Economic Crisis in Pakistan

 Post the 1960s, Pakistan’s economic history has not been especially renowned for innovation or excellence. But in 2022, the economy’s characteristic underperformance was only exacerbated by catastrophic floods leading to widespread destruction of infrastructure, loss of life, and the highest food prices in over 40 years that have left the country’s poor unable to access many staples. The Government of Pakistan struggles to meet a worsening situation with an effective plan for economic stability or recovery. Unparalleled rallies across Pakistan by citizens protesting corruption and unoptimistic job prospects indicates rising frustration among a growing middle class with governance failures in the country.

In a previous blog post, we identified two major improvement areas the Pakistani economy requires to emerge from its present economic problems – improved tax collection and establishment of a high-value export sector. Here, we dig deeper into Pakistan’s economic problems, and analyze whether current remedies are sufficient for bringing the economy out of turmoil.

Current Economic Landscape

A brief highlight of Pakistan’s current economic position throws up the following (mostly worrisome) numbers.

Information

Inflation, measured by Consumer Price Index (CPI), spiked in August 2022: up by 27.3% year-on-year (YOY). This is the highest recorded figure in Pakistan’s history since 1973-1974 (Pakistan Bureau of Statistics). But this is part of a larger pattern, captured in Figure 1. Year-on-year inflation has been in double digits, and over 20%, from June 2022. As per the latest published statistics from the Pakistan Bureau of Statistics, in December 2022, YOY inflation was 24.5%.

Since 2004, Pakistan’s reserve levels have not been great. Its best reserve levels have only been enough for about 5 months of imports. But as Figure 2 suggests, Pakistan is currently unable to touch even this high (realistically, only in a position to afford about 3.5 months of imports). Pakistan had total liquid foreign exchange reserves of $10 billion in the week ending 6th January 2023 (State Bank of Pakistan). For perspective, in December 2022, our import needs were valued at USD 7.5 bn.

Current account (CA) was in a deficit of USD 12 bn in the year 2022 (State Bank of Pakistan). (Not sure what this current account matter everyone keeps talking about is? Click here for easy ideas.) Pakistan’s current account has consistently been in deficit since 2004, with accelerated increases in the years 2003-2008 and 2015-2018, offset respectively by recovery efforts in the years 2010 and 2020 (Figure 3). When read with Figure 2 above, this trend makes an important case for why exports (especially of high value) are critical to economic trade and sustainability for Pakistan.