Everything you need to know about Pakistan's economic collapse

Due to the tremendous inflation rate, Pakistan's economy is in a terrible state, with dangerously low foreign exchange reserves and international lenders like the International Monetary Fund (IMF) refusing to offer extra cash.

Even though the economy has been in trouble for some time, the floods of 2022 caused irreparable harm to the country, destroying essential infrastructure and uprooting millions of people.

Pakistan's economy is currently on the verge of collapse, relying on the IMF to adjust to the Extended Fund Facility (EFF) that was established in 2019, as well as support from friendly nations in the form of long-term loans or gifts.

The economic unrest in Pakistan is a result of many reasons. Investor confidence in the country has been significantly weakened as a result of political instability and poor administration, which has also encouraged corruption and backroom agreements that are detrimental to the country's fiscal health.

Due to Pakistan's high reliance on imports, particularly in the energy sector, the country is particularly vulnerable to global increases in the price of gas and oil. The epidemic was ineffective, and Pakistan's tense relations with India continue to hinder it from having a partner for trade and investment that may be game-changing.

Reasons for the economic collapse of Pakistan

Inflation and Loans

The ability of Pakistan's economy to grow has dramatically decreased over time. Inflation has typically exceeded 8% since the 1990s. Balancing the current account deficit and inflation has always been a challenge for the country because of the reliance on oil imports and the absence of significant exports. Pakistan routinely asks the IMF for financial assistance.

The country has asked the IMF for help 23 times. The IMF grants financial assistance to its members based on a quota established by the contribution of each member nation. Pakistan borrowed more than twice as much from the IMF as it was allowed.

Politics

This background information serves as an introduction to the Pakistani issue. Pakistan's economic problem has politics to thank primarily for it. Since Pakistan has never had a stable administration for most of its history, the Army and political parties have been locked in a never-ending power struggle.

Even when political parties are in power, the pressure from the opposition and internal disputes within the ruling party frequently lead to the toppling of an elected government and the installation of a new party. In the last ten years, the country has had six prime ministers.

Economic Performance

Political pressure and weak economic performance force all governments to spend money and give things away to the public. The recent rains made the government's issues worse.

In return for aid, the IMF requires that a country implement economic reforms that should increase growth while reducing inflation and deficits. Even if changes to Pakistan's economy do occur, Given the political environment of the nation, they will only endure a short while.

In its assessment of Pakistan's economy released in September 2022, the IMF asserted that the "prior government gave a 4-month "relief package" in late February 2022 that undid vows to budgetary restraint made earlier in the year.

How can Pakistan revive its economy?

Pakistan aims to make fundamental reforms, which can mean liberalising tariffs or switching from state ownership to private ownership. In the last few years, the administration has seen several significant changes.

Current Actions

The State Bank of Pakistan's independence is one such instance (SBP). The creation of monetary policy gave the central bank independence; as a result, preserving price stability is now wholly their responsibility.

A reduction in tariffs was also implemented for hundreds of industrial imports, but these reductions were tragically reversed when new regulatory and customs taxes were introduced.

How taxes are handled has stayed structurally, but technology has been employed to assist taxpayers.

These improvements have had little effect on Pakistan's economy, even if they were made with the best intentions. SBP autonomy isn't helping to stabilise prices because other policies, such as lending with concessions, have an expansionary impact. Restrictions on trade and production and record-high commodity prices globally are also lessening the impact of monetary policy.

Donkeys Can solve the Economic Crisis

Pakistan currently has the third-largest number of donkeys worldwide. The nation is presently home to around 5.7 billion donkeys. Donkeys benefit from the current economic crisis because they are helpful in China.

The latter country uses donkey hides to create its traditional medicines. Donkey numbers in China are falling very quickly. The government has now started importing donkeys from abroad.

Pakistan acknowledged China's need for the donkeys and the country's rising animal demand before agreeing to transport the animals. Pakistan's economy might benefit from exports of donkeys.

Skill Development

Since neither the public nor the private sectors produce enough graduates with the required abilities, information technology is a prime example of an industry that needs to be more experienced.

Instead of giving the IT sector tax breaks or credits, Pakistan can achieve better outcomes by investing in the IT-related skills that the private sector lacks (an example of an old industrial strategy). Any business, whether situated in Pakistan or not, may benefit from better-trained IT professionals.

Creating economic corridors

One way to get there is through clearly defined geographic regions with modern commerce and transit infrastructure, amenities, and laws. These routes will boost economic activity within the country and its neighbours.

Economic corridors include urban, industrial, and infrastructure growth. If done correctly, these can be a rich source of opportunities and investments that will strengthen the economy, create jobs, and speed up the movement of people and goods.

Robust infrastructure serves as the cornerstone for the growth of economic corridors. Effective multimodal transport networks facilitate mobility and increase trade by linking metropolitan areas to domestic and international markets. Highways, railroads, and ports are a few of these networks.

Pakistan may take advantage of its advantageous location and contribute to standardising regional standards to increase cross-border trade through connectivity and economic integration with other partners in the Central Asia Regional Economic Cooperation (CAREC) Program.

Industrial Development

Economic corridors are crucial for concentrating industries in strategic areas. For the sector to thrive, more must be close to railroads or highways; it also needs a climate that promotes investment and skilled staff.

The government may employ tax cuts or other incentives to encourage such growth. The nation's exports must be linked to the global supply chain, not just to the rest of Pakistan but also to the rest of the globe so that whatever is created inside an economic corridor can expand outside of it.

Urban Growth

When built, controlled, and appropriately planned, cities have the potential to be substantial producers of innovation, labour, and goods. Therefore, urban development is vital to the success of economic corridors.

The citizens of Pakistan should have access to high-quality public services like affordable housing, a stable water supply, and other facilities, and efforts should be made to make cities more habitable. Green public spaces must be developed to boost the labour market, and the educational system must be strengthened.

Conclusion

The economic crisis is impacting many countries around the world. Despite the problem between Russia and Ukraine, Pakistan is one of the countries that is still suffering as a result. The economic crisis is actual in Pakistan. The country's foreign exchange reserve has declined during the last few years.

The economic crisis in Sri Lanka recently made news; if Pakistan wants to avoid a similar problem, strict financial management procedures must be implemented.

While the weather was good outside, this hazardous mixture worked.

The external environment has gotten worse due to the plague and the War. The external environment has brought worse due to the epidemic and the War. Due to the pandemic and closure, the Chinese economy, which had been a significant backer of these struggling South Asian economies, has also faced financial challenges. Given the political constraints, more is needed to meet the requirements for IMF support.

 

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