Pakistan edges closer to debt default as inflation, political turmoil and unrest collide

Pakistan’s economy is facing total collapse – will it go the same way as Sri Lanka?

ByJoe Wallen, SOUTH ASIA CORRESPONDENT13 February 2023 •

Supporters of Pakistan Markazi Muslim League hold placards during a protest against inflation in Karachi, Pakistan
Protesters hold placards during a demonstration against inflation in Karachi CREDIT: SHAHZAIB AKBER/EPA-EFE/Shutterstock

The morning news updates on the television flickered before turning off. 

At the same time, confused motorists tried to navigate rush hour without the help of traffic lights, while hospitals scrambled to run emergency generators.

Pakistan’s national grid had failed and plunged more than 230 million people into a darkness that would bring the country to a standstill for over 24 hours before the electricity returned.

Frustrated netizens joked they wished they had a switch to turn the country back on and off, as Islamabad faces its greatest crisis of the modern era.

Pakistan’s economy faces total collapse, with a similar pattern emerging to that of its South Asian neighbour, Sri Lanka

Yet, unlike in Sri Lanka, the country is nuclear armed, its leading politicians are engaged in a violent power struggle, while an emboldened Taliban-affiliated terror group lays siege to the country’s west and north.

A worker refuels motorcycle at a gas station in Karachi, Pakistan
Long queues form outside fuel stations in Pakistan’s major cities in recent days, as rumours spread of a further price hike CREDIT: Asim Hafeez/Bloomberg

Last week, the International Monetary Fund (IMF) arrived in Pakistan to negotiate the release of more than $1 billion of aid

But, an agreement couldn’t be reached and talks are set to continue virtually. The money couldn’t come any sooner.

Inflation has soared to its highest level in 50 years. Long fuel queues have snaked around the block in Pakistan’s major cities in recent days, as rumours spread of a further price hike to meet external debt repayments.

Over 5,000 shipping containers, each holding food and essential medicines, stand idle in Karachi’s port, as the authorities cannot afford to unload them. Pakistan has less than three weeks of foreign exchange reserves left.

Many middle-class, white collar professionals – including doctors – have been forced to take on a second job to put food on the table for their families. For the lower classes, each day has become about survival.

“The crisis has burdened people with unprecedented inflation,” said Khurram Husain, a leading Pakistani economic analyst. “We have never seen anything like this before.

“We’ve seen a surge in crime in urban areas, petty crime and people getting into fights with shopkeepers over essential items. These incidents are being more widely reported now.”

Borrowing beyond its means

Pakistan has a chequered past when it comes to its economy and it has previously borrowed money from the IMF on 23 occasions since 1988. But, several factors appear to have combined to create the perfect storm this time around.

Successive governments over the last ten years have struggled to stimulate economic growth in Pakistan, despite a rapid population rise which has seen the country become the fifth most populous on the planet.

The nation has remained dependent on its limited agriculture and manufacturing industries, such as cotton production and textiles, while failing to broaden its limited tax base.

To escape defaulting over the last ten years, Pakistan has borrowed well beyond its means, from the IMF and other countries, including China. Islamabad owes over $30 billion to Beijing alone.

Pakistan owes more than $20 billion over the current fiscal year in repayments but only has around $3 billion left in the bank. It is unclear how it will avoid a default, unless friendly countries, such as Saudi Arabia or the United Arab Emirates, roll debts over.

Girls use a temporary raft across a flooded street in a residential area after heavy monsoon rains in Karachi
Girls use a temporary raft across a flooded street in a residential area after heavy monsoon rains in Karachi last summer CREDIT: RIZWAN TABASSUM/AFP via Getty Images

The war in Ukraine, which sent the price of commodities spiralling worldwide, has also pushed Pakistan’s economy to the brink.

The monthly cost of importing food and fuel had already increased by 60 per cent in March 2022, for example, when compared to the previous year.

Certainly, gross macroeconomic mismanagement and surging import costs were also seen in Sri Lanka, in the lead up to Colombo’s default and the public protests that succeeded in toppling President Gotabaya Rajapaksa, last April.

But, there are also factors unique to Pakistan. In August, around one-third of the country was submerged by the worst flooding in Pakistani history, displacing more than 30 million people and causing over $40 billion in damages.

Limited available funds have been diverted to restructuring and rebuilding lives. The World Bank has warned that such devastating flooding, believed to have been caused by climate change, will occur more regularly in the years to come.

This tranche of funding from the IMF had also been agreed in 2019 but a series of successive governments in Pakistan had temporarily suspended or attempted to re-negotiate the original agreed terms, leading to the ongoing delay in its release.

“We are going to see higher taxes, higher prices for utilities and food items, transport costs and fuel price hikes. I think we will also see an increase in disturbances as inflation is expected to surge again in February,” said Mr Husain.

Insurgency threat

The economic crisis is a boon for one group of Pakistanis, the Tehreek-e-Taliban (TTP).

The insurgents, who seek to overthrow the Pakistani government, have regrouped since their allies, the Afghan Taliban, returned to power in August 2021 in Kabul.

The Afghan Taliban are known to have provided the TTP with logistical and financial support in the past. Now, the TTP had been permitted to operate inside Afghan territory and launch cross-border attacks against the Pakistani military and police.

The TTP and its affiliates carried out more than 150 attacks in the first 11 months of 2022, killing more than 150 people, while December 2022 was the deadliest month for Pakistan’s security personnel in over a decade.

The economic crisis in Pakistan means the country’s army is seemingly unable to also counter the spread of the TTP across the country.

Previously active in the restive Khyber Pakhtunkhwa province, the group is now launching attacks in Balochistan and Punjab provinces.

“Pakistan is facing economic turmoil and this has allowed the TTP to become more active. There is no continuity on the war on terror here, in part due to costs, sometimes the military and police are active and sometimes they are silent,” explains Saleem Mehsud, a Pakistani journalist covering the Afghan-Pakistan border, specialising in militancy.

“Groups like the TTP seemingly have more public support than they did a few years ago too, they are able to move around in areas of Pakistan they couldn’t previously.”

Plain-clothed policemen gather over the rubble of a damaged mosque following January's 30 suicide blast inside the police headquarters in Peshawar
Plain-clothed officer gather over the rubble of a damaged mosque following the suicide bomb attack inside Peshawar’s police headquarters CREDIT: ABDUL MAJEED/AFP via Getty Images

On January 30, a suicide bomber killed over 100 people – largely police officials – while they prayed in a mosque in the city of Peshawar. A TTP commander claimed responsibility for the attack, the deadliest in a decade.

“If Pakistani officials do not make a strong strategy against the TTP then they will continue to spread across the country,” adds Mr Mehsud.

“The TTP is currently active in several districts in Khyber Pakhtunkhwa province and some areas of Balochistan. But, if the Pakistani government fails to stop them then the TTP will likely spread from district to district as happened in Afghanistan [with the Afghan Taliban]”.

“I can see the insurgency spreading this year to every district in Pakistan. You saw what happened in Afghanistan, the Afghan Taliban kept spreading from district to district until the whole country was under their control.”

Political turmoil

Such trying times call for robust political leadership. But, here Pakistan is also facing a crisis, ahead of a planned general election in the autumn of this year.

Former international cricket captain, Imran Khan, was deposed as Prime Minister in a no-confidence vote last April. Mr Khan alleges his replacement, Shehbaz Sharif, engaged in horse trading of his MPs in order to remove him from power.

Mr Khan still enjoys huge public support and had planned to march on Islamabad with his supporters calling for an early election until he narrowly survived an assassination attempt in November, during which he was shot four times in the legs.

He promptly accused Mr Sharif and his allies of being behind the assassination attempt and warned there would be further attempts on his life. Mr Sharif denies the allegations.

“One can never make predictions about Pakistani politics but I do think if there was to be an election this year and it was free and fair, there is a good chance Mr Khan and his party would win,” explains Michael Kugelman, South Asia Institute Director at The Wilson Centre, a policy forum based in Washington DC.

“But, this is a big if. The government might use the attack in Peshawar and the ongoing economic situation to delay the election, which could in turn increase political instability and lead to Mr Khan calling for mass protests.”

Police officials escort Pakistan's former interior minister Sheikh Rashid Ahmed (C) to present him before a court in Islamabad
Police officials escort Pakistan’s former interior minister Sheikh Rashid Ahmed to a court in Islamabad CREDIT: Muhammed Reza/Anadolu Agency via Getty Images

There is growing anger among Pakistanis from across the political spectrum that their leaders are embroiled in a growing power struggle, rather than focusing on solving the country’s more pressing issues.

Last week, the Pakistan Association for Clinical Psychologists released a warning over a surge in citizens seeking help for mental health issues, blamed on the ongoing political upheaval in the country.

Added into the unpredictable mix, is the all-powerful Pakistani military. Long seen as the entity pulling the political strings, the army provided substantial backing to Mr Khan when he was first elected in 2018.

Having spectacularly fallen out with him in the lead up to his ousting, it remains to be seen whether the army would interfere if it appeared Mr Khan would return to power.

Unsurprisingly, many Pakistanis are looking ahead to 2023 with trepidation, given the challenges facing their country. 

“It will definitely get worse before it gets better and I don’t see it getting better in the calendar year of 2023,” said Mr Husain.

“Politicians should prioritise sorting out their differences through dialogue and not allow these differences stop them from addressing the economic situation. Pakistan can’t afford a political power struggle right now.”

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1 reply

  1. As a super Islamic Republic Pakistan should refuse any loans that come with interest attached. Obviously, is it not? You accept interest loans and you put yourself in trouble…
    Solve this problem instead of lynching blasphemy suspects from jails…

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