Updated: Oct 9, 2022
The debt-crisis of the Sri Lankan economy and its collapse with the island nation failing to meet its foreign debt obligation has increased fears about similar collapse in other South Asian nations. Such is the financial crisis in Pakistan that its Prime Minister Shehbaz Sharif recently said that even nations that are friends of Pakistan feel that the country is always begging for money. The debt situation has been worsened due to Pakistan's high exposure to big scale Chinese infrastructure projects which come with heavy interest and debt repayment obligations.
In a historic devaluation, the Pakistani rupee fell recently to under 240 rupees for one US dollar. Analysts believe that Pakistan might be the next country after Sri Lanka whose economy might collapse.
The reasons for this are clear. Pakistan closely follows Sri Lanka in having the largest forex liquidity gap. Apart from direct external funding needs, the fiscal situation of Pakistan is also precarious. Pakistan's fiscal gaps also need to be financed by renewed external sources as domestic savings are too small and local financial markets too shallow to provide this support. The ever rising size of interest payments also suggest that the route to fiscal consolidation would be difficult, if not impossible for Pakistan. Pakistan is unlikely to be able to raise very vast sums of additional money from international creditors due to its poor track record in fiscal management and unbalanced allocation of resources, with most of available money going towards its bloated armed forces.
On top of all this, the country is now battling its worst floods crisis which has further worsened an already tremendous electricity supply problem. The devastation caused by the floods is putting additional and unprecedented pressure on Pakistan's finances which is taking the country to the brink of being a failed state. The floods have critically damaged capacity in the textile industry, one of the biggest foreign exchange earners for Pakistan, and the country might soon have to import food crops due to the damage flood waters have done to agricultural produce.
All this means that Pakistan's economy has been battered critically and with the global economic uncertainty, Pakistan is not being able to raise further support from the global community as it cannot promise better governance. In such a scenario, its economy might collapse soon.