What led to the economic crisis in Pakistan?

Rahul Nath Choudhury*

On 30 November 2021, Pakistan signed an agreement with the Saudi Fund for Development
(SFD) to receive $3 billion with an aim to improve its foreign exchange reserves. i Earlier also in
2013, 2016, and 2018, Pakistan sought external financial aid from International Monetary Fund
(IMF), UAE, and China to fight its economic crisis. ii The current crisis prevailing in Pakistan is
attributed to a large number of policy decisions that did not deliver expected result combined
with political unrest in several parts of the country. In this context, this article outlines some of
the crucial indicators such as public debt, foreign exchange reserve, inflation, etc., that are
responsible for the deepening economic crisis in Pakistan. This article also examines the reasons
that influenced Pakistan to resort to Saudi Arab instead of multilateral agencies such as IMF,
Asian Development Bank (ADB), or any other source for loan.

Why Saudi Arab?

Traditionally, Pakistan and Saudi Arabia have had a very close relationship, particularly based
on religious affinity. Both countries are members of Organisation of Islamic Cooperation (OIC).
Huge volumes of aid for promoting religious activities and supporting humanitarian causes have
always flown from Saudi Arabia to Pakistan. iii Growing defence cooperation and increasing
financial assistance to Pakistan marked the ties between the two countries. Saudi’s Crown Prince
Mohammed Bin Salman visited Pakistan in February 2019 with a large business delegation
which pledged over USD 20 billion to Saudi investments in Pakistan. iv Similarly, Pakistani
delegates including Prime Minister Imran Khan have visited Riyadh on multiple occasions. Both
nations have always maintained a friendly relationship between them.

Prime Minister Imran Khan, after assuming office in 2018, looked towards China for loan but it
did not materialise. China refused to extend any fresh loans to Pakistan. v Importantly, Pakistan
owes more than 25 percent of its external loans to China. Later in 2018, Pakistan availed a
bailout package from the IMF. The IMF loan came with a huge cost to Pakistan as it mandated a
series of requirements and adjustments to be made in the economy. IMF loan comes with the
condition to reduce budget deficit, improving banking and tax legislation, strengthening the
social safety net for poor households, phasing out electricity subsidies, and reducing foreign
exchange market intervention by the federal bank.vi Given its economic structure and the
performance of different indicators Pakistan could hardly meet the IMF conditions.

Pakistan is also blamed for lack of political will to break the grip of powerful vested interest
groups. A recent United Nations report suggests that an elite group of citizens in Pakistan receive
economic privileges of around $17.4 billion in the form of tax breaks and preferential access to
public capital.vii

Further, Pakistan’s inability to negotiate with the IMF reflected in the failed discussion held in
October 2021 and left it with no alternative but to seek help from Saudi Arabia. viii Incidentally,
conditions attached with its loans from Saudi Arabia is comparatively flexible than the IMF.
However, the rate of interest charged by Saudi Arabia is much higher than the IMFs soft loan.

Debt obligation to other sources

By June 2021, Pakistan’s public external debt touched US$ 86.4 billion registering an annual
growth of 10.8 percent. This increase in external debt is explained by revaluation of losses due to
the depreciation of US dollar against other international currencies, which inflated the value of
external debt in dollar terms. More than one-half of the revaluation losses were due to the
appreciation of the Special Drawing Rights (SDR) against the US dollar.

The table presented below gives us an overview of Pakistan’s external debt liabilities from select
sources. Pakistan’s external public debt is availed primarily from four key sources, with around
49 percent coming from multilateral agencies, 31 percent from bilateral institutions, 13 percent
from commercial entities, and 7 percent from Eurobond and Sukuk.ix
 Pakistan's external debt profile (million US$)
2020 2021
Commitment Disbursement Commitment Disbursement
Multilateral 6,791.00 5,670.00 5,253.80 4,370.20
ADB 3,112.00 2,824.00 1,470.00 1,368.30
IDA 1,179.20 1,467.50 1,596.40
Bilateral 193 1,648.30 457 453.5
Safe Deposits - - - 1,000.00
Bonds - - 1,500.00 2,500.00
Commercials 3,463.00 3,373.30 3,922.50 4,721.20
Source-Annual Report, State Bank of Pakistan 2020-21: State of Economyx

The reasons of the crisis

The current economic crisis is primarily attributed to Pakistan’s short-sighted policy decision
leading to extensive spending on non-developmental and economically unviable projects.
Economic mismanagement and financing of futile infrastructure projects like Gwader-Kashgar
Railway line project through long-term debt instruments, and relying massively on external
borrowing rather than from domestic institutions added to its troubles. Roll out of the China–
Pakistan Economic Corridor (CPEC) increased the debt burden opening the doors of the ever-
increasing external loans. Notably, CPEC created a Chinese debt of US$ 64 billion on Pakistan
which was originally valued at US$47 billion during 2014.

The persistent fall in the Pakistani Rupee against the US Dollar has further contributed to the
ballooning external debt. Falling confidence coupled with low ranking by international rating
agencies and grey listing of Pakistan in Financial Action Task Force (FATF) kept foreign
investors away. The State Bank of Pakistan data suggests that in the past 10 years, Foreign Direct
Investment (FDI) inflows into Pakistan never exceeded 1percent of GDP. The vicious cycle of
seeking fresh loans and repaying old ones has led Pakistan into the notorious ‘debt trap’.
Moreover, due to the reluctance of the international community in extending loans to Pakistan,
the country was forced to resort mainly to China and Saudi Arabia and thus making it vulnerable
to their complex terms

Pakistan has been struggling with mounting trade deficit driven by its ever-increasing import
bills and falling exports. Pakistan’s trade deficit touched its all-time high of US$37.7 billion in
FY 2018.xi The first five months of the current fiscal year saw a rise of more than 117.25 percent
in trade deficit. In February 2022, ADB reported that Pakistan has one of the lowest trade-to-
GDP ratios in the world.xii The outbreak of the Covid-19 pandemic further deteriorated the
situation. Major exporting items such as cement, textiles, leather, and sport goods merely had
any buyer during the pandemic. The nature of Pakistan’s trade basket that imports essential items
and exports non-essential items has played a large role in widening the gap between exports and
imports. Pakistan imports mostly items of domestic consumption.

A widening trade deficit and falling investment has led to a sharp fall in the foreign exchange
reserves in Pakistan. The foreign exchange reserves fell by 1.97 percent in the second week of
November to US$23.550 billion, compared to US$24.025 billion in its previous week. The
reserves of commercial banks also declined to US$6.605 billion from US$6.699 billion in
November 2021.xiii The depreciation of the Pakistani Rupee against the US Dollar reduced the
value of the existing reserves.

Inflation in Pakistan touched its highest level in November 2021. xiv This is primarily because of
the global rise in crude oil prices leading to costlier freight charges. Importantly, Pakistan is a net
importer of essential food items such as pulses, wheat, edible oil, and sugar. Notably, Pakistan’s
food imports consist of around 16 percent of its gross imports. Pakistan has been affected by the
global rise in the food prices. Poor harvest in the last sowing season is also blamed for high food
inflation. Sharp increase in the energy prices during the last few years have created immense
inflationary pressure and burdened the common citizen with additional expenditure.

Experts suggest that correcting imbalances in the economy through external borrowing is not a
sustainable solution and, hence, for Pakistan there is a need to bring structural economic reforms
in its monetary and fiscal policy in line with international best practices. Economists are of the
view that curbing of unviable development projects, reducing import bills, and relying more on
its domestic firms would possibly help Pakistan to avoid deepening the crisis further.

*Rahul Nath Choudhury is a research fellow. Views are personal.

End Notes
i
State Bank of Pakistan. (2021). Press Release Number ERD/M&PRD/PR/01/2021-135. State Bank of Pakistan, Available
at: https://www.sbp.org.pk/press/2021/Pr-29-Nov-2021.pdf. Accessed on 10-02-2022

ii
Nadia, et.al. (2020). Pakistan and the IMF: Debts, Deficits and Dependency. ISAS Insights. National University of
Singapore.

iii
Yi, L. (2019). Saudi Arabia’s Economic Diplomacy through Foreign Aid: Dynamics, Objectives and Mode, Asian Journal
of Middle Eastern and Islamic Studies

iv
Hasim, A. (18 Feb, 2018) As MBS arrives, Pakistan seals Saudi ties with $20bn in deals. Aljazeera. Available at:
https://www.aljazeera.com/economy/2019/2/18/as-mbs-arrives-pakistan-seals-saudi-ties-with-20bn-in-deals Accessed on
12-02-2022

v
Radio Pakistan. (Nov 4, 2018). Pak, China to further expand cooperation under CPEC set up working group on socio-
economic dev. Radio Pakistan Available at: https://www.radio.gov.pk/04-11-2018/joint-declaration-pakistan-china-agree-
to-further-strengthen-strategic-cooperative-partnershipAccessed on 12-02-2022

vi
Questions and Answers on the IMF Pakistan Program. International Monetary Fund Available at:
https://www.imf.org/en/News/Articles/2015/09/28/04/54/vc120308#q3Accessed on 12302-2022

vii
UNDP. (2021). National Human Development Report, 2020. UNDP, Available at: https://hdr.undp.org/en/2020-
reportAccessed on 12-02-2022

viii
Mission Concluding Report, International Monetary Fund Available
at:https://www.imf.org/en/News/Articles/2021/11/19/mcs-pakistan-staff-concluding-statement-2021-art-iv-staff-level-
agreement-6th-review-eff Accessed on 12-02-2022

ix
Ministry of Finance, Chapter 9, Pakistan Economic Survey 2020-21. Government of Pakistan

x
Annual Report 2020-21: State of Economy, State Bank of Pakistan

xi
Export of goods and Services, December 2021. State Bank of Pakistan. Available at:
https://www.sbp.org.pk/publications/export/index.htm accessed on 17.2.21

xii
ADB and IDBI (2022). Pakistan’s economy and trade in the age of Global Value Chains. Asian Development Bank and
Islamic Development Bank Institute. Available at:https://www.adb.org/sites/default/files/publication/768386/pakistan-
economy-trade-global-value-chains.pdf accessed on 15-02-2022

xiii
Export of goods and Services, December 2021. State Bank of Pakistan. Available at:
https://www.sbp.org.pk/publications/export/index.htm accessed on 17.2.21

xiv
Pakistan Bureau of Statistics, Consumer price index for the month of November 2021. Available at:
https://www.pbs.gov.pk/sites/default/files//press_releases/2021/cpi_press_release_november_2021.pdf Accessed on 12-02-
2022