As the sun was setting on 2021, the people of Pakistan hoped for a better future. Sadly, all those hopes have been dashed as the year 2022 turned out to be what writer Nassim Nicholas Taleb calls a “black swan,” or an outlier, where the previously unthinkable has come to pass in terms of a rare confluence of political, economic and climate chaos.
Though the start of 2022 had the trappings of an auspicious year, especially as the world seemed to be finally recovering from Covid-19, this optimism abruptly ended in late February as Russia invaded Ukraine. Russia’s bumbling misadventure in Ukraine resulted in a significant spike in international commodity prices since Russia and Ukraine are among the main producers of oil and wheat.
This conflict had a direct impact on Pakistan’s economy. For instance, a barrel of Brent crude oil that stood at below $80 at the beginning of this year, shot up to $123 in the immediate aftermath of the Russian invasion. These price spikes led to a significant increase in Pakistan’s current account deficit, thereby putting downward pressure on the Pakistani rupee making it shed almost 25% of its value against the USD this year. Rising oil prices and the falling rupee had a huge impact on prices in Pakistan, where inflation stood at 12.3 at the end of last year, it accelerated to almost 24% at the end of November 2022 making life increasingly difficult for a vast majority of Pakistanis.
As Russia’s misadventure in Ukraine was becoming the most momentous story of the year, a political thriller was played out in Pakistan when Prime Minister Imran Khan was ousted through a no-confidence motion in April. This change at the helm, however, unleashed such potent forces that the new government is still trying to get its sea legs, eight months later. This is perhaps also a reason why this government has dragged its feet in accepting the IMF’s conditions since the government fears social unrest in an already polarized atmosphere where the ex-Prime Minister has been breathing down the government’s neck.
In June, as inflation hit 40-year-highs in the US, the Federal Reserve, US central bank, started increasing interest rates to control inflation forcing almost all central banks around the world to follow suit. Due to a series of unprecedented rate hikes in the US and Euro zone, investment started flowing in the direction of the US and other developed countries leading to massive exchange rate depreciations in the developing world thereby adding still more fuel to inflationary fires in the developing world.
In August, as Pakistan’s political leadership was desperately trying to bring things back on to an even keel, the country was left reeling after the worst floods, at least in the last 75 years. Where these floods killed more than 1,700 people, more than 2.2 million homes were damaged, while more than 1 million livestock perished in the deluge. According to Post-Disaster Needs Assessment done by the Ministry of Planning, Development & Special Initiatives, Pakistan suffered a damage and loss of USD 30 billion. Most alarmingly, the Assessment also shows that almost 9 million more people have been pushed below the poverty line due to these floods.
In August, as Pakistan’s political leadership was desperately trying to bring things back on to an even keel, the country was left reeling after the worst floods, at least in the last 75 years.
As if all of this was not enough, the government inadvertently escalated economic uncertainty by shuffling its finance team in late September. The government should have known better because only a week prior to Pakistan getting a new Finance Minister, Kwasi Kwarteng’s unorthodox approach to public finances had brought the Pound sterling at new lows in the UK. Predictably, the new Finance Minister’s somewhat unorthodox approach to the exchange rate policy, among others, raised quite a few eyebrows at the IMF.
As the sun sets on 2022, Pakistan will remain stuck in the midst of the ongoing economic maelstrom. Pakistan’s exports and remittances will go down, widening the current account deficit, primarily because of the recent floods and recession in the US, Eurozone and now in China. This will put additional downward pressure on the exchange rate forcing the rupee to lose value against major currencies. At the same time, agriculture losses due to the floods will manifest themselves through higher food prices. What this means is that people could see even more inflation in the coming year!
The government will be able to bring the IMF program back online but will find it increasingly difficult to balance the conditions of fiscal prudence versus giving relief, especially as the next year is an election year in Pakistan. This points towards a tense relationship between the IMF and Pakistan as well as towards a widening effect on the primary and the overall fiscal deficits.
The government will be able to bring the IMF program back online but will find it increasingly difficult to balance the conditions of fiscal prudence versus giving relief, especially as the next year is the year of general elections in Pakistan.
Alternatively, some potential scenarios may also prove to be a boon for Pakistan. First, international oil prices may fall because of the resurgence of Covid-19 in China. Second, Senator Sherry Rehman may be able to convince rich countries to open their coffers to Pakistan in the International Conference on Climate Resilient Pakistan in January 2023. Finally, the end of hostilities between Russia and Ukraine could ease the pressure on global commodities thereby leading to lower food prices in Pakistan.
One hopes that 2022 remains a black swan year—a rare confluence of multiple crises.