mintpaisa

People jostle to buy bags of subsidized wheat flour at a retail outlet in Quetta, Pakistan.  People are suffering from the recent rise in wheat flour prices in Pakistan.

People jostle to buy bags of subsidized wheat flour at a retail outlet in Quetta, Pakistan. People are suffering from the recent rise in wheat flour prices in Pakistan. | Photo credit: AP/Arshad Butt

Pakistan’s economy is on the verge of collapse. The country has asked the International Monetary Fund for a bailout in the event of an imminent default. Pakistan is in its 13th bailout from the IMF since the late 1980s. It is grappling with widespread power cuts, soaring inflation, currency depreciation and plummeting foreign exchange reserves. Its economic difficulties have worsened following the devastating floods of last year. In January 2023, retail inflation soared to 27.6%, its highest level in 48 years. Urban food inflation was 39% while rural food inflation soared to 45.2%. Urban and rural food inflation has remained in double digits for more than 10 months now. Chart 1 shows general retail inflation and food inflation in urban and rural areas (in %).

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Growing inflationary pressure has pushed up the prices of staples like wheat, onions, milk and eggs. The average cost of a 20 kg bag of wheat flour in January 2022 was 1,164.8 Pakistani rupees (PKR). This jumped to 1,736.5 PKR in January 2023, an increase of 50%. Similarly, the price of one kg of onions has increased fivefold from PKR 39.4 to PKR 231 within a year. Chart 2 shows January commodity prices (in PKR) for the past five years.

Meanwhile, reports suggest thousands of containers with essential food items, raw materials and medical equipment are stuck at ports due to a lack of dollars. Foreign exchange reserves at the State Bank of Pakistan fell to $3.08 billion in the week ending January 27, 2023. Foreign exchange reserves in Pakistan fell to their lowest level in nine years and are just sufficient to cover three weeks of importation. Chart 3 shows the weekly foreign exchange reserves (in billions of dollars) held by the central bank of Pakistan.

Currency depreciation and dwindling foreign exchange reserves will inevitably make imports expensive, which is a concern for Pakistan as it is highly dependent on imports. While the country’s imports have seen a significant increase, exports have remained largely stagnant, widening the trade deficit in recent years. According to an Asian Development Bank working paper, Pakistan was not producing essential machinery for manufacturing and infrastructure development, making them dependent on imports. Pakistan’s exports mainly include textiles and agriculture-related products and lack technological sophistication. However, in recent months, imports have also declined due to a shortage of dollars. Chart 4 shows the annual value of exports and imports of goods in millions of dollars.

Pakistan’s spending is also rising while revenue has not kept pace. Interest payments represent a considerable share of expenditure, leaving little room for development-related expenditure. At the same time, Pakistan has also been unable to mobilize tax revenue due to a narrow tax base and tax concessions. In FY22, total revenue as a percentage of GDP fell to 12%, while total expenditure as a percentage of GDP approached 20%. Chart 5 shows the share of total revenue and total expenditure in GDP.

Due to high levels of borrowing, total debt and liabilities reached PKR 59,697.7 billion (89% of GDP) in FY22. Total debt has steadily increased over the years and has peaked at 93.8% in FY2020. Of the total outstanding bilateral debt owed by Pakistan as of March 2022, China accounts for approximately 35%. Moreover, a sectoral share of foreign private debt shows that up to 92% was used for the electricity sector. Chart 6 shows Pakistan’s debt and total debts by financial year in billions of PKR (left axis). It also plots the share of total debt as a % of GDP (right axis).

Source: State Bank of Pakistan, Economic Affairs Division of Pakistan, Pakistan Bureau of Statistics and Asian Development Bank

Read also: Data | After 2019, Pakistan reduced its dependence on India by importing from China and Brazil


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