Once hailed as a model for economic development, Pakistan is now on the verge of financial collapse and has surpassed Sri Lanka to become Asia’s worst-hit nation in terms of the cost of living crisis. The rapid depreciation of Pakistan’s currency poses a severe threat of bankruptcy- raising questions about how the country reached this dire situation in the first place and what path it must chart for itself to avoid financial ruin.
After gaining independence in 1947, the Ministry of Finance devised a comprehensive economic plan consisting of multiple five-year plans, each with specific objectives. However, the first of these plans, scheduled from 1955 to 1960, failed due to severe political and economic instability.
It was not until 1958 that a new leader, Ayub Khan, took charge and initiated a period of remarkable economic growth. Under Khan’s leadership, the second five-year plan ushered in a period of rapid industrialisation thanks to improvements in education, literacy, and scientific research. The result was impressive as annual GDP growth exceeded 10 per cent during certain years – earning Pakistan global recognition. For a while, it seemed Pakistan was well on its way to becoming an Asian Tiger. Yet, in 2023, progress has taken a u-turn with Pakistan suffering a crippling financial crisis – marked by soaring inflation and impending bankruptcy.
The root cause of Pakistan’s economic woes is excessive borrowing over the past 25 years. From 1999 to 2022, the national debt skyrocketed from 3 trillion to 60 trillion rupees, doubling every five years. Borrowing, in theory, is not necessarily detrimental as long as it is being offset by even greater economic expansion. However, despite the surge in national debt, GDP growth remained stagnant at an average of three per cent per year, marking the failure of excessive government spending.
To make matters worse, Pakistan houses a substantial trade deficit which opens the doors for a terrible Balance of Payments crisis, as a significant portion of the total money borrowed is owed to external creditors. This places the country in a catch-22 situation whereby the printing of more currency to meet mounting debt obligations only devalues the rupee which then feeds back into the cost of the debt mountain. Simultaneously, this devaluation also causes import prices to skyrocket, pushing headline inflation higher to the 39 per cent mark in May 2023. As such, the country’s widening twin deficits and mounting debt levels can only be resolved by addressing fundamental economic failures, not through more money printing
Instead, Pakistan needs to achieve a stable economic and political environment, by taking steps towards balancing its budget. In a balance of payments crisis, the only way to stabilise the economy is by restoring the confidence of the creditors. As such, despite Pakistan seeing previous success in its debt-fuelled developments, this strategy is not free lunch and they have now been forced into fiscal responsibility.
To complement this, good leadership is crucial in implementing necessary reforms and ensuring long-term economic revival. Once investor confidence and government credibility have been restored, Pakistan can focus on education as underspending on education in Pakistan has led to a high number of out-of-school children, posing challenges for Pakistan’s future given its demographic profile and young population. To pave the way for a brighter economic future, the country must implement persistent and proactive reforms, introduce comprehensive structural changes, and have an unwavering focus on the long-term outlook all under a strong backdrop of fiscal responsibility.
