Blackouts, currency dives and corruption: Pakistan's economy is on the brink of collapse

Blackouts, currency dives and corruption: Pakistan’s economy is on the brink of collapse

People light a bonfire to warm themselves during a nationwide power outage, in Muzaffarabad on January 23, 2023.

Sajjad Qayyum | Afp | Getty Images

Pakistan’s economy is on a cliff-edge.

The South Asian country this week suffered a horrific bombing attack on a mosque that took at least 100 lives. On Jan. 24, the country’s 230 million residents were hit with a nationwide blackout. At time of writing, the Pakistani rupee is at a record low against the dollar.

These are just the latest shocks amid months of crisis as endemic government corruption, depleted foreign reserves and crippling debt have sent Pakistan’s economy spiraling.

“What would you like to know? How a bag of flour, essential here as we eat roti or chapati on a daily basis, has more than doubled in price? How fuel prices nearly doubled in less than a year?” Mohammed Usman, a photographer living in Pakistan’s capital Islamabad, told CNBC.

“Almost every discussion these days amongst friends or family is about how everything is getting more expensive,” he said. “Add to it the political instability and one ends up in a hopeless situation.”

International Monetary Fund officials landed in Islamabad on Tuesday for make-or-break talks with the Pakistani government. The goal of the talks? Unlocking desperately-needed funds from a $7 billion bailout package.

And it couldn’t come at a more critical time: Pakistan only has enough foreign currency reserves to pay for roughly three weeks of imports.

People throng at a wholesale market in Karachi, Pakistan on February 1, 2023.

Rizwan Tabassum | Afp | Getty Images

Pakistan received a $6 billion bailout from the IMF in 2019to which another $1 billion was added in August of 2022, in the IMF’s 23rd funding program for the country in its 75-year existence.

But the money won’t be unlocked so easily this time, as IMF officials want to see Pakistan’s government implement fiscal reforms. Those include allowing a market-determined exchange rate for the country’s currency, the rupee, and the reduction of fuel subsidies, which have become more costly amid the global rise in energy prices.

Pakistani Prime Minister Shehbaz Sharif refused to make such changes for months, fearing popular backlash.

But the prospect of national bankruptcy finally forced him to bend — in late January, Pakistan lifted the artificial cap on its currency, causing the rupee to plunge 20% against the dollar in a few days. The government raised fuel prices by 16%. And the Pakistani central bank raised its interest rate by 100 basis points to battle the country’s highest inflation in decades, expected to be as high as 26% in January.

How did Pakistan get here?

Deep in China’s debt

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