Pakistan’s economy is on the brink of collapse as foreign exchange reserves collapse

Pakistan’s economy is on the brink of collapse, with ongoing power outages and a severe foreign exchange crunch causing businesses to struggle while authorities try to revive an IMF bailout package to ease the deepening crisis.

According to the country’s central bank, containers filled with imports are piling up in Pakistani ports and buyers are unable to secure the dollars to pay for them. Airline and foreign company associations have warned they have been prevented from repatriating dollars because of capital controls put in place to protect dwindling foreign exchange reserves. Officials said factories like textile manufacturers are closing or cutting hours to conserve energy and resources.

Difficulties were compounded by a nationwide power outage on Monday that lasted more than 12 hours. Prime Minister Shehbaz Sharif on Tuesday expressed “sincere regret for the inconvenience” and said an investigation will determine the cause.

“Many industries have already shut down, and if those industries don’t restart soon, some of the losses will be permanent,” said Sakib Sherani, founder of Macro Economic Insights in Islamabad.

Analysts warn that Pakistan’s economic position is becoming unsustainable and risks to follow Sri Lanka, where a lack of foreign exchange reserves led to serious shortages of essential goods, eventually leading to a default in May. Islamabad’s foreign exchange reserves have fallen below $5 billion, less than a full month of imports, and Sharif’s government remains at an impasse with the IMF over reviving a $7 billion aid package that stalled last year is.

“Every day counts now. It’s just not clear what the way out is,” said Abid Hasan, a former World Bank adviser. “Even if they get a billion [dollars] or two to roll over. . . Things are so bad that it will only be a band-aid at best.”

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Ahsan Iqbal, Pakistan’s planning minister, told the Financial Times that Pakistan has “drastically” reduced its imports to save foreign exchange. Analysts said this included restricting banks from opening letters of credit to importers, leading to a steel industry panel this week threatening to shut down production.

The central bank said Monday it was easing import restrictions to ease supplies of essentials like food and fuel. Pakistan is still suffering from last year’s devastating floods, which affected tens of millions of people and caused an estimated $30 billion in damage.

International lenders pledged more than £9 billion at a lenders conference in Geneva this month.

Sharif’s government has said it is committed to reviving the IMF deal to unlock the next tranche of funds. But the sides remain at an impasse over the IMF’s requirement that Pakistan accept economic reforms such as raising subsidized energy prices.

Pakistan argues that it is impractical to impose painful austerity measures while recovering from the floods. “If we just meet the IMF conditionalities, as they want, there will be riots in the streets,” Iqbal said. “We need a phased program. . . Economy and society cannot absorb the shock or the costs of an advanced program.”

The economic turmoil comes as Pakistan prepares for elections due to be held this year. Sharif’s main challenger is Imran Khan, the former prime minister who was ousted last year but remains hugely popular. Both leaders blame the other for the economic predicament and Khan is trying to force early polls.

“We need predictable energy,” said Taimur Khan Jhagra, a leader of Khan’s Pakistani Tehreek-e-Insaf party, accusing Sharif’s government of mishandling energy supplies. “That decides the quality of life”

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“As you can see, nothing works in Pakistan,” said Akram Khan, a 25-year-old who lost his job at a used car dealership in Islamabad during the blackout. “We have had gas shortages at home since early winter. And now we have seen the power cut across our country.”

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