Global Affairs Desk

Tue Jun 18 2024

Pakistan- A Crumbling Economy and it's impact on India

~ By Aarush J on 7/23/2022

Pakistan- A Crumbling Economy and it's impact on India

Pakistan is on the verge of bankruptcy as the country's economic situation is facing a dire future with no immediate positive outlook despite ongoing negotiations between Islamabad and the International Monetary Fund (IMF) to resume the USD 6 billion bailout package.

The Pakistani Rupee (PKR) has been on a free fall as it crossed 228 per USD on July 22. Pakistan's foreign exchange reserves have depleted to a critical level and the country has less than six weeks of import cover remaining. The reserves are currently below USD 9 billion, according to a report published in Pakistan Tribune.

The Pakistani rupee has devalued by a massive 34 per cent (or PKR 53.67) in the past year. In contrast, it closed at PKR 157.54 in June last year. As a result, the Pakistani Rupee has become Asia’s “worst-performing currency in 2022” with a fall of nearly 16.5 per cent (since December 31, 2001) against the US Dollar that put it at the bottom of a basket of 13 peers, including the Japanese Yen, South Korean Won, and Bangladeshi Taka.

Adding to Pakistan’s economic and population issues, the Shehbaz Sharif-led coalition government has recently increased fuel prices, the third time in the last month, to fulfil the IMF ‘conditionalities’ to revive the bailout package. This has severely hit the common Pakistani as reports of cab services, restaurants and home deliveries shutting down continue to float across the internet. petrol prices in Pakistan have been raised by 56 per cent or PKR 84 (current price: PKR 233 per litre) and high-speed diesel prices have gone up by a massive 83 per cent (current price: PKR 263 per litre) since May 26, putting further pressure on the common people.

These measures have been taken by a desperate government in Islamabad to revive the IMF bailout package, which is of critical importance to the Pakistani economy as this, according to many analysts would bring more foreign lending and improve foreign exchange reserves that have fallen over 50 per cent in the last 10 months.

Impact on India

According to a report published by the Indian Council for Research on International Economic Relations (ICRIER), deep economic troubles in Pakistan suggest that India might have to live with increased Chinese influence in Pakistan, and eventually on the region. The last time a big power, the US, had roped in Pakistan in its proxy war against the then Union of Soviet Socialist Republics (USSR), sections of Pakistan’s ruling establishment felt emboldened to undertake hostile actions against India.

However. owing to the dire situation of Pakistan's economic condition, it is hardly possible for Islamabad to pursue an adventurist policy vis-a-vis India via China. China, due to its investments and strategic interests in Pakistan, would at least have a stake in stability, if not peace. Moreover, China has demonstrated in past instances that it could have a restraining effect on Pakistan.

It is however not possible currently to say whether a China-Pakistan alliance would lead to greater anti-India activities. However, India might also need to evolve a policy to reduce or limit the influence of external donors in the region, increasingly due to the volatile situation in India's immediate neighbourhood. Pakistan’s fate today also has a lesson for the neighbourhood, as it exposes how jingoistic majoritarianism can wreak havoc on the social and economic fabric of a nation. Therefore India still needs to check its short-term, medium-term and long-term impact on the failure of economic stability of its immediate neighbour i.e. Pakistan.

The upcoming months will be hard for the government in Islamabad as the rupee is expected to depreciate further, causing inflation to rise. Pakistan’s economic crisis cannot be addressed overnight. International support and observations from the IMF and friendly countries like Saudi Arabia, China, and the UAE will only provide some breathing room in the short term to its faltering economy.

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