Pakistan is beset by a serious economic crisis. A flailing economy, sinking currency and decades-high inflation have been exacerbated by energy and food shortages as a result of the war in Ukraine and devastating floods that wrecked parts of the country last year.
While the country is, of course, not new to an economic crisis, the current one has impacted the lives of millions of people. Here’s a look at what led to the crisis.
What is the state of Pakistan’s economy?The main indicators of Pakistan’s economy are given in the below table
In the pandemic, Pakistan’s economy contracted by nearly 1 percent more than the South Asian average of 5 percent. Post the pandemic, while growth rate picked up so did inflation, budget deficits and current account deficit.
The economy is highly dependent on imports such as food and fuel. The Russia –Ukraine war led to rise in prices of these essential imports which put pressure on both inflation and the current account deficit.
The country only had foreign exchange reserves equal to a few months of imports and with higher current account deficits, the pressure on financing the deficit has only grown. Due to concerns over financing the current account deficit,
the exchange rate has depreciated significantly in the recent years. During pandemic times, 1 US Dollar (USD) was equal to around 160 Pakistan Rupees (PKR). Currently, the exchange rate is at 225 PKR to USD.
The political environment has been highly volatile in recent years. The pandemic and higher oil prices has forced the government to give subsidies leading to higher budget deficit.
\