The upcoming currency crisis
The good news is that the price of oil in the international market has come down from $123 per barrel in March to $81 per barrel. A sharp drop of 35 percent in the price of oil could cut our import bill by a hefty $10 billion.
The other good news is that we are no longer in the FATF’s dreaded ‘gray list’. The other good news is that the current account deficit during the first four months of fiscal year 2023 has come down to $2.8 billion; down 47 percent.
The good news on the political front is that Imran Khan’s ‘long march’ is over. The other good news is that the uncertainty over filling the office of the Chief of Army Staff (COAS) is behind us.
Now onto the challenges that our economy is up against. The mother of all challenges staring us in the face is a currency crisis.
A currency crisis is when an import-dependent country begins to run out of hard currency. A currency crisis is really a consequence of chronic balance of payments deficits.
Pakistan is an import-dependent coun try and we have been running balance of payments deficits for the past several decades.
To fill these balance of payments deficits we have taken on an accumulated external debt of $135 billion.
Over the 1948 to 2016 period, a total of $78.3 billion came in as ‘economic assistance’ from the United States. Between 2002 and 2011, the US Congress approved $18 billion in military and economic aid. Between 2009 and 2013, the United Kingdom pledged £665 million.
Over the 1950 to 2022 period, we have had 23 ‘arrangements’ with the International Monetary Fund (IMF) where outstanding loans now stand at $7.8 billion.
Total multilateral debt hovers around $60 billion. Then there’s $27 billion worth of Chinese debt plus $10 billion in bonds and $10 billion in commercial debt.
Pakistan’s economic history is witness to the rise and fall of ‘economic assistance’ from the United States and loans from the US-controlled multilaterals-like the IMF, the World Bank and the Asian Development Bank-depending on America’s geopolitical interests in the region.
To be certain, “peaks in aid have followed years of neglect. In several periods, including as recently as the 1990s, the US halted aid entirely and shut the doors of the USAID offices” in Pakistan.
On 30 August 2021, US Army Major-General Chris Donahue-the commander of the 82nd Airborne Division, XVIII Airborne Corps-was the very last American soldier to board a C-17 cargo plane at Hamid Karzai International Airport and leave Afghanistan.
That departure seems to have been missed by Pakistan’s policy makers. The IMF used to grant us dozens of ‘waivers’-no more. There used to be billion-dollar appropriations by the US Congress under the Economic Support Fund (ESF)-no more.
There used to be hundreds of millions of dollars under the International Narcotics Control & Law Enforcement (INCLE)-no more. There used to be additional dollars under the Global Health & Child Survival-no more.
Alas, Pakistani decision makers are so insulated from the realities of the international political economy. No one is willing to fund our twin deficits of budget and trade; no more. That insulation has a heavy cost.
Currency crisis would mean a sharp devaluation of the Pakistani rupee. Currency crisis would make our government really struggle to meet external debt obligations. Currency crisis would mean strict capital controls.
Currency crisis would make it difficult for us to buy petrol and diesel from the international market. Currency crisis would mean higher rates of inflation. Currency crisis would mean shortages of life saving drugs, petrol, diesel, LNG and coal.
Red alert: time to wake up and put our house in order-before it is too late.
