Is Pakistan’s Economy collapsing?

Is Pakistan’s Economy collapsing? Pakistan’s economic crisis is worsening with every passing day. Moreover, there is no clarity on where the things are going. For instance, the prices of basic commodities are increasing across the country. The rents, mobility and other costs related to living in the country are also rapidly increasing. The economy is collapsing and the entire country is waiting for the response from International Monetary Fund (IMF). Let us ponder into some key questions.

Is Pakistan debt too much for economic bankruptcy?

If we talk about only economic default or economic bankruptcy in purest sense, then US, China etc. has much more debt compared to Pakistan. Is it bankrupt now? Not at all. Can it be? 70% chances. A few years ago, Pakistan had been bailed out with US$10 billion package. Later, the country has taken several loans from friendly countries, bilateral and international donors to support its economy. So let us look how can a state end up in bankruptcy?

It’s common that the government projects are meant for public welfare and the public or private companies work with profit motive all over the world. However, there’s a bit difference in Pakistan’s approach. Pakistan runs several of Public Sector Enterprises (PSEs) on its own and has to take economic pressure from these companies as well. Moreover, Economies do not function where other big powers are supposed to dictate them on governance, policy making and management. So the poor Pakistanis burn with booming inflation caused by the loot of all these forces combine.

What happens in case of a Bankruptcy?

First effect of any country going bankrupt will be felt by the people employed by the state. No salaries, no benefits but plenty of promises to clear it all as soon as possible.

Next will be felt by patients in hospitals especially government run hospitals. Lack of medicines and absence of equipment means treatments including surgeries can’t be conducted.

Very soon stores will show empty shelves and that’s when rioting starts. People will try to hoard as much as physically possible and that’s when trouble begins. Desperation will show features of human behavior that we can’t even imagine that exists in us.

Factories will start remaining more and more idle. Once the raw materials are all but consumed then power plants will start rationing its production as well as distribution. In this situation, power produced will be prioritized first to nuclear installations both civilian as well as military. You see nuclear materials need to be kept at subzero temperatures while in storage or else it will overheat and will leave a mess.

It will result in mass brain drain, movement of people out of the country and people seeking refuge elsewhere. Moreover, there will also a lot of political violence and uncertainty in the region.

What happens if Pakistan goes Bankrupt?

A bankruptcy means Pakistan is not being able to meet its debt obligations. According to all three bond rating companies in the world, Pakistan is nowhere close to Bankruptcy. There may be other problems but not bankruptcy. It doesn’t mean Pakistan is rich or it doesn’t have problems, but most people don’t even understand what bankruptcy really is. I believe it would be a liquidity crisis first rather than genuine insolvency anyway.

In any case, let’s say Pakistan has no access to funds to pay off its debt? Well, there are several countries in the world that have gone through this process. There were several during the Asian crises, Argentina, and Sri Lanka will probably go through it any minute I am guessing. Russia sort of already has as well. And then Greece!!!

I don’t think Pakistan will have many problems with domestic debt, so I imagine most questions like this refer to international government debt, leading to worthless Pakistani bonds and extremely high-interest rates to raise finance. In such a case, Pakistan will have to sit down and renegotiate with the lenders and other institutions and go through a process. This can take any shape. Major grants, extended loan terms, reorganization of the economy, possibly extreme austerity, and so on.

The good news is that Pakistan’s economy is going down. Yet, it isn’t going towards a bankruptcy anytime soon.

Impact of Pakistan bankruptcy on global economy

The question is of utmost importance yet we need to consider. Countries don’t go easily bankrupt. Right now, the problem for Pakistan is that it doesn’t have the dollars to pay for its imports and its loan repayments to foreigners. But, the government of Pakistan can still pay its bills in Pakistani rupees.

So, Pakistan needs to find a way to get an infusion of dollars. There’s no way around – except to not pay foreign loans and cut imports drastically. Cutting imports drastically is doable but will not be enough. Pakistan will still need an infusion of dollars – to repay its loans.

Many sources promise that they will provide at least some of the dollars that Pakistan needs. All of these will be loans, not grants. Even if you tap Pakistanis abroad, you will take a loan from them – in some shape. And, Pakistan will have to repay these loans in the future. It’s a bit like borrow from ‘Peter’ to pay ‘Paul.’

In the meantime, Pakistan’s economic problems will have no measurable impact on the world economy or on any country, India included. Even Pakistan’s own GDP will not decline – the growth rate will slow down.

In short, don’t make too much of Pakistan’s current shortage of dollars. It’s a sign of poor financial discipline, but it’s not a major worry for other economies.

Is Pakistan economy nearing collapse?

No. I don’t think there is any significant chance of Pakistan completely collapsing as a state anytime in the near future. This is not to say that the country does not suffer from multiple problems at the moment. The current economic crisis, political instability, current floods, etc. However, these issues are unlikely to result in a complete collapse of the country. The only situation that would result in a collapse would be a civil war. The likelihood of an actual civil war (like the one in 1971) is quite insignificant.

What is more likely is that we may see the worst economic situation within Pakistan in the entire history of the country. Negligible economic growth, depreciating currency, rapidly rising inflation, energy crisis, frequent power outages, and shortages. The end result of which will be a reduction in the quality of life, rise in nation-wide poverty, and dwindling middle-class. None of that bodes well for Pakistan; especially considering that no one (political party or military) has any real way out of the problems. However, a completely collapse of the state is unlikely.

My prediction based on past and current trends is that Pakistan will continue to drag on into the future. Not thriving or improving by any means anytime in the near future. Things are going to get a lot worse before they start to get better. A path of slow decline.

What to do?

Pakistan needs to adopt a comprehensive economic policy to deal with this situation. It means that the government shouldn’t borrow any more money, increase the exports, decrease the spending and adopt positive austerity measures. Most importantly, it should stop once and for all misusing public funds for the personal business of politicians, bureaucrats or military men.

Remember that, Pakistan is not a poor third world country by any means. This beautiful country is handled very badly by successive governments.

Do you know that Pakistan is blessed with five good long rivers and with amazing network of canals systems? This canal system irrigates the huge agriculture fertile plain fields all around year, amazingly without much modern equipment. It grows almost every known crop in abundance, in the millions and the millions of tons. Utilize this for the export.

Moreover, there are wonderful opportunities in IT, media, digital space and new technologies that Pakistan can rely upon with a clear policy focus.