Pakistan is in the eye of the poly-crisis, with its external debt almost doubling between 2015 and 2020 to become the main driver of more widespread economic problems in 2022, according to a new UN report, which also warns that developing countries face years of difficulty as the global economy slows down amid heightened financial turbulence.
The United Nations Trade and Development Conference (UNCTAD) said in its latest report that Pakistan’s export earnings were falling or stagnant over the same period.
As a net wheat and energy importer, exposure to rising prices in these markets was a concern even before the war in Ukraine, the Geneva-based UN trade body said.
The sharp spike resulting from the Ukrainian conflict led to significant import costs, which persisted through much of 2022, it was pointed out.
The currency has also seen a sharp fall in value (over 40 per cent against the dollar since the beginning of 2020), adding to inflationary pressures and depleting exchange reserves, the report noted.
Pakistan, the report said, needs to urgently address the problem of its failure to raise tax revenues. However, the damage from the floods that hit the country in July and August 2022 is of an order of magnitude that even with a more robust fiscal base Pakistan would be facing severe financial stress.
In the wake of COVID-19, Pakistan was amongst the first to sign-up for the G20-backed Debt Service Suspension Initiative (DSSI), which allowed it to suspend payments to bilateral creditors between May 2020 and December 2021 and it is in ongoing negotiations with the IMF to secure new loans to avoid defaulting on its external debt in the short-run.
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Nearly $31 billion concessionary capital, which would help create the fiscal space needed to respond to any exogenous shock, is currently tied up in ongoing negotiations over the programme, the report said. Over the next five years, the IMF estimates the annual external financing need of Pakistan at $35 billion.
Against a worsening economic backdrop, it said, last year’s monsoon rains were an estimated 50 per cent stronger than normal, flooding one-third of the country and leaving 8 million people displaced.
The loss and damage (LD) from the floods have been estimated by the World Bank (2022b) to amount to more than $30 billion, or 8 per cent of Pakistan’s GDP. This relative cost is about two times larger than extreme flooding events that hit Bangladesh and Bolivia over a decade ago, hinting at the rising cost from LD.
Bilateral and multilateral partners have pledged to extend $9 billion of funds to cover slightly more than half of the $16.3 billion reconstruction needs to be estimated by the World Bank, the report said.
“Though extended on favourable terms, these loans will increase Pakistan’s debt burden and weigh negatively on adaptation and other required social and productive investment,” it said, adding, “Unless more Loss and Damage finance is made available in the form of grants, the risk of a debt spiral will only intensify.”