- By Caroline Davis
- ` News, Islamabad
1 hour ago
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People are lining up in Islamabad to buy groceries at government-controlled prices – there are fears goods will cost more
Pakistan is in final talks with the International Monetary Fund (IMF) to secure help to stem a deepening economic crisis that has all but drained its foreign exchange reserves.
It has enough dollars to cover less than a month’s worth of imports at normal levels and is struggling to service its sky-high external debt.
An IMF team is due to leave the country on Thursday after 10 days of talks with the government aimed at freeing up vital international funds.
Annual inflation rose to over 27% in January, the highest level in Pakistan since 1975, and there are growing fears for the economy in a crucial election year.
This week the rupee fell to an all-time low of 275 per dollar, down from 175 a year ago, making things more expensive for Pakistan to buy and pay for.
The lack of foreign exchange is one of Pakistan’s most pressing problems.
Factories like Jubilee Textiles in Faisalabad, Pakistan’s industrial heartland, have recently been shut down – not because of the frequent power outages that have plagued Pakistan for years, but because they could not find dollars to pay for the goods they needed.
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Many factories like this have been shut down across Pakistan for the past few weeks
“If we can’t import, how can we produce? We’ve already made a loss,” his manager Fahim told the `, adding that all of his 300 workers had been sent home.
Jubilee’s presses have just restarted after being shut down last month. Stacks of white cotton sheets lay in iron tubs, covered with a light layer of brick dust, when the ` came to visit, and the only sound was the drip, drip of an industrial washing machine.
Fahim went through the web of frozen machines and said the factory had run out of dyes they imported from China, not because they weren’t available, but because they say their bank wouldn’t release the dollars for weeks to get them pay.
The government had kept the bank’s exchange rate artificially high behind the scenes, analysts said, contributing to the lack of dollars in the system. They dropped it late last month, which could help some businesses but also push prices higher.
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Imports are piling up in ports, including here in Karachi
Businesses and industries across Pakistan said they had to slow down or halt work while also awaiting goods they imported, which are currently piling up at ports.
At the end of January, a government minister told the ` that more than 8,000 containers with goods ranging from medicines to food were piled up in Karachi’s two ports. Some of this has gradually cleared up, according to local media reports, but much is still stuck.
A perfect storm of troubles
Pakistan, like many other countries, is suffering from the coronavirus pandemic and the Russian invasion of Ukraine, which has caused global fuel prices to skyrocket. Pakistan relies heavily on imported fossil fuels and importing food has also become more expensive.
If the rupee falls in value, fuel costs more, with knock-on effects for goods transported or manufactured. The government recently hiked fuel prices by over 13% but says it has no plans to do more.
Add to that the cost of last year’s floods, which the UN says caused more than $16 billion in damage. Vast areas of Pakistan have been inundated, farmland destroyed and food production ability affected. Basics like wheat and onions have exploded in price.
All of this is happening in an uncertain and feverish political climate – with elections due by the end of the year.
When it comes to bailouts, Pakistan is no stranger to them. The country – which has a massive military budget and years of debt-fueled infrastructure spending – has long struggled to break free from populist slumps and stabilize its economy.
“If you look at Pakistan’s history, we have a cycle of balance of payments problems,” says Dr. Sajid Amin Javed, Deputy Executive Director of the Sustainable Development Policy Institute in Islamabad.
“We go to the IMF. We carry out very strict reforms for two or three years, then it’s an election year and unfortunately we reverse them all.”
Subsidies have long been used in Pakistan to woo voters, he says.
Is Pakistan the next Sri Lanka?
Imran Khan, who was ousted as Pakistan’s prime minister last April, came to power in 2018 and vowed to fix the economy. At the time, he had vowed not to ask the IMF for help, but inflation rose and the rupee fell.
He ended up negotiating a $6 billion bailout package with the IMF to address the balance of payments crisis.
Current negotiations are ongoing for the next tranche of USD 1.1 billion. It was originally supposed to be done in November, but talks have repeatedly stalled.
Mr Khan’s government and party, the PTI, have had their own disagreements with the IMF in the past, but with the country’s foreign exchange reserves now so low, they both agree Pakistan must come to an agreement to raise the funds to secure.
According to Pakistan, the negotiations were difficult; Last week Prime Minister Shehbaz Sharif said the organization had given Pakistan’s Finance Minister a hard time.
In an interview last month, Mr Khan warned that Pakistan could follow in the footsteps of Sri Lanka, which last year ran out of money to buy food, fuel and other essential necessities, causing a popular uprising that ousted the president.
The comparison does not apply to Dr. Javed.
“The size of the economy is absolutely different, number one,” he says. “Pakistan has always had good support from friendly countries like China, UAE and Saudi Arabia – and in turbulent times this comes in the form of extensions, refinancing, friendly deposits and delayed oil repayments.”
However, he has his concerns.
“The commonality we have is political instability and our ability to navigate, which will be crucial to get out of this crisis.”
The current government and Mr Khan’s party, the PTI, have no lost love between them. Mr Khan, who still has considerable support, has held rallies and marches, claiming his constitutional impeachment was unfair.
Pakistan’s new government says it will not meet his calls for early elections, arguing it is putting the economy first.
“We cannot put the whole country in limbo for one person’s personal interest,” Planning Minister Ahsan Iqbal told the `.
“Scheduling an election at this point means there will be four to five months of uncertainty.”
Both sides agree that economic stability is difficult when there is no political certainty, and with elections on the horizon, that is unlikely.
The IMF holds the key – for now
So could the situation for Pakistan improve? Put simply, the country needs more dollars, and soon, not least to keep the lights going.
As the weather gets warmer and people use more electricity to run fans and air conditioners, demand for energy will increase, putting more strain on the system – and putting more pressure on Pakistan’s nearly depleted foreign exchange reserves.
The question is how long would a bailout buy the country this time?
“If the resumption of the IMF program is successful, it will also unlock billions of dollars promised by Saudi Arabia and the United Arab Emirates. Then the risk of a major balance of payments problem is pushed onto the street,” says Khurram Hussain, a business journalist in Pakistan.
But he adds: “Long term, the program will have little to no impact. Pakistan faces a crushing debt burden. Without a comprehensive debt restructuring, the country will always end up at this point, on the brink of a balance of payments crisis.”
Trying to reach an agreement could mean painful political promises, possibly including the scrapping of energy subsidies.
Mr Hussain says a deal with the IMF will help the economy and government, but at the expense of ordinary people. However, he sees the greatest risk in the government reaching an agreement with the IMF, starting to implement the plans and then changing its mind.
“If the government gets cold feet and asks to stop the adjustment process and renegotiate, Pakistan will be firmly back in a balance of payments crisis.”
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