On our journey looking at world economic developments, crises are sadly rarely far away. Indeed, our subject of today has in many ways been one long-running crisis. But the 2022 energy crisis and its consequences has given another shove to the problems of Pakistan. Here is the Financial Times.
Pakistan’s economy is at risk of collapse, with rolling blackouts and a severe foreign currency shortage, leaving businesses struggling to operate as authorities attempt to revive an IMF bailout to relieve the deepening crisis.
A ‘foreign currency shortage’ is not unfamiliar. As we think of that part of that world, Sri Lanka comes to mind. It defaulted last spring. There are some familiar events and phrases below.
Shipping containers full of imports are piling up at Pakistani ports, according to the country’s central bank, with buyers unable to secure the dollars to pay for them. Associations for airlines and foreign companies have warned that they have been blocked from repatriating dollars by capital controls imposed to protect dwindling foreign reserves. Officials said that factories, such as textile manufacturers, were closing or cutting hours to conserve energy and resources.
Capital controls are never a good sign, so let us take a look at the state of play via the central bank and its actions.
State Bank of Pakistan
On Monday it did this:
At today’s meeting, the Monetary Policy Committee (MPC) decided to increase the policy rate by 100 basis points to 17%. The committee noted that inflationary pressures are persisting and continue to be broad-based.
As you can see, they blame inflation, but a 17% interest rate in these times comes with more than a heavy hint of currency troubles, They get along to this eventually:
Second, near-term challenges for the external sector have increased despite the policy-induced contraction in the current account deficit. The lack of fresh financial inflows and ongoing debt repayments have led to a continuous draw down in official reserves.
Mentions of challenges for the external sector are a red flag, and we soon see that they have crunched imports to try and get by. That means someone has been some combination of cold and hungry. Not the elites, who sail above such inconveniences. Next up they have borrowed from abroad, no doubt in US dollars, and have issues in repaying it. That sounds a lot worse than just the strong dollar of 2022.
In fact we see that there has been quite a trade crunch:
