In Pakistan, an Economic Crisis Keeps Life on the Edge

A combination of skyrocketing inflation and a plummeting currency has the world’s fifth most populous country reeling

In Pakistan, an Economic Crisis Keeps Life on the Edge
People gather to receive free flour in Lahore, Pakistan, on March 20, 2023. (Arif Ali/AFP via Getty Images)

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Saif, 40, a staunch Muslim, thought of ending his life during the holy month of Ramadan. A daily wage laborer in the town of Dera Ismail Khan, in the Khyber Pakhtunkhwa province of Pakistan, he had lost his eldest daughter, who had a tumor in her throat, because of the hefty fees for medical care he was unable to afford. He was also unable to feed his other children — two daughters and a son.

“After losing my job as a security guard in Islamabad, I moved back to my village and started working as a laborer doing menial jobs,” he said. “But for a long time there has been no work. During this time, I lost my eldest daughter. My younger daughter has been sick too and I had to seek charity to buy her medicines.” The family paid the monthly rent of 6,000 rupees ($21) for three months by taking personal loans.

The majority of Pakistanis, like Saif, are finding it nearly impossible to make ends meet. Home to a population of more than 240 million, Pakistan — the world’s fifth most populous country – is reeling from the worst economic crisis since its formation in 1947, with backbreaking inflation, a plummeting currency and precariously low foreign reserves. Inflation rose to a record rate of 37.9% in May — the highest the country has experienced in five decades and the highest in South Asia currently, beating Sri Lanka, which until recently was going through the worst economic crisis in the region.

“We couldn’t even buy flour,” Saif said. “I was feeding my children boiled rice and did not have the money to buy basic vegetables or anything. Prices of basic items have increased tenfold. I was unable to hear the cries of my children who could not sleep because of hunger. During Ramadan, they’d say, ‘Papa, I am hungry, I want food,’ and I would just talk to them, make them drink water and somehow make the night pass.” Eventually, he decided to take his children out of school to cut costs and recently found a job as a driver in Islamabad.

The International Monetary Fund (IMF) recently forecast economic growth of a mere 0.5% in Pakistan, down from last year’s rate of 6%. The country’s coalition government led by Prime Minister Shahbaz Sharif has been in talks with the IMF to receive a key tranche of the $6.5 billion bailout package that was agreed upon when Imran Khan was in office. But the political turmoil fueled by Khan’s arrest last month on corruption charges has pushed the cash-strapped country into further crisis and is likely to cause further delays in receiving that bailout. Moreover, last year’s devastating floods destroyed at least 4 million acres of crops, which further compounded the crisis.

Pakistan’s current foreign reserves stand at $4.3 billion, barely enough to cover a month’s worth of imports. With an incessant decline in the value of its currency, which has fallen to 286 rupees per dollar (compared to 198 the same time last year), Pakistan is also finding it hard to pay off its foreign debt. From February this year until January 2026, the country will have owed about $80 billion to friendly countries like China and multilateral creditors like the World Bank, the IMF and the Asian Development Bank. The $50.5 billion budget recently unveiled by the government, which was closely watched by the IMF and had to cater to populist sentiments ahead of the general elections this year, set aside over half of expenditures to service the debt.

“The current crisis is different from any other that the country has faced because right now it isn’t just an unprecedented economic crisis — along with it there is a political crisis that keeps worsening, not allowing for consensus to come up with policies to better the economy. The country is also faced with the re-emergence of militancy,” Maryam Zia Baloch, a research analyst based in Washington, D.C., told New Lines.

As part of immediate relief measures, the government set up free flour distribution sites across the country in April. But when 16 people, including five women and three children, were killed in a stampede in Peshawar, it illustrated how desperate ordinary people are.

“The people were treated as beggars. They were made to stand in lines for hours; many ended up going home empty handed,” a bureaucrat told New Lines on condition of anonymity.

When Khan sought power in 2018 with the promise of economic prosperity, he wanted to avoid seeking loans from the IMF. However, a year later, when the economic growth rate fell from 6.6% to 3.3%, the government approached the IMF, for the 22nd time in Pakistan’s history. This has become a cycle in Pakistan. Because of the structural issues in its economy and heavy reliance on borrowing, when the minor growth spurts fade and debt levels and balance of payment crises worsen, it leads each successive government to go back to the IMF.

So, once again, the IMF decided to disburse roughly $6.5 billion, on the conditions that energy subsidies would be removed, taxes would be increased and energy tariffs hiked. But when a vote of no confidence loomed over Khan’s head, he announced massive subsidies in fuel and electricity. This led to delays in the release of the IMF funds.

After Khan’s ouster last year, Sharif’s government rolled back gasoline subsidies and then-Finance Minister Miftah Ismail secured a tranche of $1.17 billion from the IMF in August. A month later, however, Ismail resigned and Ishaq Dar replaced him, which led to further delays and setbacks. Since then, the country has been negotiating for the release of $1.1 billion to avoid defaulting and the IMF program will expire at the end of June. Sharif contacted the IMF director, Kristalina Georgieva, to help revive the program. Nathan Porter, the IMF’s mission chief to Pakistan, said that they were taking note of the recent political developments after Khan’s arrest.

Economic experts say the government has been slow in responding to the crisis and instead engaged in retributive politics against Khan. The latter’s arrest in May led to widespread protests and clashes when angry supporters attacked the military headquarters, residences of senior army generals and other public property. While Khan was granted bail, the government has been engaged in a crackdown against Khan’s Pakistan Tehreek-e-Insaf (PTI) party, leading to the mass arrest of protesters and senior politicians.

Apart from the political turmoil, high oil prices and supply chain bottlenecks sparked by the war in Ukraine and the COVID-19 pandemic, the economic crisis is also an outcome of some long-term issues, such as a reliance on extensive fuel imports, a heavy dependence on an inefficient agriculture sector and an emphasis on textile exports, said Michael Kugelman, director of the South Asia Institute at the Wilson Center.

Pakistan’s exports, which include textile, rice, cotton and leather goods, continue to plummet, creating a serious imbalance of trade in the economy.

“The government has banned imports of certain important raw materials needed for exports — such bans would only exacerbate the situation,” Baloch said. “While there are global factors at play, Pakistan’s situation is a result of mistakes at the domestic policy making level in the country.” Shahruk Wani, an economist at the University of Oxford, added that “low productivity and flawed public policy” incentivize firms to sell domestically, rather than compete globally, which also leads to low exports.

News of an imminent default has kept Pakistanis on edge in the midst of a tense political environment. “It is somewhat surprising that Pakistan has held out so long without a default. Its economy has seemingly been on life support for weeks. I imagine if it doesn’t get IMF funding unlocked by the end of next month, the default will happen,” Kugelman said.

Moreover, the crisis is also leading to a massive brain drain. The number of people moving out of the country is at a record level. According to the Bureau of Emigration and Overseas Employment, almost 765,000 people left the country in 2022 — triple those who left in 2021. The figure includes 92,000 highly educated professionals such as doctors, engineers, information technology experts and accountants.

Hailing from Pakistan-administered-Kashmir, Muhammad Aftab Khan, 27, had never thought of leaving the country before but he is ready now to take up any opportunity that comes his way and leave. Khan lost his job at a telecom company during the pandemic and has since been taking up part-time jobs. “Before I was managing well, working part-time as a driver and a laborer but since a year it has become almost impossible to make ends meet,” Khan told New Lines. Father to a 14 month old, he is worried for his son’s future. “Even if I send him to a government school, there will be expenses that I won’t be able to bear if the situation continues like this,” he said.

There seems to be no easy way out for Pakistan, said Wani. “The country has two choices — either make progress with the IMF to unlock the tranche of payments and brace for economic pain, or fail to secure the IMF program and brace for significantly more economic pain,” he said.

But getting the $1.1 billion from the IMF will not end the crisis. “The debt and inflation levels are just too high. Also, the issue of the $1.1 billion is a bit of a sideshow: Pakistan’s current agreement with the IMF expires next month. Pakistan will need more IMF support, which means it will need to hold talks on getting a fresh accord,” said Kugelman. Given how long it is taking the government to negotiate the release of a small portion of an existing agreement, it is hard to imagine how long it would require to negotiate a whole new deal, he said.

“How the political unrest will be dealt with, when the elections will take place — all this will determine the future course because any policy or budget needs the consensus of all parliamentarians. Everyone must come together for tough policy choices that are beneficial in the long run,” said Baloch.

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