Pakistan is currently facing a severe foreign exchange crisis, causing thousands of containers filled with essential food items, raw materials and medical equipment to be held up at Karachi port. The shortage of crucial dollars has led to banks refusing to issue new letters of credit for importers, further hurting an economy already struggling with soaring inflation and lack of growth. Operations at the port have decreased by at least 50 percent as shipping containers are stuck waiting for payment guarantees.
State bank forex reserves have dwindled to less than $6 billion, the lowest in almost nine years, with obligations of more than $8 billion due in the first quarter alone. Analysts estimate that the reserves are enough to pay for around a month of imports. The country’s economy has crumbled alongside a political crisis, with the rupee plummeting and inflation at high levels, while devastating floods and energy shortages have added further pressure.
Pakistan’s enormous national debt, currently $274 billion, or nearly 90 percent of GDP, and the constant effort to service it, makes the country particularly vulnerable to economic shocks. The government has been relying on an IMF deal brokered under former leader Imran Khan, but the latest payment has been pending since September. The IMF is demanding the withdrawal of remaining subsidies on petroleum products and electricity, aimed at helping the population of 220 million with the cost of living.
Prime Minister Shehbaz Sharif has urged the IMF to give Pakistan some breathing space as it tackles the “nightmarish” situation. With an election due at the end of the year, implementing or campaigning on the tough conditions demanded by the IMF would be political suicide, but Pakistan is unlikely to secure fresh credit without making some cutbacks.
On Thursday, the United Arab Emirates agreed to roll over $2 billion owed by Pakistan and provide the country with an extra loan of $1 billion, helping it to avoid immediate default. Sharif continues to press allies, including Saudi Arabia, Qatar, and Beijing, which has invested billions as part of the China-Pakistan Economic Corridor project, for help.