Economic and political crisis of Pakistan

Pakistan’s Economic and Political Crisis: A Scholarly Analysis

Pakistan is presently navigating an escalating economic and political crisis marked by complex factors that challenge its stability and development. From a sharp currency depreciation to a spiraling debt burden, the nation's financial outlook is precarious. The inability to avert a default, despite asset sales and stringent austerity measures, suggests that deeper structural issues were seeded long before the current crisis.

Currency Depreciation and the Rise in Debt

In early 2022, Pakistan’s currency was valued at PKR 182 against the dollar; today, it has depreciated to PKR 280, reflecting a 98 rupee drop in less than two years. During the Pakistan Tehreek-e-Insaf (PTI) tenure, the currency devalued by 55 rupees over 3.5 years. In contrast, under the Pakistan Democratic Movement (PDM), the currency has lost 68 rupees within only a few months. Such rapid depreciation is indicative not just of local economic instability but of Pakistan’s vulnerability to external economic shifts. Given the global economic context, especially in the United States, where interest rates have risen significantly, the dollar’s value has surged, further impacting developing nations like Pakistan, whose debt-servicing obligations are dollar-denominated.

Global Instability and Economic Vulnerability

The COVID-19 pandemic coupled with the ongoing Russia-Ukraine war has destabilized global markets, exacerbating the energy and commodity prices crises. For import-dependent countries like Pakistan, these surges have caused significant strain, particularly as oil prices skyrocketed from $40 to over $120 per barrel. Nations with high current account deficits and large foreign debt burdens are especially vulnerable to such external shocks.

Debt Overhang and Unsustainable Projects

The situation in Pakistan mirrors aspects of Sri Lanka’s crisis, where non-productive debt-funded infrastructure projects, such as Chinese-financed port developments, ultimately led to debt default and asset forfeiture. Pakistan, too, has taken on significant high-interest commercial loans without sufficient revenue-generating outcomes, leaving the government struggling to service its debt. With Pakistan’s debt-to-GDP ratio at 88%, and repayments scheduled to reach $41 billion this year alone, Pakistan’s debt has ballooned, surpassing $52 trillion PKR in 2022 from approximately 6 trillion in 2008.

Political Instability and Economic Mismanagement

The political landscape, characterized by infighting among major parties and fluctuating policy priorities, has contributed to an inconsistent approach toward economic management. The political pursuit of short-term gains over sustainable policies has further undermined economic stability. Instability, both political and economic, deters investment and hinders economic growth, perpetuating a cycle of crisis.

IMF Reliance and Long-term Implications

Pakistan’s engagement with the International Monetary Fund (IMF) remains ongoing, though recent rounds of funding have been accompanied by increasingly stringent conditions, amplifying economic austerity. Without IMF support, economists warn that the currency could depreciate further to PKR 300 against the dollar. This potential outcome would not only escalate Pakistan’s debt service obligations but also intensify inflationary pressures on essential goods, affecting millions.

Pakistan’s economic challenges are inextricably linked to its political instability and inconsistent economic policies. To avoid scenarios like Sri Lanka’s, where international creditors seized national assets, Pakistan must adopt a long-term, stable economic policy framework, encourage investment, and foster political unity. Sustainable policies could help shield the nation from recurring cycles of economic and political turmoil.

Through these lenses, it becomes clear that the road to stability requires a balanced approach, avoiding reactionary measures and investing in growth sectors with enduring impact.