Pakistan’s economy nears collapse as foreign currency reserves plunge
Pakistan’s economy is at risk of collapse, with rolling blackouts and a severe foreign currency shortage leaving businesses struggling to operate as authorities attempt to revive an IMF bailout to relieve the deepening crisis.
Shipping containers full of imports are piling up at Pakistani ports, according to the country’s central bank, with buyers unable to secure the dollars to pay for them. Associations for airlines and foreign companies have warned that they have been blocked from repatriating dollars by capital controls imposed to protect dwindling foreign reserves. Officials said that factories such as textile manufacturers were closing or cutting hours to conserve energy and resources.
The difficulties were compounded by a nationwide blackout on Monday that lasted more than 12 hours. Prime Minister Shehbaz Sharif on Tuesday expressed his “sincere regrets for the inconvenience” and said an inquiry would determine the cause.
“Already a lot of industries have closed down, and if those industries don’t restart soon, some of the losses will be permanent,” said Sakib Sherani, founder of Macro Economic Insights in Islamabad.
Analysts warn that Pakistan’s economic situation is becoming untenable, and is at risk of following Sri Lanka, where a lack of foreign reserves triggered severe shortages of essential goods and eventually led to a default in May. Islamabad’s foreign reserves have dropped to under $5bn, less than a full month of imports, and Sharif’s government remains in a deadlock with the IMF over resurrecting a $7bn assistance package that stalled last year.
“Every day matters now. It’s simply not clear what the way out is,” said Abid Hasan, a former adviser to the World Bank. “Even if they get a billion [dollars] or two to roll over . . . things are so bad that it’s going to be just a Band-Aid at best.”
Ahsan Iqbal, Pakistan’s planning minister, told the Financial Times that Pakistan had “drastically” reduced imports in an attempt to conserve foreign currency. Analysts said this included restricting banks from opening letters of credit for importers, leading a steel industry body this week to threaten to stop production.
The central bank on Monday said it was easing import restrictions to facilitate the supply of essential items such as food and fuel. Pakistan is still reeling from devastating floods last year, which affected tens of millions of people and caused damage costing an estimated $30bn.
International lenders pledged more than $9bn to aid the country’s recovery at a donor conference in Geneva this month, but details about how and when that money will arrive are still being negotiated.
Sharif’s government has said it is committed to reviving the IMF deal to unlock the next tranche of funds. But the sides remain at an impasse over the IMF’s demand that Pakistan accepts economic reforms such as raising subsidised energy prices.
Pakistan argues that pushing through painful austerity measures while it is recovering from the floods is impractical. “If we just comply with the IMF conditionalities, as they want, there will be riots in the streets,” Iqbal said. “We need a staggered programme . . . The economy and society cannot absorb the shock or cost of a front-loaded programme.”
The economic turmoil comes as Pakistan prepares for elections that have to be held this year. Sharif’s main challenger is Imran Khan, the former prime minister who was ousted last year but remains highly popular. Both leaders blame the other for the economic predicament, and Khan is attempting to force early polls.
“We need predictable power,” said Taimur Khan Jhagra, a leader from Khan’s Pakistan Tehreek-e-Insaf party, accusing Sharif’s government of mishandling the energy supply. “It dictates the quality of life.”
“As you can see, nothing works in Pakistan,” said Akram Khan, a 25-year-old who had lost his job at a used-car showroom in Islamabad, during the blackout. “Since early winter, we have had gas shortages at home. And now we saw electricity to all of our country getting disconnected.”
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