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Time of Turmoil!

There is a threat of an economic meltdown in Sri Lanka and Pakistan. The article analyses the external accounts of both countries.

By Dr. Aadil Nakhoda | June 2022

Both Pakistan and Sri Lanka are again at the brink of economic turmoil. The International Monetary Fund (IMF) released statements on Pakistan and Sri Lanka at the end of April 2022 after meeting the respective delegations, warning of significant economic risks and challenges to both countries. The statement on Pakistan discussed the developments under the Extended Fund Facility (EFF) programme. It stated the need to remove unfunded subsidies offered by the government in recent months and the resumption of discussion of policies for completing the 7th EFF review. The statement also stated the desire of the Pakistani authorities to extend the EFF arrangement through June 2023.

The statement on Sri Lanka stressed the need to restore macroeconomic stability and signified the importance of strong social safety in order to alleviate the impact of an economic crisis for a more vulnerable population.

In essence, both South Asian economies face significant economic challenges and are looking towards the IMF for funds to mitigate the impact. According to the IMF’s country statistics, Pakistan has had 23 arrangements with the IMF since its membership in the fund while Sri Lanka has had 16. Both became members in 1950. Pakistan had outstanding purchases and loans 5.4 billion SDR (special drawing rights) in March 2022, while Sri Lanka had 892 million SDR.

Pakistan and Sri Lanka are both reporting significant pressure on their external accounts. According to statistics provided by the State Bank of Pakistan (SBP), Pakistan’s account deficit was $13.17 billion in the first nine months of fiscal year 2022. Comparatively, the current account, at $275 million, was barely in deficit in the same period in the previous fiscal year. This was similar to the amount when the economy was last facing a crisis situation in FY18 and was planning to negotiate the EFF package with the IMF. The current account deficit is at around $20 billion, slightly below 6% of GDP.

According to statistics provided by the Central Bank of Sri Lanka, the country had a current account deficit of $3.3 billion in 2021, which was more than two times the amount reported in 2020 and the highest reported since 2012. With a GDP of approximately $80 billion, the current account deficit in Sri Lanka is about 4.1% of GDP. This is comparatively lower than that of Pakistan. Further, Pakistan’s real GDP growth rate as reported by IMF DataMapper in April 2022 was 4% and inflation was at 11.2%. Sri Lanka’s real GDP growth rate was reported at 2% and the inflation rate was at 17.6%. Both countries faced low growth rates and high inflation rates during the pandemic. However, the recovery in GDP growth rate was higher for Pakistan than for Sri Lanka as Pakistan peaked at 5.6% in 2021 after the low on -1% in 2020, while Sri Lanka achieved 3.6% after dipping to -3.6% in 2020.

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