What's new

Pakistan is in big trouble

RescueRanger

PDF THINK TANK: CONSULTANT
Sep 20, 2008
12,043
192
24,664
Country
Pakistan
Location
Pakistan
1658681492505.png
 

waz

ADMINISTRATOR
Sep 15, 2006
20,125
80
54,728
Country
Pakistan
Location
United Kingdom
He's actually bang on the money with this article. One thing he does leave out which as an economist is difficult to measure i.e. confidence, which can make a great deal of difference. The nation is in the hands of crooks which is sending it further into a spiral.
 

fatman17

PDF THINK TANK: CONSULTANT
Apr 24, 2007
31,567
88
37,773
Country
Pakistan
Location
Pakistan

Pakistan is in big trouble​

Another emerging-market crisis looms​


Noah Smith
4 hr ago

Pakistan’s economy appears to be in pretty bad shape. Atif Mian, a Princeton economist who immigrated from Pakistan, recently wrote a long and dire thread about the problems facing his native country:

Twitter avatar for @AtifRMian Atif Mian @AtifRMian
Pakistan's economy is in deep crisis a long 🧵
July 20th 2022
My first reaction after reading about Pakistan’s situation is that it looks like it’s headed for a crisis similar to the one that recently befell Sri Lanka. I wrote a long post about Sri Lanka the other day, using it to explain the features of the classic “emerging-markets crisis”:

Noahpinion
Why Sri Lanka is having an economic crisis
Many of the particular root causes of Pakistan’s situation are different than in Sri Lanka — they didn’t ban synthetic fertilizer or engage in sweeping tax cuts. The political situations of the two countries, though both dysfunctional, are also different (here is a primer on Pakistan’s troubles). But there are enough similarities at the macroeconomic level that I think it’s worth comparing and contrasting the two.
In my post about Sri Lanka, I made a checklist of eight features that made that country’s crisis so “textbook”:
  • An import-dependent country
  • A persistent trade deficit
  • A pegged exchange rate
  • Lots of foreign-currency borrowing
  • Capital flight
  • An exchange rate crash (balance-of-payments crisis)
  • A sovereign default
  • Accelerating inflation
So let’s go through each one of these and see how it applies to Pakistan.

1. Import dependence ✔️

Remember, the root cause of an emerging-market crisis is import dependence. This means that a country imports much of the basic goods that it needs in order to live — especially food and fuel. Mian points out that Pakistan is pretty dependent on imports:

Twitter avatar for @AtifRMian Atif Mian @AtifRMian
Energy is mostly imported, medicine are mostly imported, even in food unfortunately pakistan is no longer self-sufficient
July 20th 2022
Fuel is the biggie here — more than a quarter of Pakistan’s total import bill goes to pay for fuel. In recent years it has become a lot more dependent on imports of liquified natural gas.
Food doesn’t look to be as big of a problem — Pakistan imports a fair amount of food, but it also exports a fair amount. That said, Pakistan’s population is pretty poor and malnourished, so even small disruptions to food imports could cause a lot of suffering there. And a cutoff of fuel imports would probably disrupt local agriculture quite a bit, which could cause output to crash and force Pakistanis to rely on imported food that they suddenly couldn’t afford.
In other words, if Pakistan’s currency (the Pakistani rupee) crashes in value and it suddenly can’t afford imports, its economy is in big trouble.

2. A persistent trade deficit ✔️

Remember that the reason a currency crash represents a crisis for an import-dependent country is that when the currency crashes, it’s a lot harder for a country to buy the foreign currency (“foreign exchange”) that it needs to buy imports.
There’s another way to get foreign exchange — by exporting. When you export, you get paid in foreign currency. But if a country runs a large and persistent trade deficit, then it doesn’t have a cushion to fall back on.
Source: macrotrends.net
So that’s bad news for Pakistan. It means that when the Pakistani rupee crashes, it will have to borrow to get foreign exchange — at a time when borrowing will suddenly have gotten a lot more expensive.

3. A pegged exchange rate ❌

This is one big difference between Sri Lanka and Pakistan. And it’s good for Pakistan! Sri Lanka pegged the Sri Lankan rupee to the U.S. dollar, so that when the currency crisis came, it came all at once, when the peg was broken. But Pakistan lets the Pakistani rupee float freely. That means that we’re less likely to see sudden, catastrophic downward moves.
That doesn’t mean Pakistan is safe from a currency crisis. What it means, though, is that a Pakistani currency crisis is more likely to be a long, drawn-out affair. That will theoretically give the Pakistani government time to reverse course and fix things before disaster truly strikes. But given the political turmoil in Pakistan, it’s anyone’s guess as to whether or not the government will have the capacity to turn the ship around.

4. Lots of foreign-currency borrowing ✔️

Remember, foreign-currency borrowing makes a country more vulnerable to a big crash in its exchange rate. If Pakistani banks or companies borrow in dollars, it means that they have to pay a certain number of dollars back each year. If the rupee falls in value, that makes those dollar repayments much more expensive. And this comes at the worst possible time — right when a country needs to borrow more money to pay its suddenly expensive import bills! Borrowing in foreign currency is thus a dangerous game.
And Pakistan has, unfortunately, been playing this game. Here’s a chart from Bloomberg showing how much dollar debt is coming due in the next few years:

Now this isn’t as bad as Sri Lanka. The amounts of dollar debt Pakistan needs to pay back in the next couple of years are about the same as for Sri Lanka, but its economy is almost four times as large. So this isn’t as catastrophic, but it’s still pretty bad.
Who has Pakistan been borrowing from? Well, a lot of people — the World Bank, the Asian Development Bank, the IMF, Saudi Arabia, and Japan. But Pakistan’s biggest foreign creditor is China.
Just like Sri Lanka, Pakistan has been borrowing heavily from China in order to fund domestic infrastructure projects, largely as part of China’s Belt and Road scheme. In fact, Pakistan has received more Belt and Road investment than any other country. But as in most countries, the Belt and Road projects have not been an economic success, due to various local factors that the Chinese planners either didn’t expect or didn’t care about. As with Sri Lanka, Pakistan has been left holding the bag.
Pakistan has been slowing down its Belt and Road projects and begging China for debt relief for years now. But while China has allowed Pakistan to roll the debt over, it has not canceled any of the debt yet — Pakistan is still on the hook. This outcome should give pause to all the people who pooh-pooh the danger of Chinese “debt traps”.
Even without China, though, Pakistan has simply borrowed too much in foreign currencies. In a previous post about Pakistan’s long-term growth, I called it a “low-income consumption society” — Pakistan borrows from abroad just to keep its desperately poor citizenry alive.

5. Capital flight ✔️

Capital flight is generally what precipitates a currency crisis. When people try to get their money out of a country, they have to sell that country’s currency in order to do it, which puts downward pressure on the exchange rate. Suddenly everyone is dumping rupees, so the rupee gets cheaper. Pakistan, unfortunately, is highly prone to capital flight. And this time is no exception — people are rushing to get their money out, and the government is trying to implement capital controls to stop them from getting their money out.

6. An exchange rate crash ❓

Capital flight is putting downward pressure on the Pakistani rupee. There hasn’t been as dramatic a crash as in Sri Lanka, but the rupee has lost around 30% of its value since 2021, and the decline seems to be accelerating:
Source: forex.pk
This isn’t yet a full-on currency crisis, but it’s getting there.

7. A sovereign default ❓

Remember, a currency crash makes a sovereign default likely when a country has a lot of foreign-currency debt. Pakistan hasn’t defaulted on its sovereign debt yet, as Sri Lanka has. But Pakistan’s bond yields have skyrocketed to 27%. This means that people are charging a very, very high price to lend Pakistan money. Why? Because people think there’s a high probability that Pakistan will soon default.

8. Accelerating inflation ❓

If a country has a lot of foreign-currency debt that it suddenly can’t afford to pay back, it can default, and/or it can print local currency to pay back the foreign-currency debt (even though this drives the exchange rate even lower). Printing a bunch of rupees would cause high inflation, as it has in Sri Lanka. So far, Pakistan’s inflation rate hasn’t spiked to the degree Sri Lanka’s has, but it’s not looking good:
Source: tradingeconomics.com
So to sum up, Pakistan shares a lot in common with Sri Lanka. It doesn’t have a pegged exchange rate, it’s not as dependent on imported food, and it doesn’t have quite as much foreign-currency debt. But the basic ingredients for a slightly more drawn-out version of the classic emerging-markets crisis are there, and there are some indications that the crisis has already begun.

Pakistan’s long-term problems​

Because Pakistan didn’t peg its exchange rate and didn’t borrow quite as much in foreign currencies as Sri Lanka, it made fewer macroeconomic mistakes than its island counterpart. But in terms of long-term economic mismanagement, it has done much worse than Sri Lanka. No, it didn’t ban synthetic fertilizers — that was an especially bizarre and boneheaded move. But one glance at the income levels of Sri Lanka and Pakistan clearly shows how much the development of the latter has lagged:

Pakistan went from 3/4 as rich as Sri Lanka in 1990 to only about 1/3 as rich today. That’s an incredibly bad performance on Pakistan’s part.
Assessing just why Pakistan has failed so badly for so long is difficult. I wrote a post about it a year ago, but that only scratched the surface:

Noahpinion
Why would Pakistan grow?
a year ago · 57 likes · 39 comments · Noah Smith
Basically, Pakistan invests very little of its GDP, so it can’t build up capital over time. Low investment is probably a result of various bad economic policies, but it’s also probably due to political instability — Pakistan frequently alternates between military and civilian control, and civilian administrations tend to be chaotic and fractious (as in the current turmoil). That’s not a very good climate to invest in!
Instead of investing, Pakistan keeps its population on life support with constant external borrowing — from international organizations, from China, from Saudi Arabia, from whoever will loan it money. It uses these loans to fund consumption of basics like fuel. Mian discusses how this has resulted in a perverse fuel subsidy — a pretty common practice for governments that want to keep their populations pacified, but one that Pakistan is particularly ill-equipped to afford.
So Pakistan constantly limps along at the knife-edge of desperate poverty, decade after decade, as generals and politicians fight over who gets to be in charge. Currency crisis or no currency crisis, that is a long-term recipe for disaster.


Source: https://noahpinion.substack.com/p/pakistan-is-in-big-trouble
Atif Mian is a nut-job. Don't know about Noah
 

nahtanbob

ELITE MEMBER
Sep 24, 2018
9,830
-55
3,331
Country
United States
Location
United States
Can any author in West post anything about the dire economic situations of some of the emerging countries without blaming and scapegoating China ? Take for Sri Lanka, it has been cleared so many times that the Chinese loans to Sri Lanka accounted for only about 10% of the country's total foreign debts. The rest 90% of the debts are owed to your greedy Western banks, companies and govs including the world bank, IMF and ADB with European, American and Japanese control as we all know. Yet, the author continues to blame the Chinese 10% of Sri Lanka's total foreign debt as the "single most important" cause of Sri Lankan's economic crisis. Wake up, come to your senses or you are just lying to deflect the real causes of the countries' problems. Pakistan's ratio of debt to Chinese loans I think is not much higher than the 10% of Sri Lankan's debt to China too. The author should advise those countries not to borrow any money from China in the future since Chinese loans to them are seem with all evil intentions while Western loans are all benevolent, those countries should just borrow from the West.

there are all these contracts to chinese companies who own power generation facilities in Pakistan, who have contracts to sell power at inflated prices and pakistani taxpayers are on the hook to pay them back
it won't show up in any "foreign debt" statistics. the money paid to those chinese companies is as bad as foreign debt payment

as someone put it there is lies, damn lies and there is statistics
 

khansaheeb

ELITE MEMBER
Dec 14, 2008
13,746
-5
15,721
Country
Pakistan
Location
United Kingdom
The sky is not falling.
No just water is.

Solutions are simple but these corrupt politicians are so drugged with greed they refuse to wean themselves of the shackled old world order. If Pakistan is to survive in the new world economic order it must change: politically, economically and socially. We must open up full trade with Iran (start the gas pipeline and oil imports) , Russia (import gas and oil), China (import more water, power and infrastructure projects) , Turkey (joint ventures) and Afghanistan, default on the IMF loan and proceed with full vigor to democratise the political system , bring more grass root power and instill military discipline into the children to empower them for tomorrow. Time is of essence , the country is sinking literally today due to the corruption of yesterday. The Islamic spirit of the partition must be ignited to save the people of today. we know what the problems are, we don't need dollar slaves to parrot the problems as we need solutions.

Atif Mian is a nut-job. Don't know about Noah
Difference between a nut job and a sane person is: nut-job always complains.
 
Last edited:

etylo

FULL MEMBER
Nov 9, 2021
1,293
-15
1,473
Country
Canada
Location
Canada
there are all these contracts to chinese companies who own power generation facilities in Pakistan, who have contracts to sell power at inflated prices and pakistani taxpayers are on the hook to pay them back
it won't show up in any "foreign debt" statistics. the money paid to those chinese companies is as bad as foreign debt payment

as someone put it there is lies, damn lies and there is statistics
All those are your nonsense speculations. You indians stop pretending you are the spoke persons of pakistan and others who have projects with china, you are not qualified. Stop being jealousy and smearing chinese all the time you hopeless and good at nothing indians.
 

nahtanbob

ELITE MEMBER
Sep 24, 2018
9,830
-55
3,331
Country
United States
Location
United States
All those are your nonsense speculations. You indians stop pretending you are the spoke persons of pakistan and others who have projects with china, you are not qualified. Stop being jealousy and smearing chinese all the time you hopeless and good at nothing indians.

All of these are Chinese and Pakistani newspapers


 

aviator_fan

FULL MEMBER
May 25, 2021
284
0
208
Country
Pakistan
Location
Pakistan
These articles are surfacing now as if to indicate something has drastically changed. Now is when the convergence of factors is taking place. But the seeds were born regardless of Govt in the heavy import deficit economy.

Go to one of the hypermarkets and Salmon imported from Nordics, food/cereal from all over the world. Consumer appliances everwhere. Its as if we were a Gulf country exporting oil.

Automobile sales go up but all purchased on debt and credit.

Acting like a GCC country where you see supermarkets with money that was borrowed and a circular debt cycle was going to lead to one conclusion. Eventually regardless of who you the money, it becomes due and it has.

We have been living beyond our means for a long time and every Govt just tried to keep status quo.
 

Users Who Are Viewing This Thread (Total: 1, Members: 0, Guests: 1)


Top Bottom