Pakistan’s current economic struggles illustrate the small fires ignited all over the global economy by war during a pandemic.

Like others in countries dependent on imported goods – for example, Ghana and Sri Lanka – Pakistanis are seeing food and fuel prices soar. Foreign exchange reserves – used to pay for imports such as food and fuel – have shrunk.

Pakistan is depleting its foreign exchange reserves faster than expected as the prices of foreign goods rise. If the situation does not change, the country risks bankruptcy.

In April, a liter of petrol cost around 150 rupees, but by July 1 the price had risen to almost 250 rupees. And the price of cooking oil rose 40% between May and June alone. Currently, the country only has enough foreign currency to pay for five weeks of imports. Pakistan relies heavily on imports of fuel and cooking oil, but also machinery and food grains from abroad.

All of this made daily activities more difficult. Power outages are not uncommon in the country, even when the economy is strong – they become frequent and long when the economy is under strain.

This happens because energy companies struggle to operate when the costs of generating electricity are higher than the revenues they collect. In recent weeks, residents of large cities have had to go without electricity at home for up to 10 hours a day – in rural areas even more so.

Public discomfort is compounded by an intense heat wave in many parts of South Asia that has pushed temperatures to 51℃ in some places.

rely on imports

Foreign exchange reserves with the Central Bank of Pakistan currently stand at $10.3 billion. This is down sharply from $16.6 billion in January 2022. Although recently supported by Chinese bank lending, reserve levels have been volatile since late April 2022, when a political crisis caused ousting of Prime Minister Imran Khan.

In Pakistan, imports are much higher than exports. To preserve foreign currency, a first step taken by the newly appointed government in May 2022 was to ban many types of imported goods considered non-essential luxury items. The list included chocolate, diapers, pet food, and tampons, but has been changed.

Initially, there were fears that pets and livestock would be malnourished as a result of this ban and that chocolate would be confiscated at international airports. And that menstruating women would not have access to sanitary napkins. Due to public pressure, the list has been changed and clarified. Chocolate is no longer seized, pet food delisted, and sanitary napkins are made domestically.

A more recent intervention, intended as a placid but widely derided nudge, is a Cabinet minister’s suggestion that individuals should drink fewer cups of tea. The drink is ubiquitous in Pakistan, which is the world’s largest importer of tea by a considerable margin. It is considered one of the simple pleasures of life in a country plagued by power outages and expensive basic foodstuffs.

Consternation over the petty “tea austerity” policy can distract from larger, more compelling issues. These are recurrent and stem from the position of Pakistan and other fragile and externally indebted economies in a global system of monetary hierarchies.

Poor countries cannot borrow in their own currency, but must use one of the major currencies traded on international exchanges. The US dollar is the most widely used currency, while other dominant currencies include the British pound and the euro.

These “hard” currencies are those that indebted countries must regularly buy to pay for their imports and to repay and service the loans they owe to private bondholders, international financial institutions and lenders.

Before being ousted, Khan attempted to retain public support as prime minister by resisting demands from the International Monetary Fund (IMF) to raise taxes and cut subsidies. Thus, by not taking measures such as making fuel more expensive, the Khan government delayed the inflow of external financing.

This weakened Pakistan’s reserves and made it difficult to maintain the value of the rupee. As the chasm between the dollar and the rupee widened, the government’s popularity declined.

Global sanctions against Russia and Iran are complicating Pakistan’s economic situation. Khan was frustrated that he could not use a relatively cheap Russian oil supply due to international pressure on Ukraine. Given the need for drastic measures, the Pakistani government could now follow in Sri Lanka’s footsteps and look to Russia for cheap fuel.

International tensions

Pakistan has also refrained from importing oil from neighboring Iran. Smuggled Iranian oil remains attractive to those living near the border. Power and energy cooperation between Pakistan and Iran is a particularly thorny issue given the opposition of the United States and Saudi Arabia, another country that has often helped Pakistan financially.

To avoid bankruptcy – and continue to buy food and fuel – Pakistan is now waiting for help from the International Monetary Fund (IMF). This Washington DC-based institution has repeatedly rescued economies in crisis. In return, recipient governments must commit to political reforms, often unpopular with the public.

Over the next few weeks, the IMF is expected to step in and commit to a bailout of around $1.85 billion. If, and when, this happens, the exchange rate between the Pakistani rupee and the US dollar will stabilize. Given that the dollar has risen more than 15% against the rupee since January 2022, policymakers will welcome a stronger Pakistani currency to calm the price spike.

But the high costs of an IMF deal have already caused a cost of living crisis, as fuel subsidies have been cut sharply and have made food and transport unaffordable for many. Tax hikes have also added to daily pressures.

Monetary issues and cost of living crises in Pakistan are inextricably linked. A higher dollar makes fuel more expensive, and those price increases quickly trickle down to basic necessities. Since Pakistanis spend more than 40% of their income on food, inflation makes large segments of the population marginalized and vulnerable.

Unless exports increase significantly in the coming years, Pakistan’s economy will remain precarious and high prices will remain a threat. Faced with this situation, financial aid is the only way to overcome the crises. Unfortunately, this tends to come with financial or political strings attached.

Juvaria Jafri is a Research Associate, University of Cambridge

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