Will Pakistan Become The First Nuclear Power To Go Bankrupt? – Analysis


By Yuan Yujing*

On January 26, at the close of the official trading day, the Pakistani rupee (PKR) fell 9.61% against the U.S. dollar, setting a record for the largest one-day drop in more than two decades, and once again raising concerns about Pakistan’s debt crisis.

Dong Tao, managing director and the vice chairman for Greater China at Credit Suisse, pointed out that what lies behind the PKR’s exchange rate plunge is Pakistan’s deteriorating economic and financial situation in recent years. Data show that since 2023, the PKR has depreciated by 22% against the USD, and the national inflation rate has exceeded 20%, hitting a 48-year high. At the same time, in the domestic market of Pakistan, a large number of food and commodities are facing shortages, severely affecting the daily life of local consumers. Coupled with the soaring energy and food prices brought about by the conflict between Russia and Ukraine, there have been massive demonstrations ongoing in the South Asian country. In addition, under the pressure of the exchange rate, Pakistan is also facing serious capital outflow problems. Pakistan’s foreign exchange reserve balance fell to a record low of less than USD 3 billion at one point after repaying USD 1 billion in business loans to two UAE banks this year. Judging from the current import data, this amount can only maintain the country’s import demand for about three weeks. On this basis, Pakistan is also facing foreign debt pressure of more than USD 126.9 billion. Under internal and external difficulties, Pakistan is gradually slipping into the abyss of the debt crisis.

How did Pakistan get to where it is today? On the one hand, this is related to the country’s long-term relatively weak economic foundation. On the other hand, the three unexpected storms in 2022 have directly pushed it to the brink of crisis.

The first storm brewed in Pakistani politics. In April 2022, former Pakistani Prime Minister Imran Khan was forced to step down as he faced a vote of no confidence. This change has caused social rifts in the country. Backed by young supporters, Khan undertook a series of moves over the next six months to regain power. In November of that year, he was shot in an assassination attempt and hospitalized at a protest rally in Wazirabad. On the other hand, after the new Prime Minister Shehbaz Sharif came to power. While struggling to deal with Khan’s opposition, he also had to carry out drastic reforms to meet the requirements of the International Monetary Fund (IMF) to obtain further financial assistance. Under his administration, the Pakistani government first aligned the official exchange rate with that of the black market which caused the PKR exchange rate to plummet, then canceled energy subsidies and raised energy prices by 16%. These moves make the life of ordinary Pakistanis worse. The changes in subsidies in the energy sector have also led to increased fluctuations in local energy prices, and in the end, the subsidies have lost their basic macro-control functions. In this regard, one of the important driving forces behind Pakistan’s economic crisis may have a lot to do with the failure of the country’s domestic governance.

The second storm stems from the indirect effects of the conflict between Russia and Ukraine. After the Russian-Ukraine war broke out, global energy and food prices soared. As a country that is highly dependent on the import of goods, Pakistan’s export scale has hardly increased in the past decade, causing the country’s trade deficit to expand rapidly. At the same time, due to its long-term dependence on importing grain from Russia and Ukraine, Pakistan’s grain supply chain is naturally on the verge of interruption when the war is protracted. By the end of 2022, many provinces such as Balochistan are experiencing shortages of flour and wheat. Although Pakistan’s textile industry has always been the country’s pillar manufacturing industry, documents from the Asian Development Bank show that in the past decade or so, it has rarely invested in the textile industry’s infrastructure and related equipment industries. are still dependent on imports. Therefore, it needs to import both energy and food, and even basic production equipment. One can only imagine the foreign exchange burden that Pakistan has to bear.

The third storm is a “storm” in the literal sense. In the summer of 2022, Pakistan suffered the largest climate disaster. On August 31, its Ministry of Climate Change released a report stating that more than one-third of the country’s land has been submerged underwater, and the government has therefore declared 72 of the country’s 160 districts as disaster areas. Among them, the rainfall in Sindh Province of southeastern Pakistan in 2022 was more than six times the average annual level in the past 30 years; and the perennially dry Baluchistan Province also experienced intensive rainfall that exceeds the annual average by more than five times. The resulting floods far exceeded the local rain and disaster prevention capabilities. This catastrophic flood caused the displacement of more than 8 million Pakistanis in 2022, and the economic loss reached about USD 30 billion. The flooded farmland and cotton fields caused the supply to be cut in half, and the inflation rate was quickly pushed to more than 25%.

Battered by three storms, Pakistan’s fragile economy has become even more fragile. To make matters worse, 2022 coincided with the radical rate hike in the United States, and severe capital outflows have become the last straw that crushed Pakistan’s economy. Dollar outflows fuel foreign exchange losses and inflation, and at the same time, soaring global food and energy prices further hurt imports and stall an economic recovery marred by floods and political corruption. With various woes intertwining, Pakistan is now pushed into its darkest days.

Under such a backdrop, in January this year, IMF representatives went to Pakistan to launch a new round of aid negotiations. However, with its political corruption and other factors, the relevant negotiation process has stalled. Data show that since its formation in 1947, Pakistan has been seeking financial assistance. Since the country received its first loan from the IMF in 1958, in the following 60 years, the IMF has provided Pakistan with a total of 23 loan programs, but Pakistan has never really paid off any loan. At the same time, its domestic construction, which has received a lot of aid, has not improved, which eventually aroused dissatisfaction in the international community in 2019. Therefore, the IMF requires Pakistan to carry out a large number of structural reforms, including open exchange rates and prices, before receiving new aid. However, historical experience shows that opening up the exchange rate in a crisis will inevitably lead to the collapse of the exchange rate. At the same time, as mentioned above, the ineffective governance of the Sharif government in the process of reform has exacerbated various crises in Pakistan. Hence, it may be difficult for Pakistan to rely on the IMF to survive this crisis.

it should be pointed out that Pakistan has maintained a close relationship with China for a long time, and it is also an important anchor point of China’s Belt and Road Initiative. Therefore, if Pakistan’s debt crisis breaks out, it will inevitably affect China. Under the catalysis of the economic crisis, the domestic security situation in Pakistan has been affected. Forces including the Pakistani Taliban and the Baluchistan Liberation Army, designated as terrorist groups, have begun to be more active, and some of their targets have been the Chinese. The future construction of the China-Pakistan Economic Corridor will certainly be impacted. At the same time, as a country that has received Chinese aid for a long time, if Pakistan falls into crisis, it will also provide a fulcrum for European and American countries to target China geopolitically.

Final analysis conclusion:

Under the multiple blows of capital outflows, bottoming out of foreign reserves, soaring prices, natural disasters, and political chaos, it is difficult for Pakistan to rely on external assistance such as the IMF to overcome its current crisis. It is, therefore, likely that Pakistan could become the first nuclear power to go bankrupt. If this happens, China could also suffer negative economic and geopolitical ramifications due to its close relationship with Pakistan.

Yuan Yujing is a researcher at ANBOUND


Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

One thought on “Will Pakistan Become The First Nuclear Power To Go Bankrupt? – Analysis

  • February 17, 2023 at 7:22 am

    Pakistan has several issues it needs to deal with but the primary is to –
    1) Accept responsibility and accountability for its own failures and not shift it to others
    2) accept the fact that it is a local military power not an Asian one
    3) it’s geopolitical world is constrained and hampered by the obsession of its ruling elite and landed gentry fixation on India. It should overcome its inherent Islamic perception that Pakistan manifest destiny is to rule South Asia
    4) The army is not destined to enable he gajwa—e-hind mindset of its ruling clerics rhetoric
    5) Accept kashmir status quo and focus on internal development
    6) instead of supporting madrassas hell bent on global extremist develop education institutions to teach students on subjects that Matter
    7) Accept that they are as special or an ordinary as citizens of any Muslim country without delusions of grandeur

    Hard recommendations but the delusional mindset in Pakistan to avoid reality is facilitating the current economic situation. They can look in the mirror for their own good and realize the constraints are within and no where else.


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