Is Pak heading for Lanka-type crisis?

New Delhi: Exactly a year ago, Sri Lanka defaulted for the first time in its history. And now as Pakistan’s economic crisis deepens amid its currency crashing against the US dollar with surging inflation, it almost seems like a replay.

It is no surprise that the Pakistani rupee slid 3.3% to an all-time low of 300 a dollar on Thursday, according to the foreign-exchange desk at Arif Habib Ltd. Dollar bonds due 2031 rose from the lowest since November on Thursday and were indicated at 33.44 cents on the dollar. Pakistan’s government called in the military to help end violent protests after a judge on Wednesday ordered the 70-year-old politician to be put under the custody of the anti-graft agency for eight days.

The rupee depreciation has piled up foreign debt without taking new external loans, making imports further expensive for Pakistan, which faced a six-decade high inflation reading at 36.4 per cent in April 2023. Financial pundits believe that the rupee has been depreciating due to political and social unrest caused after the arrest of PTI Chairman Imran Khan, Geo News reported. Moreover, the dollar demand-supply gap has also widened as the exporters have stopped selling US currency on speculations that rupee would depreciated further versus the greenback. On the other hand, importers are seen rushing to buy dollars. This gap in the demand and supply of the foreign currency in the interbank market has contributed to the rupee’s devaluation. Khaqan Najeeb, former finance ministry advisor, said that continuing political instability has taken a toll on market sentiments, pushing the Pakistani rupee to hit a record low.

The currency could further lose its sheen as the country’s political and security situation nosedived with widespread violence hitting several parts.

The implications would be severe for the already crumbling economy though Islamabad has assured repayments of $3.7 billion in principal debt in the next couple of months even as talks with the International Monetary Fund (IMF) on a possible bailout package remain inconclusive. Global ratings agency Moody’s warned that Pakistan could default in case it fails to thrash out an agreement with the IMF. The political crisis could delay the IMF deal.

Pakistan’s land area, population and gross domestic product are 12 times, 10 times and four times higher than Sri Lanka’s, respectively. However, Pakistan’s per capita gross domestic product is half of the island nation. Despite these differences, a significant decline in Pakistan’s foreign exchange reserves and a persistent political crisis have given the international community the impression that the country is following in Sri Lanka’s footsteps, says a report at scroll.in. Meanwhile, Pakistan’s stock market took a beating too.

The 100-index of the Pakistan Stock Exchange (PSX) declined by 298.86 points on Wednesday, showing a negative change of 0.72 per cent, closing at 41,074.95. The economic crisis is a direct fallout of maladministration and misplaced priorities of the government. “And now the worry for businesses is that the arrest has added one new dimension to the crises. We are already in the middle of multiple crises and now the arrest and the violence only do more damage to the businesses,” an analyst tracking Afghanistan and Pakistan told India Narrative. The deepening crisis will mean that Pakistan’s political class will have to focus more on dealing with the domestic crises.

Meanwhile, the interior ministry has already authorised deployment of army personnel in Punjab and Khyber Pakhtunkhwa. To arrest the growing tension in the country mobile services have also been suspended. The current situation is likely to push more expatriates to leave the country. While China has not explicitly made any observation on Pakistan’s situation, it will keep a close watch on the developments. Despite putting up a brave face, China-Pakistan’s largest investor, has expressed concerns over the growing security threats in the country.

Just last week, China’s Foreign Minister, Qin Gang during his visit to Pakistan said that stability is the premise of development and that the South Asian nation must focus on building political consensus and uphold the economy.