Pakistan and Sri Lanka are countries that have suffered at the hands of long-term economic mismanagement and dynastic politics that have led to institutional corruption. Both countries have also taken massive debt from entering into long-term debt-funded projects with China, which is notorious for it's problematic loan agreements and high-interest rates. Other countries in the region, despite having larger economies (i.e Bangladesh), are significantly less exposed. Pakistan is facing an economic crisis similar to the one it faced in 2018, and only has 3 months of import cover, requiring IMF relief. The ground realities are similar to that of Sri Lanka leading up to the crisis. Galloping inflation, ruppee in free fall, worsening current account/fiscal deficit, and a Balance of Payments crisis. To make matters worse, the ousting of the current government has only polarised further, an already fractured polity and created a political crisis. The outgoing government left a jigsaw puzzle to solve, with double-digit inflation and a subsidy trap that violated the IMF agreement with fuel subsidies and announced subsidies for gasoline. The IMF demands that fuel subsidies offered by the previous government be withdrawn, which was costing the government almost 96 billion, which they can not finance. However, with a polarized political climate and elections around the corner- tough contractionary policies may not be popular with the public, which is already bearing the brunt of rising inflation.
https://theprint.in/opinion/chinas-debt-trap-diplomacy-played-role-in-pakistan-sri-lanka-crises-but-its-not-the-cause/908740/
Although it may not seem like it, this is definitely an area that we should be concerned about. If two economies in the same region start facing downturns, they still impact the global economy. Pakistan's new government should try negotiating with the IMF to lower their repayment value, or else it's possible we may see more economic collapse in surrounding areas.
ReplyDeleteI think it will be interesting to see how this effects other economies. Though many other countries in that region don't seem to be affected now, there may be ways that they are affected in the future.
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