The Failing Economy of Pakistan

this is Pakistan the 23rd largest economy in the world by purchasing power parity and home to 230 million people who are now facing a situation of complete economic collapse this is not the kind of economic collapse experienced by advanced economies but instead the kind of economic collapse that could genuinely see the world's fifth largest population dealing with mass starvation beyond the potential for massive human suffering these economic issues are attracting the attention of a lot of economists because of Pakistan's influence and Reliance on a lot of major economic events in the world Pakistan is a central figure in China's belt and Road initiative providing both a trading route and a source of supplemental labor to the world's second largest economy Pakistan also has one of the world's largest foreign workforces with as much as 10 of the country's GDP been sent in from their workers abroad back home to their families these workers are primarily finding jobs in places like Saudi Arabia the UAE and the Cooperative Gulf States areas that have stirred up a lot of controversy for their global politics and their treatment of these very workers so understanding the economics of the other side of this labor force can teach us a lot about how these issues will evolve into the future Pakistani workers also send billions of dollars home every year from countries like the UK the USA Australia and the EU so the fate of this country has very real ramifications for our own economies and their workforces finally and perhaps most concerningly For Better or Worse Pakistan's economy is often viewed through the lens of the Hostile relationship it has with India a major economic power in the region and another home to a lot of the same Industries a lot of economists are comparing the current economic collapse in Pakistan to the economic collapse in Sri Lanka that has played out over the last two years there are certainly a lot of similarities but the differences are probably more important Pakistan is a larger and more regionally influential economy in political center it's also the world's sixth largest nuclear power and I must emphasize that we don't want to unnecessarily stir up fear but pushing a nation with a massive arsenal of devastating weapons into a desperate situation is never going to be ideal so how has Pakistan falled into this economic crisis what impacts will it have on the border economic region and finally what steps are being taken to get the struggling economy back on track this episode of Economics explained was brought to you by grammarly a digital writing assistant that helps 30 million people write more clearly and effectively every day I have used grammarly for every single video I've ever written because I know being able to clearly explain things without redundant words bad grammar or the wrong tone can be the difference between you all enjoying and learning something interesting in a video or just getting bored of listening to me even if your work doesn't involve writing out long essays effective communication is crucial for maintaining strong and effective professional relationships one of the biggest challenges of talking via text is making sure that people are reading things the way that you want them to be said and that your tone is coming across the way you want it to I communicate via instant messages with the editors that bring these videos to life and providing them with clear confident instructions allows them to understand exactly what needs to be put on screen and avoids those annoying back and forth for clarification I'm sure everybody knows the free version of grammarly but when you upgrade to premium that's when you can take your communication and writing to the next level your tone matters and it's easy to get misinterpreted upgrading the premium gives you access to their premium tone suggestions which rewrites your sentences to make sure that your tone is confident without being too direct or too passive this way you can get your projects moving along on a tight deadline you can try out grammarly completely for free by going to grammarly.com economics explained and if you do decide to level up your writing you'll also get 20 off grammarly premium by using the link which we'll also put in the video description below it's very easy to assume that a lot of low-income or developing economies are just inevitably going to suffer from economic catastrophe after economic catastrophe and there is definitely some logic to that assumption Nations that are not as established in the global economy are going to find it harder to borrow money from reputable institutions at reasonable interest rates like advanced economies that are often able to borrow money in their own currency giving them much more control over their debt burdens a country like Japan can sustain a level of government debt that is 260 percent of its total national GDP because it borrows money in Yen and extremely stable and widely recognized Global Currency it also pays very low or sometimes even negative interest rates on that money Japan is also able to borrow money from its own citizens because it's home to a lot of very wealthy people that need somewhere to put their money Japan being a much more established economy also has trillions of dollars in other currency reserves like US dollars so investors have security knowing that they will always be able to pay their loans no matter how high their debt level gets Pakistan on the other hand would struggle to borrow money in its own currency because its own population is not wealthy enough to satisfy the borrowing requirements of the government and international institutions don't want to make loans denoted in Pakistani Rupees because there is significant foreign exchange rate risk involved in dealing with a currency that is rarely used outside of Pakistan itself because of this Pakistan has had to take out loans denoted in foreign currencies like the US dollar or increasingly the Chinese RMB these loans are going to demand higher interest rates or political strings attached because the countries are institutions making these loans are taking on significant risks that they will never be paid back having higher interest rates in a currency that the country has no control over opens it up to a lot of things that can go wrong like its own currency being devalued its exports no longer been demanded or its growth not outpacing the interest rates it has been charged good economic management political stability and a generally lower level of things like institutional corruption does help the advanced Nations avoid a lot of the economic crises experienced by developing economies but advanced economies are not immune from making dumb decisions just look at the UK in the past six months it's just that when things do go wrong they have a lot more wiggle room to mess up before their whole economic system collapses largely that's thanks to their ability to borrow securely and cheaply from a broad range of investors advanced economies are also much more secure on an individual level as well simply because the average citizen of a developed country will be in a less vulnerable situation if the economy experiences a downturn people might lose their jobs and suffer a significant hit to their quality of life but nobody's going to starve or need to resort to Desperate Measures to provide basic necessities a advanced economies also benefit from having highly value-added exports to offer to the global economy if South Korea for example fell into an extended recession it wouldn't be good but the devaluation in their currency would make their Global exports more competitive suddenly everything from smartphones to container ships and even tourist holidays would be cheaper to international buyers so they would sell more exports and welcome more tourists which would help them self-correct the negative economic pressures it would also give them a consistent source of foreign income that could help them pay off any debts that they had compare this again to a country like Pakistan and the devaluation of their currency hasn't quite had the same effect the country is heavily reliant on Imports to keep its basic Industries going those Industries mostly produce Commodities like rice and linens which are the country's biggest exports unlike specialized Goods that can only be sourced from a limited selection of countries like smartphones from South Korea rice and linens are items that compete in a global Marketplace and a struggling economy just can't produce these items as efficiently as industrial agricultural centers that have the benefit of stable apply and finance remember this point for later because it is very important tourism is also improving but visitors are mainly coming in the form of Pakistani diaspora coming back to visit friends and family high value big spending tourists from Western countries just don't want to visit Pakistan whether deserved or not it has a reputation for being unsafe and lacking in the attractions that would draw adventurous tourists to other countries in the region so that's just a basic list of reasons that Pakistan is vulnerable to economic challenges like the one it is currently facing even before considering any specific economic shocks which we'll look at soon but it's also important to mention first that despite all of these vulnerabilities Pakistan used to have a reputation for being a surprisingly resilient economy in 1998 the Asian financial crisis hit a lot of fast-growing economies in the region the crisis started in Thailand when the government of the country was forced to float the Thai baht after they simply ran out of foreign currency a floating exchange rate simply means that the price of a currency is determined by the global market demand for that currency for example as of making this video one US dollar buys our dollar 45 Australian if demand for Australian exports Rose overnight for some reason then one US dollar might only buy a dollar forty Australian but the point is that it's the forces of supply and demand that determine the price not the government the opposite of a free-floating currency is a fixed or pegged currency this is where the government says that one American dollar buys 100 Thai baht no more no less to make sure that people honor this fixed conversion the government will keep lots of American dollars and lots of Thai baht in reserve to handle any money exchanges in the market if an investor wants to invest a million US Dollars into a new Factory in Thailand the Thai government would be there to take their money and give them 100 million Thai baht to make their local investment if the investor want to take their profits out of the factory after a few years the government would also convert the Thai baht back to American Dollars this system is very popular amongst International investors because it gets rid of the foreign exchange rate risk they take when investing in foreign currencies it's no good if an investment doubles in price if the currency it's denoted in halves in value in the same time a fixed exchange rate makes sure this doesn't happen a fixed exchange rate also makes it easier and often more competitive for local Industries to export their goods globally if the government sets the price of the currency 10 below what it would trade for in a free Foreign Exchange Market then exported goods from that economy effectively come at a 10 discount to international buyers and who doesn't like a discount even if the government does Peg their currency at a fair price simply knowing how much something is going to cost from a regular supplier and not having to worry about daily exchange rate fluctuations is a good reason to want to do business with an economy that has a fixed exchange rate because Asian economies in the late 1990s and early 2000s were highly dependent on Industrial exports and International Investment fixed exchange rates were very popular the problem with fixed exchange rates is that they are very expensive to maintain the government needs to keep enough foreign cash in Reserve at all times to make sure that they can honor any transfer requests while they are exporting lots of staff and getting a constant supply of foreign dollars coming into an economy that's fine but if they had a bad season or suffer from any kind of economic shock their supply of foreign dollars could dry up and as soon as one person tries to change their butt for US dollars at the agreed upon exchange rate and can't the whole system comes crashing down other investors will try to move their money out of the economy and it effectively becomes a run on the bank just on a national level this is what happened in Thailand in 1997 and the market Panic sent shockwaves through the region as other major growing economies like South Korea Indonesia Taiwan and the Philippines were running off very similar systems the concern became that if the Thai government could run out of money to keep their currency pegged then these other similar economies could too and as everyone started pulling their money out it became a self-fulfilling prophecy eventually almost all of the countries involved had to admit defeat and let their currency become free-floating which meant though they lost all of the advantages that came with a pig currency and their economies did suffer because of it but pakistans was almost totally unaffected around the same time Pakistan was also getting in trouble with the International Community for openly testing nuclear weapons it was placed under heavy sanctions similar to the ones that we're seeing placed on Russia Today these sanctions were only heightened after the September 11 attacks when Pakistan was identified as supplying Fuel and weaponry to the groups involved in the attacks the country also received an influx of refugees from their war-affected neighbors like Afghanistan if the global economic environment was not hostile enough the country also had to deal with the worst droughts in the country's history which lasted for four years and severely impacted food production for a country with a swelling population but despite all of these challenges Pakistan's economy was incredibly resilient and actually sustained growth through the turbulent period the economy wasn't very large or sophisticated to begin with so it didn't have as far to fall as a lot of its neighbors at the same time but being able to survive a perfect storm of economic shocks seemingly unaffected still says a lot about how self-sufficient the nation could be so if it's survived back then with so many things going wrong why is it struggling today first and foremost since the sanctions were relaxed in the Southeast Asian economic region bounced back the Pakistani economy has grown significantly the economy is almost four times larger today than it was back in 2000 so it has further to fall and it's extremely unlikely that it will shrink back to that level ever again so even the worst possible economic outcome today would be better than the best possible economic conditions back then the current crisis really started with covert as the economy was cut off from a major source of its foreign currency revenue and that was simply Pakistani workers abroad sending money back home as remittances the workers would usually send the money as US dollars or some other globally recognized currency and then their families would trade in those dollars for Rupees to use locally for their everyday lives the government and exchange institutions would give out those rupees for American dollars which would provide them with a foreign currency Reserve which was used by the government and big businesses to buy imports that the larger and more sophisticated economy had become reliant on things like petroleum fertilizer and Machinery without remittances keeping the economy topped up with foreign reserves the nation had no way to pay for these Goods because nobody accepts Pakistani Rupees outside of Pakistan the cutoff of these foreign remittances was just the first problem and the second problem was the increasing costs of the very same Goods that they were importing the war in Ukraine increased the price of oil and Agricultural Supplies so they had less money coming in and more money going out the country also suffered from record floods that killed more than 1700 people added 30 billion dollars worth of economic damages these challenges started to turn into crises as the government attempted to control living costs for its financially vulnerable citizens by putting a cap on electricity and gas prices this was a major expense for the government and businesses and led to shortages in the country's supply of fuel for cars and machines and even entire regions falling into rolling blackouts in an attempt to reduce energy consumption the government has started Banning a lot of imports especially non-essentials in an attempt to slow the rate at which foreign currency is leaving the country but most of these efforts only accelerated the rate at which people are trying to swap out their rupees for more globally recognized currencies before it's too late the government has put further restrictions on how much cash individuals can transfer which has meant Country Now technically has three exchange rates the rate that the Central Bank recognizes the rate that private institutions adhering to government laws will exchange money at and the black market rate which is dictated purely by supply and demand all three of these rates are falling but I probably don't need to tell you that the government rate is significantly more optimistic than what the black market would suggest the true exchange rate really is it's almost easy to laugh at such an absurd situation but the average Pakistani lives on about 15 a day they're going to be extremely vulnerable to a situation where the country doesn't have the means to import Basic Essentials so then how can this be fixed International institutions have offered to provide some support in the form of loans to give the country the cash it needs to restock its reserves and get back on track but those offers have come with strings attached the international monetary fund which is an institution funded by dozens of global economies with the main goal to be to support countries going through economic turbulence to avoid that turbulence spreading around the world is the obvious answer here this sees literally what they were created for the IMF has already given Pakistan billions of dollars in loans and promised to give billions more as long as the government makes certain changes the biggest one to me to allow the country's currency to float freely in the foreign exchange markets the government has been hesitant to do this so far because remember there are a lot of advantages to having a pegged or controlled currency especially for a country that despite its challenges has been experiencing significant growth over the past two decades China has also come forward as a major lender to Pakistan and it already has 30 billion dollars in loans with the country approximately three times out of the IMF these loans were made as part of China's built and Road initiative which was Keen to include Pakistan as a convenient stopover for both Railroad and shipping ways on the route to Europe and the Middle East both very important trading partners to China there is an old saying that I'm gonna change a bit here and that is if you owe the Chinese government a million dollars and can't pay it back you have a problem but if you owe the Chinese government 30 billion dollars and you can't pay it back back they have a problem it's possible that China will extend assistance simply because they don't want the economy to collapse because that would cost them both in the debt that they would have to write off but also because it would look terrible geopolitically as a sign that the Belton Road initiative is not going as well as they promised the downside of this is that again it comes with strings attached and the expectation that Pakistan will fall in line with China's less popular geopolitical Ambitions as well as giving first dibs to their natural resource wealth to the industrial centers in China if Pakistan is able to secure funding to keep its economy afloat despite the drop in confidence caused by the alarming headlines there is no reason to believe that exports couldn't be resumed vital Imports could be provided the people of the country would start trusting their own currency and that growth could get back to where it was before these most recent rounds of extreme economic shocks okay now it's time to put Pakistan on the economics explained National leaderboard starting as always with size Pakistan has a GDP of 348 billion dollars as of 2021. the recent economic challenges are going to reduce this number but it will still be a major global economy currently the 42nd largest in the world so it gets a 6 out of 10. that GDP is spread out over one of the largest populations in the world so each individual participant is only contributing one thousand five hundred and five dollars worth of output to the economy every year which is around an eighth of the global average it gets a 2 out of 10. stability and confidence is quite poor beyond the recent economic shocks the country is dealing with a messy political rivalry and there is ongoing uncertainty about how the economy will be run even in the immediate future the country gets a 3 out of 10 and a reminder that a zero or a one basically means the country is in Civil War and it too means the country has a completely non-functioning or military government so three out of ten is not a good score go growth has been strong over the past decade but has stalled and declined since 2018 when the problems that we explored in this video started occurring still for the sake of uniformity with every other country on this list we take the growth rate from the past decade so the country gets a six out of ten finally industry Pakistan is a very basic economy with simple Industries and unskilled Workforce and no major Global corporations to speak of it does have substantial natural resource wealth but it's going to find it difficult to properly exploit those Treasures in its current economic condition it gets a 4 out of 10. altogether that gives Pakistan an average score of 4.2 out of 10. putting it here on the economics explained National leaderboard thanks for watching mate bye foreign

Channel: Economics Explained

Views: 1,178,424

Keywords: economics, economics explained, pakistan, economic crisis, bankrupt pakistan, pakistan crash, sri lanka, nuclear, debt crisis, pakistan debt crisis, pakistan food crisis, collapse of pakistan, economy of pakistan, pakistan debt trap, pakistan economic crisis, pakistan economy, pakistan crisis

Id: W1OxR7Dd5wA

Length: 18min 42sec (1122 seconds)

Published: Wed Mar 01 2023

Reddit Comments

[u/papashotgun]

Great video. Discusses what caused it, the repercussions and what steps are being taken to rectify it. Recommend watching.

[u/Pakistani_in_MURICA]

This answers the fallacy of "diaspora only helps their own family when they send money."

[u/sherry_waseer]

indians on the comments tho so obsessed😭

[u/sipret]

So we are better than Brazil

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