India’s neighbouring nation, Pakistan has found itself caught in the vicious circle of debt that has made it unable to fulfil the demands of essentials like milk and chicken. The economic crisis has gone worse to the extent that the country is now forced to ask for aid from the world.

As prices of essentials surge, people seen fighting for food

Now the question that arises is how Pakistan landed in such a critical situation and how can this affect India.

What Led To Pakistan’s Economic Crisis?  

What one needs to understand is that Pakistan’s economy hasn’t been stable for quite a long time and because it didn’t take precautionary steps, it is now on the verge of collapse.

In this matter, the World Bank noted, “Over the past two decades, Pakistan has achieved significant poverty reduction, but human development outcomes have lagged, while economic growth has remained volatile and slow.”

There are quite a few reasons for Pakistan’s collapsing economy. One of which is debt. The World Bank stated that Pakistan’s external debt stocks, which were $115.695 billion by the end of 2020, increased to $130.433 billion by the end of 2021. And, the external debt stands at $126.9 billion as of September 2022 as per the CEIC data.

According to Reuters, a news agency, “Pakistan’s debt-to-GDP ratio is in a danger zone of 70 percent, and 40-50 percent of government revenue is earmarked for interest payments this year.”


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Another reason is that the inflation in the country was at a 48 year high in January because thousands of containers of food items, raw materials, and equipment were stuck in the ports as the Pakistani government curtailed imports due to being cash-strapped. Inflation has caused a depressing effect on the country’s currency as inflation reduces the currency’s buying power and thus, weakening it against other currencies.

Also, Pakistan’s central bank noted the Pakistani rupee fell 9.6 percent against the dollar on January 26. It is the biggest one-day drop in more than two decades. Notably, Pakistan also removed the artificial cap on the rupee leading it to lose 14.73% in interbank trading during the last three trading sessions.

Pakistani currency

In January this year, Pakistan’s foreign exchange reserves dropped to $4.3 billion, the lowest ever since 2014. According to the State Bank of Pakistan, this came after paying off some of the external debt payments.

Political Chaos And Shortage Of Power

Even the political chaos in the country has disturbed the country’s economy. Notably, none of the Pakistani Prime Ministers has completed the full tenure of five years in office.

Maintaining the record, in 2022, Shehbaz Sharif took over after ousting Imran Khan. Since then, Imran Khan has been putting his best foot forward to fight Sharif and bring his government down.

Shebaz Sharif ousts Imran Khan to be the next Prime Minister of Pakistan

John Ciorciari, Professor and Associate Dean for Research and Policy Engagement at the University of Michigan said, “Pakistan is highly import-dependent, particularly with regard to energy, which renders it acutely vulnerable to hikes in global oil and gas prices.”  

Though Pakistan has enough installed power capacity, it lacks the resources to run oil and gas-powered plants. Because of heavy debt, the nation can’t afford to invest in infrastructure and power lines. Even the government was forced to close shopping malls and markets by 8.30 pm for the purpose of energy conservation.

Some of the power infrastructure was built as part of China Pakistan Economic Corridor (CPED), which is a framework for regional connectivity. However, this infrastructure has added to Pakistan’s debt as the country cannot even operate them.

The World Bank said, “In early FY23, Pakistan’s economy was undergoing an overdue adjustment, as it recovered from the impacts of COVID-19. However, the economic impacts of the recent flood might have delayed the much-needed economic adjustment. The growth in Pakistan’s economy is expected to reach only around 2 percent in FY23.”

How Can India Be Affected?

The bilateral ties between India and Pakistan in 2020-2021 were $329 million. It went up to $514 million in 2021-2022 according to the Ministry of Commerce, as Indian exports outnumbered imports from Pakistan. However, to date, terrorism continues to be of core concern in bilateral ties between the two nations.

Also, there can be a possible influx of refugees as an activist told ANI, that residents of Pakistan-Occupied-Kashmir are willing to join India as people are agitated with the continuously surging prices of wheat, flour, and rice. However, if the influx happens, it can restrain the law and order in India.

Also, the Indian Council for Research on International Economic Relations has suggested that if the economy of Pakistan continues to worsen, India might have to accept China’s influence in Pakistan, and South Asia in general. Notably, increasing Pakistan and China ties might lead to anti-India activities. Hence, India needs to strategize engagement with Pakistan’s external donors to bring down any risks from the neighbouring countries.

Thus, India needs to be wary of the situation of its neighbouring countries and plan out ways in which it can lessen the impact of other countries’ problems. 


Image Credits: Google Images

Feature image designed by Saudamini Seth

Sources: CNBCSwarajya Magazine, Dhyeya IAS

Find the blogger: Palak Dogra

This post is tagged under: Pakistan, economy, Pakistan economic crisis, economy of Pakistan, Imran Khan, Shehbaz Sharif, Pakistani currency, Pakistani ruppee, India Pakistan relation, trade, India-Pak

Disclaimer: We do not hold any right, copyright over any of the images used, these have been taken from Google. In case of credits or removal, the owner may kindly mail us.


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