Our Pakistani neighbours are staring into an economic abyss with the rupee in free-fall, inflation soaring and energy running short. That’s why so much hangs on an IMF team’s visit this week to Islamabad to discuss unlocking a vital loan programme. But that effort is already in trouble.
The IMF now says it wants not just the government but all political parties on board for a deal. Given the bad blood between Prime Minister Shebhaz Sharif and his predecessor, Imran Khan, who’s angling to return to power in looming national elections, that may be a tall order. Khan has conceded Pakistan needs the bailout. But the IMF may still be sceptical given that the ex-cricketer torpedoed the last IMF package by backing out of his word to slash subsidies.
In Pakistan, for the moment, the IMF talks have been pushed out of the news by the suicide-bombing deaths of over 101 people, mainly policemen, in a mosque inside a police headquarters in violence-torn Peshawar. But as the shock of that attack recedes, Pakistan’s focus will again return to the economy.
Economists say Pakistan’s never been this close to default. Just a few days ago, the Pakistan rupee was at 231 to the US dollar. Now it’s at 269. With foreign exchange reserves of just $3.68 billion, Pakistan has barely enough to cover a few weeks of imports. Nasir Iqbal, of Pakistan’s Institute of Development Economics, says the economy has already “virtually collapsed” amid political upheaval.
One IMF demand is for the rupee to float and find its own level, which would drive up import costs — and Pakistan imports almost everything it consumes. So, a falling rupee means people feel pain for almost everything they buy and inflation is already running at nearly 28 per cent, a 48-year high.
Also, the government has decided one way to stop the dollar outflow is not to release foreign exchange. That means companies like Pakistan Suzuki had to halt production in late December as they couldn’t import parts. Motorbike production has just restarted and demand has risen, partly from people who feel they can only afford two-wheelers. Pakistan’s central bank did, however, release foreign exchange to import 2,200 luxury cars in the last six months, stoking huge public anger.
Shabbar Zaidi, ex-chairman of Pakistan’s Federal Board of Revenue, remarked direly that Pakistan’s insatiable “desire for status quo” had made “the nervous system of the Pakistani economy… dysfunctional”. In other words, the elite still want their luxury cars and are unwilling to tighten their belts. The government has moved on another IMF demand, and this week hiked petrol and diesel prices by Pak ₹35. Kerosene prices climbed by Pak ₹18. Electricity prices, too, were increased in parts of the country — and that’s coming just a few days after a second power outage in two months plunged the nation into darkness.
Pakistan has just inaugurated a $2.7-billion nuclear reactor financed by China that should relieve some pressure on the country’s stretched electricity grid. Adding to Pakistan’s woes, let’s not forget it’s still struggling to recover from last year’s worst-ever devastating floods.
Textile sector badly hit
Also badly hit is the textile industry and at least 150 plants have closed because they can’t import dye. Textiles are one of the biggest employers, so around a million workers could be either fully or partly laid off as a result. Inevitably, industrial production has fallen steeply in recent weeks, possibly by up to 25 per cent.
One estimate is that around 6,000 containers are stuck in Karachi Port because importers can’t get the foreign exchange to pay for their release. That bottleneck is stoking inflation. Even exporters can’t get the letters of credit required before consignments are accepted.
If somehow a deal with the IMF is clinched, the loan is expected to total $6.5 billion with slightly over $1 billion coming almost immediately. The UAE and Saudi Arabia will also send financial assistance once the package is tied up. (China, which has its own problems, is hanging back.)
But even this sum will be barely enough to see Pakistan through the next few months and is a stopgap solution at best to its larger problems. By June, Pakistan will have uncovered repayments of $8 billion. So, most of the loans will go to paying off creditors. For years, Pakistan’s politicians have operated on the premise the nuclear-armed country is so geopolitically vital, a rescue will materialise. But with the world in crisis over Ukraine and the global economy slowing, a last-minute miracle may not be in the cards.