Muhammad Radaqat, a 27-year-old greengrocer, is worried. He doesn’t know how much an onion will cost next week, let alone how he’ll be able to afford the fuel he needs to heat his home and keep his family warm. “All we’re being told by the government is that things are going to get worse,” Radaqat said. His anxiety reflects the mood of a nation racing to ward off an economic meltdown. Faced with a shortage of US dollars, Pakistan only has enough foreign currency in its reserves to pay for three weeks of imports. Pakistan’s currency, the rupee, recently dropped to new lows against the US dollar after authorities eased currency controls to meet one of the IMF’s lending conditions.
Crisis in Making
Pakistan is experiencing what economists call a balance-of-payments crisis. The country has been spending more on trade than it has brought in, running down its stock of foreign currency and weighing on the rupee’s value. These dynamics make interest payments on debt from foreign lenders even more expensive and push the cost of importing goods higher still, requiring even bigger drawdowns in reserves that compound the distress. The country is also grappling with rampant price increases. The country’s central bank has hiked its key interest rate to 17% in a bid to clamp down on annual consumer inflation of almost 28%.
Historic floods last summer have also led to huge bills for reconstruction and aid, adding to strains on the government budget. The World Bank has estimated that at least $16 billion is needed to cope with damage and losses. Yet global factors are making the situation worse. The economic slowdown has weighed on demand for Pakistan’s exports, while a sharp rally in the value of the US dollar last year piled pressure on countries that import significant volumes of food and fuel. The IMF has warned repeatedly that this could stress vulnerable economies. While it forecasts that emerging markets and developing economies will see a modest uptick in growth this year as the dollar comes off its highs, global inflation falls and China’s reopening spurs demand, the ability to manage debt loads remains a concern.
For Pakistan to avoid default, talks with the IMF to restart its stalled assistance program must succeed, according to investors and economists. The IMF’s delegation arrived on Tuesday and is set to stay through Feb. 9. “Availability of the IMF loan is critical,” said Ammar Habib Khan, a senior non-resident fellow at the Atlantic Council. But Farooq Tirmizi, the CEO of Elphinstone, a startup geared at Pakistani investors, said that even if the IMF program resumes, it won’t fix all the problems, since the main issues plaguing Pakistan are “not economic, but political, with a government in place that is not willing to make structural changes.”
The situation has remained turbulent since then. Pakistan has gone through three finance ministers in less than a year. The last two were part of the current government, raising questions about whether Sharif can hold onto power. The country is expected to hold a general election this summer. The tumult comes as Pakistan faces a fresh wave of attacks by militants. Earlier this week, a suicide bomb ripped through a mosque in the city of Peshawar, killing at least 100 people. It was one of the deadliest attacks in the country in years.
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