Catastrophic flooding has heaped pressure on what was already an economy in dire straits, with the government now estimating the damage as high as US$30 billion. And while the IMF’s approval of a US$1.17 billion loan tranche at the end of August was expected to give other countries more confidence to offer support, thereby staving off a default, allies appear to be giving the cold shoulder.
At a gathering in Islamabad this month, Prime Minister Shehbaz Sharif described the uphill battle to secure aid. “Today, when we go to any friendly country or make a phone call, they think that we have come [to them] to beg for money,” he said.
Both the UAE and Qatar are believed to have turned down Islamabad’s request to deposit money in the State Bank of Pakistan to support dwindling foreign reserves. Instead, both have offered to invest in Pakistan, which would take time to materialise.
Saudi Arabia did agree to roll over a US$3 billion deposit in the State Bank of Pakistan for one more year. But this will not come close to resolving the nation’s problems.
Yousuf Nazar, a London-based economist and a former head of Citi’s emerging markets equity investments, thinks foreign countries are tired of helping Pakistan. Islamabad has become notorious for requesting handouts without conducting any meaningful reforms, he said.
“Pakistan is claiming floods have caused a loss of US$30 billion and the global community has just pledged US$600 million in aid, which marks their lack of trust in Pakistan,” Nazar told Nikkei Asia.
He further argued that Pakistan’s powerful military establishment has misjudged the country’s strategic importance, as proven by the limited help from the global community.
As the government scrambles for solutions, the pressure is only mounting.
The Pakistani rupee briefly rebounded against the dollar after the IMF announced it was resuming support. But in the past couple of weeks, it has continued to weaken, hitting 239 to the dollar.
Inflation reached 27.3% in August from a year ago, the highest Pakistan has seen in 47 years.
The floods are likely to exacerbate these problems and cause a food crisis.
Maryam Zia Baloch, a research analyst covering the economy in Washington, noted that the disaster has devastated crops and as a result, Pakistan will have to export less and import more basic food items. “For this, Pakistan will need more dollars to cover the import bills. This will definitely put pressure on the exchange rate and the trade deficit will worsen,” she said.
“The loss of agriculture output will also lower the overall GDP growth,” she added.
The business community is also hurting. Habibullah Paracha, co-founder and chief strategy and innovation officer at fintech company Blinq, said the rupee’s plunge has stopped new investment and higher interest rates are squeezing businesses by raising the cost of financing working capital.
Paracha said it was impossible, for example, to do any investment feasibility study because the exchange rate was so volatile “that one can’t be certain what the project financials and profitability will look like at the end.”
These circumstances are raising fears that Pakistan is moving toward hyperinflation, chronic fuel shortages and ultimately a default. Nazar, the economist, believes drastic action is needed.
In a recent report, he outlined recommendations for declaring a state of financial emergency. He suggested the government could impose a one-time flood tax on the affluent, cut defence and public expenditure, increase the price of fuel, provide direct cash transfers to motorcyclists as subsidies, seek debt rescheduling and resume trade with India and sanctions-hit Iran, among other proposals.
“The action points I have suggested are not radical but mandatory for the economic revival of Pakistan,” he said.
Nazar added that the core issue for Pakistan now is the energy crisis. “Pakistan needs to revise agreements with power producers, including [the] Chinese,” he said. “There are precedents for this in Honduras, Ghana, Brazil and India; Pakistan can do the same.”
If Pakistan does not fix the energy problem, it will soon run out of money to buy oil, which will bring the country to a standstill, he warned.
Nazar’s report has generated a buzz in Pakistan. But some experts, including Baloch, think many of the changes are easier said than done. “Trade with Iran and India is doable, but anything with India gets politicised so I don’t think it is going to happen,” she said.
Nevertheless, Nazar sees a risk of inflation skyrocketing as high as 70%, and stressed the country must not wait around for others to come to its aid.
“Pakistan needs to act now and should not hope for its allies to come for help,” he said. “Hope is not a strategy.”