The Pakistan Crisis Is Far Worse Than We Think

Venu Gopal Narayanan

Feb 04, 2023, 03:12 PM | Updated 03:11 PM IST

Crowd to buy flour in Pakistan (Twitter)
Crowd to buy flour in Pakistan (Twitter)
  • Galloping inflation, depleting foreign exchange reserves and a bumbling political leadership—each of these problems is more severe in Pakistan than they appear at first look.
  • It is always bad news in Pakistan. Be it social, financial, cultural, political, strategic, or geopolitical subjects, a general impression which forms is one of relentless violence, the absence of law or order, backwardness, sectarian strife, and hatred. Feudalism is still the governing agent of its society.

    Just in the past week, the two biggest stories to come out of that country are the suicide bombing in a Peshawar Mosque, which killed a hundred policemen, and confirmation that Pakistan is now fiscally bankrupt.

    That much-vaunted strategic depth, which Pakistan’s generals gleefully believed they had gained when the Americans abruptly exited Afghanistan in mid-2021, has been shown up to be a chilling chimera.

    Instead, it is the warlords of southern Afghanistan who are actively, aggressively, and successfully expanding their own strategic depth into entire provinces of Pakistan.

    Their politics is a mess, and their Prime Minister, by his own dejected admission, has been reduced to a pathetic figure, humiliatingly forced to trawl the world for funds.

    And, sadly, bad news there has always meant bad news for India. Consequently, the average Indian is so inured to this unidimensional reporting, that we often fail to grasp the actual nature and magnitude of our neighbour’s disasters.

    Recent data released by the State Bank of Pakistan (SBP) offers depressing insights. According to its latest monthly inflation monitor released in January 2023, the overall Consumer Price Index (CPI) soared to a whopping 24.5 per cent in December 2022. 

    Table 1: Inflation in Pakistan (Open in new tab to enlarge)
    Table 1: Inflation in Pakistan (Open in new tab to enlarge)

    While the situation is bad overall, the conditions are a lot worse in rural areas, where two-thirds of the population lives. The prices of perishable goods, like vegetables, are up 59.5 per cent in the villages. Unbelievably, this is actually an improvement, since inflation in this segment hit 74.2 per cent in September 2022.

    It is the same with rural energy costs; inflation ‘eased’ to only 26 per cent in December 2022, after soaring to an incredible 67.8 per cent in August 2022. These key figures are highlighted in blue, in a second table below.

    Table 2: Rural inflation in Pakistan (Open in new tab to enlarge)
    Table 2: Rural inflation in Pakistan (Open in new tab to enlarge)

    Whether rural, urban, or overall, we see that the situation worsened dramatically from June 2022, when fuel prices were hiked by a third. This hike was necessitated because the International Monetary Fund (IMF) made it a mandatory prerequisite for Pakistan to secure further funding.

    Another aspect of Pakistan’s bankruptcy which often goes under-reported, is its impact on power generation. A third of the country’s electricity comes from furnace oil-fired plants (called RFO, or Residual Fuel Oil). All of it is imported, and some implications of such extreme dependency on one of the most polluting fuels in use, were highlighted by Swarajya as far back as March 2019.

    Now, Pakistan’s latest Economic Survey of June 2022 may state that power stations which run on furnace oil constitute only 14 per cent of installed capacity, but in reality, the same document inadvertently admits on the next page that one third of the power generated comes from furnace oil.

    The difference is crucial, because if Pakistan is unable to pay for the imports of this vital feedstock, consistently, and in requisite volumes, the nation-wide power cut they suffered last month for two full days will, in comparison, seem like a minor fluctuation.

    Aside from crippling inflation, Pakistan is also suffering from widespread shortages of essential commodities – often for truly absurd reasons. One example is soyabean meal, a key ingredient of poultry feed, which they import from Brazil and America.

    Multiple shipments of soyabean meal were stuck at Karachi port for months, late last year, because these consignments were classified as genetically modified organisms by some obscure bureaucratic red tape, and could therefore not be offloaded as per law

    As a result, poultry feed manufacturers had to stop production, a shortage of broiler chickens and eggs hit the market, and the prices of these went through the roof. The Pakistan Poultry Association went on strike until the government allowed the meal to be offloaded. 

    Did it have to come to this? No, but it did. The reason, as Mian Tariq Javed, president of the Punjab Poultry Farmers Association explained, is because the rules were quietly tweaked in 2018 so that influential importers could corner the market! 

    Yet, if the inflation of the past year was devastating, the level of their foreign exchange reserves alarming, the efforts by their politicians to get foreign aid mortifying, and the artificial poultry feed shortage episode symptomatic of the countless reasons why Pakistan is in such a mess, the situation is only set to get worse.

    There are two principal reasons.

    One, in an effort to revive the stalled IMF loan talks (the IMF team is presently in Islamabad for negotiations), the Pakistani government removed an unofficial cap on the rupee-dollar exchange rate on 25 January.

    Overnight, the Pakistani rupee started devaluing at a frenetic clip. From 230 rupees to the US Dollar, it fell to 273 on 3 February (an 18 per cent decline in a week), and the end is not in sight. This makes imports (like furnace oil) that much more expensive.

    Two, on 29 January, Pakistan once again raised the prices of diesel, kerosene and petrol to comply with IMF requirements. This hike is not quite as bad as the one of June 2022, but its impact will be felt strongly by the public, and become visible in next month’s data.

    This is how the country functions, on the avarice and caprice of Pakistan’s military establishment, who have their fingers in every pie.

    Ironically, while Pakistan may be the only large nation not to have had its economy wrecked by communism or socialism, the current circumstances there actually offer a perfect platform for the eruption of a Marxist revolution. Perhaps, at the core, that is what the sizzling Islamist insurgencies of Pakistan also are.

    Venu Gopal Narayanan is an independent upstream petroleum consultant who focuses on energy, geopolitics, current affairs and electoral arithmetic. He tweets at @ideorogue.

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