Understanding the economic crisis

May 12, 2024

Political uncertainty has undermined the confidence of investors and the public in the government’s ability to address economic challenges

Understanding the economic crisis


akistan has faced economic crises for many years. These have included high inflation, weakening currency and a growing debt burden. The common man is finding it difficult to meet his obligations. The poor live from hand-to-mouth and many in the middle class are exposed to significant financial strain. The standards of living have worsened considerably.

There are many reasons behind these economic crises. The national economy has been on the brink of country of a sovereign default on external debt. The debt burden has grown since the derailment of a $6.5 billion International Monetary Fund programme initiated in 2019. The international lender is upset with Pakistan’s lack of commitment to reforms and its apparent inability to generate revenue to meet its external financing requirements.

As of June 2023, the public debt and liabilities were estimated at about $223.86 billion or Rs 62.881 trillion, which is 74.3 percent of the gross domestic product. About Rs 24.309 trillion is owed to domestic creditors. About Rs 1.67 trillion is owed by loss-making public sector enterprises.

Pakistan’s economic problems are caused by several things happening at once. The Covid-19 pandemic jolted the world economy. There were disruptions in global supply chains and geopolitical tensions. Together, these have put the nation into an economic disarray, marked by dwindling purchasing power and depleting foreign exchange reserves. This has led to escalating civil unrest.

Devaluation of the rupee has complicated the situation even more. From hopes of becoming the world’s best-performing currency in October 2022 to hitting a record low in February 2023, the devaluation has had far-reaching implications, impacting essential imports such as fuel, edible oil and pulses.

The foreign exchange reserves are currently insufficient to pay even for one month’s imports. Pakistanis are facing a decline in purchasing power and an increase in poverty due to high inflation.

The rising costs of food, fuel, electricity and imported goods are the primary factors in this inflation. The expansionary fiscal and monetary policies implemented to boost the economy in the face of the Covid-19 pandemic have exacerbated the inflationary pressure.

Pakistan depends heavily on imported petrol fuel.

Pakistan frequently faces power outages, affecting industry and businesses. Because of these problems, the economy has shrunk.

Understanding the economic crisis

A lost has to be done to To overcome this crisis. The government is responsible for making policies and taking required actions to overcome such a situation. But the current government is weak and its choices are limited. 

Political instability is another factor. Political and economic stability go hand-in-hand. Pakistan’s financial instability is linked to its political instability. Frequent changes in government, governance and political unrest have eroded investor confidence. This has led to a decrease in foreign direct investment, causing capital flight and lowering the likelihood of economic growth.

Political uncertainty has undermined the confidence of the investors, creditors and the public in the government’s ability to address the economic challenges.

The uncertainty surrounding investments has led to a decline in confidence in the economy, leading to capital flight and hindering the country’s ability to attract much-needed foreign investment. The declining value of the rupee has fuelled concerns about the economy’s stability and raised questions about the government’s ability to manage the financial crisis.

The big question is: how to end the crises? What are the possible solutions? What can we do to overcome our problems? A lot has to be done to overcome these crises. The government is responsible for making policies and taking required actions to overcome such situations. But the current government is weak and its choices are limited. However, further delay can aggravate the crises and prove very costly. The foreign exchange reserves must not drop further. To fix the economic problems both the government of Pakistan and its international allies need to act urgently.

The possible solutions include debt relief, structural reforms, political dialogue, international collaboration, monetary and fiscal policy reform, promoting exports, investment in human capital and better long-term economic strategies.

Pakistan could ask its lenders to ease its debt repayment pressure, allowing use of the resources to spur economic growth. Seeking IMF assistance to restart a paused bailout programme can provide crucial financial support. Structural reforms are required to address the underlying causes of Pakistan’s economic problems. To curb inflation, the budget deficit and the national debt, the government should implement responsible monetary and fiscal policies. It is essential to improve tax collection and expense management to increase revenue.

To resolve its political crisis, government and opposition should engage in a productive dialogue to end confrontation. By seeking help from its friends and partners like China, Saudi Arabia, Turkey, Iran and the United States, Pakistan can strengthen its international position. This could bring financial aid, increased exports and introduction of new technologies. Pakistan needs a comprehensive long-term economic development strategy with clear goals, timelines and monitoring mechanisms for effective implementation and sustainable growth.

By implementing essential reforms, Pakistan can attain upper-middle-income status by its 100th anniversary in 2047. It has the human capital to reach this goal. Pakistan has significant potential to capitalise on this economic crisis, turning it into a pivotal moment in history. The year 2024 could be Pakistan’s defining moment.

The writer is a student at the University of Engineering and Technology, Lahore

Understanding the economic crisis