Economic Crisis in Pakistan

Pakistan faces a multidimensional crisis. Its economy is on the brink of collapse due to a possible political crisis, a sharp fall in the rupee exchange rate and inflation at the highest levels in decades, devastating floods and severe energy shortages. 

Public Q/A

How bad is the economic crisis in Pakistan, especially after the floods?

Pakistan is facing a serious economic crisis and clearly needs external support. Foreign exchange reserves are at dangerously low levels, enough to pay for just a few weeks' worth of imports. Inflation is at its highest level in decades, growth is slowing and the central bank has hiked interest rates sharply to deal with the weak currency. Food and fuel prices are causing real suffering to ordinary people, and the country's economic woes are compounded by the devastation caused by the floods.

The economy was already in trouble before the floods. What are the other causes?

The economic crisis in Pakistan has many causes. Poor governance and political instability were key factors eroding investor confidence in the country, and contributed to corruption and pig barrel politics eroding the country's fiscal position. Pakistan is also heavily dependent on imports, particularly for energy, making it highly vulnerable to rising world oil and gas prices. 

The pandemic hasn't helped, and Pakistan's strained ties with India continue to deprive it of a trade and investment partner that can make a difference.

The international community has pledged $9 billion to help them. Saudi Arabia and China are major donors. Do you think these governments will expect Pakistan's support in return?

Donors such as China and Saudi Arabia may not include many explicit terms for aid, but implicit terms are always included. China will look to Pakistan for favorable development opportunities, such as an energy corridor from the Arabian Sea to China's western provinces and the strategic port of Gwadar. China will also seek Pakistan's support on geopolitical issues, from the Taiwan Strait to Afghanistan and Ukraine.

Saudi Arabia sees Pakistan not only as a major oil buyer and source of migrant workers, but also as a key ally of Sunni-majority Iran. Riyadh will turn to Islamabad to support Saudi Gulf initiatives and the Saudi leadership due to their role as guardians of the holy sites of Mecca and Medina.

Will $9 billion be enough to help them rebuild and get out of the crisis?

Pakistan needs an injection of more than $9 billion to emerge from the crisis. However, much is said to come from private sources. The value of IMF money is to create a temporary pause and restore confidence in a way that encourages the recovery of private capital flows.

Will Pakistan be able to protect itself from the inevitable future climate catastrophes?

Pakistan is highly vulnerable to climate-related natural disasters and cannot build a climate change fortress on its own. Greater internal preparedness and resilience are clearly needed, but ultimately Pakistan's fate will largely depend on global progress in tackling the causes of climate change.

Will all of the money pledged to Pakistan be used for post-flood reconstruction, or do they expect some of it to help their federal reserves, which were at dangerous levels before the floods?

First, IMF funds will help Pakistan avoid breaching its international obligations, which could have devastating consequences for its economy and people. The rebuilding of foreign exchange reserves is of crucial importance. Relief programs will also contribute to flood relief, but this will become much more manageable when Pakistan's reserves reach levels that inspire confidence in its ability to repay its debt.