Pakistan Leaning Towards An Economic Crisis!

Concerns have grown that Pakistan is heading for an economic crisis and hyperinflation as more than 9,000 containers are still stuck at ports, threatening to disrupt supply chains for essential goods.

Experts warn that the country is facing a deep financial crisis, with inflation rising to unprecedented levels, food prices rising, and financial resources drying up. The escalation of the situation can soon switch into an ugly disaster that engulfs homes, offices and hospitals.

On the one hand, importers are unable to clear more than 8531 containers due to a lack of dollars. Meanwhile, shipping companies threaten to shut down their operations in Pakistan due to non-payment on time.

The central bank has just $3.9 billion reserves, barely enough for three weeks of imports. As per the people in the industry and government, the estimated amount required to clear containers and open more letters of credit to cater to the industry’s needs ranges between $1.5 to $2 billion.

In addition, the government has suspended more than $2 billion in dividends, hurting future investment prospects.

Businesses that are dependent on imports are now closing. It can disrupt the supply chain because many domestically produced goods are based on imported raw materials.

On the other hand, even worse, factories that have stopped production can lay off workers and cause an employment crisis.

Hospitals are running out of medicine, and failing windshield wipers and running out of fuel can quickly bring cars to a standstill on the side of the road on a rainy day.

Everything from gasoline to pulses and medicines may soon fall below demand. The flour crisis has put people’s lives at risk due to the sharp price increase.

Pakistan is currently facing an inflation rate of 25%, and supply chain disruptions could lead to hyperinflation, where a sharp devaluation could fuel imported inflation.

Apart from past mismanagement of the previous government, the current crisis is exacerbated by the indecisiveness of the ruling coalition, which has twice postponed its decision to return to the IMF.

According to SBP data, when the PTI period ended on April 8, 2022, SBP’s foreign exchange reserves stood at $10.9 billion. Reserves fell 29%, or $3.1 billion, from April 9 to $7.8 billion on August 26. IMF approved a $1.2 billion loan instalment in late August last year.

Foreign reserves recovered slightly to $8.8 billion following the revival of the IMF program but fell again to $7.8 billion when the current finance minister Ishaq Dar took the helm of the finance ministry in September last year.

The country’s reserves are now down to $3.9 billion, 50% less since Ismail’s ouster. Overall, the PML-N-led coalition has lost $7 billion, or approximately 64% of its total reserves, since coming to power.

Dr Aisha Ghaus Pasha, Provincial minister of finance, said, The government wants to protect its citizens by reducing the burden as much as possible, but the IMF program is pushing us in the other direction.

Similarly, with little foreign currency available, governments and central banks began to freeze more imports months ago through administrative controls and different tactics.

The data on electricity consumption suggests that there has been a 25-30% reduction in industrial activity.

This week, the SBP governor said it has been solving 5,000 to 6,000 cases every month. As of May 2022, they have settled 33,000 cases. However, many businesses necessary for day-to-day economic and social life have been declared non-essential to reduce import bills.

The petroleum sector has warned the central bank that stocks of petroleum products may run out as banks refuse to open and approve LCs for imports. An oil shipment from Pakistan National Oil has already been cancelled, and the LC of another shipment that was supposed to be loaded on January 23 was not confirmed until last week.

A shipment of 532,000 barrels of crude oil bound for Pakistan Refinery (PRL) is scheduled to be loaded on January 30; its LC is yet to be confirmed and is under negotiation with the state-owned bank. Two shipments of PSO petrol in the pipeline are also awaiting LC approval by local banks.

Pakistan is an energy-deficient country, and approximately 430,000 Metric tons of petrol, 200,000 Metric tons of diesel, and 650,000 Metric tons of crude oil are imported monthly at an estimated cost of $1.3 billion to meet its energy needs.

The situation worsened significantly during the month. Banks discourage industry members from opening new LCs. Earlier, SBP accepted requests to open LCs, but now banks are apparently refusing to open letters or even release documents for imports that have already arrived but are stuck at ports.

Ibrahim Tariq Shafi, who runs sugar and steel mills in Pakistan, faced a unique situation when a foreign supplier did not receive payment despite the bank having issued import documents.

In a letter to the Ministry of Information Technology, the telecommunications industry expressed concern over the bank’s refusal to open an LC for the telecommunications company and said that these restrictions had caused delays in the implementation of new projects. C-Jazz, Zong4G, Telenor, Ufone, and back-end technology equipment suppliers rely on imports to maintain and expand their networks.

The industries have begun to shut down their operations temporarily. Beco Steel Ltd has stopped its production till further notice due to a delay in the approval of the LC letter. Inventory levels have “significantly reduced” and have a negative impact on the supply chain.

Sitara Peroxide Ltd has informed its shareholders that it can no longer operate its manufacturing facility due to reasons including non-approval of LC with required raw materials.

Pak Suzuki announced that the closure of its automobile factory had been extended due to the continued lack of inventory. Crescent Fibres Ltd cut production by 50%. Suraj Textile Mills Ltd, Nishat Chuniyan Ltd and Kohinoor Spinning Mills also announced production cuts due to high operating costs and low demand. Diamond Industries, the famous foam-making company, has halted production until “raw materials are available.

Pakistan also faces severe shortages of life-saving drugs needed to treat cancer, diabetes, epilepsy and heart disease.

About 100 businesses were placed under the list of non-essential import items under the Import Policy Order 2022.

This list includes solar panels, batteries, transformers, electric lighting and fittings, traffic lights, windshield wipers, ladies’ handbags, microwave ovens, scooters & tricycles, consumer electronics, sanitary fittings, and mobile phones etc.

The government has spent the last four months hoping for unconditional loans from Saudi Arabia, China and the UAE, but this was not achieved, and the country’s reserves kept shrinking.

After facing embarrassment from all sides, the government has decided that IMF is the only option. Once the deal becomes mature, things might turn towards a positive direction.