Pakistan is facing a deep forex crisis with its reserves down to just $3.09 billion, leaving the country in need of completing the pending ninth review under IMF’s $7 billion extended fund facility to avoid default.
The IMF review mission recently rejected Pakistan’s debt management plan and asked for a steep increase in electricity tariffs to restrict subsidies. Prime Minister Shehbaz Sharif has indicated that he has no choice but to implement these harsh conditions.
The power sector, however, poses a problem, with a long history of unsustainable subsidies, poor transmission, and lack of accountability. The source of the problems can be traced back to the mismanaged privatisation exercise that resulted in the creation of 12 local distribution companies mostly comprised of military retirees.
A 2020 study also found that the Pakistani government was paying over Pakistani Rs 1 trillion as a Tariff Differential Subsidy, applying a uniform tariff across all electrical distribution companies despite cost differences, financed by the government. The recent Pakistani Rs 120 billion energy subsidy to exporters announced four months ago only adds to the issue.
If Pakistan is unable to get out of this economic hole, it would have catastrophic consequences not only for its people, but also for India.
A total collapse of the Pakistani government, which is also facing a new wave of terrorism, could lead to the entire stretch from the Iran-Afghanistan border to Lahore becoming an extremist hotbed, further complicating India’s security challenges and leading to an even greater Af-Pak problem. Major countries must be vigilant against such a disaster.
