Comparative Assessment of Economic Crisis

Critical Appraisal of Pakistan & Sri Lanka Case

It is crucial to evaluate and compare the Sri Lankan economic crisis with Pakistan’s economic situation against the backdrop of the wider global economic pressures affecting developing countries.

Pakistan’s economy has faced serious challenges arising from mounting debt, high inflation, unemployment, external financing pressures and other macroeconomic weaknesses.

A critical comparison shows that several factors associated with Sri Lanka’s crisis have also affected Pakistan and many other developing economies.

These include:

• The COVID-19 pandemic
• Rising global borrowing costs
• Consequences of the Russia-Ukraine war
• Dependence on imports
• Limited sources of foreign exchange
• Growing external debt
• Weak fiscal management

Tourism had long been an important source of foreign-exchange earnings for Sri Lanka. The COVID-19 pandemic and prolonged restrictions severely damaged this sector, depriving the country of an important source of revenue.

Sri Lanka’s inability to strengthen revenue collection while continuing to accumulate debt eventually intensified its financial difficulties.

Other disturbing parallels between Sri Lanka and Pakistan include dependence on essential imports, restrictions affecting trade, limited foreign-exchange earnings and mounting external liabilities.

The Sri Lankan experience therefore provides an important warning for Pakistan: if governance, finances and economic policies are not managed effectively, economic stress can eventually develop into a wider political and social crisis.

In March 2022, Pakistan’s trade deficit had increased sharply on a year-on-year basis, adding pressure on foreign-exchange reserves.

Pakistan therefore needs sufficient fiscal space to provide targeted subsidies to those who need them most while avoiding policies that intensify long-term economic instability.

Economic stabilisation and sustainable growth can only become durable when supported by wider political dialogue, citizen participation and consistent policymaking.

Sri Lankan Economic Crisis – Key Factors

Sri Lanka entered its economic crisis because of a combination of domestic policy failures and external shocks.

The major factors identified in the source include:

• Poor governance
• Corruption
• COVID-19
• High inflation
• Mounting external debt
• Political mismanagement
• Decline in tourism
• Agricultural policy failures
• Delayed economic reforms

Sri Lanka had already experienced decades of instability, including a civil war between 1983 and 2009. However, the later economic crisis created a different and extremely serious challenge.

Mounting External Debt

External debt became one of the most important drivers of Sri Lanka’s economic crisis.

The source notes that Sri Lanka’s external debt increased substantially over the decade preceding the crisis, leaving the country increasingly vulnerable to external repayment pressures.

Corruption and Governance Failures

Corruption weakened state institutions and reduced the effectiveness of economic policymaking.

Long-standing governance weaknesses prevented the country from adopting reforms capable of improving fiscal stability and economic resilience.

Agricultural Policy Failure

The decision to restrict chemical fertilisers in an attempt to rapidly shift towards organic agriculture worsened agricultural production.

The decline in agricultural output contributed to shortages, increased food insecurity and created additional economic pressure.

Collapse of Tourism

Tourism had traditionally contributed significantly to Sri Lanka’s economy and foreign-exchange earnings.

The combined effects of security incidents and the COVID-19 pandemic caused tourist arrivals to fall substantially.

This removed an important source of foreign currency at a time when the country urgently needed external earnings.

Sri Lanka and Pakistan – Brothers in Crisis?

Pakistan and Sri Lanka differ considerably in population size, geography, economic structure and resource base.

Pakistan has a much larger population and economy and possesses a relatively larger agricultural sector.

However, despite these differences, the source identifies several similarities in the economic problems faced by both countries.

Comparison of Basic Macroeconomic Indicators

Pakistan’s economy is significantly larger than Sri Lanka’s in absolute terms, but its much larger population affects per-capita indicators.

The resource structures of the two economies also differ.

These differences mean that Pakistan cannot be treated as an exact replica of Sri Lanka.

Nevertheless, the underlying vulnerabilities offer important comparative lessons.

War, Terrorism and Domestic Unrest

Sri Lanka experienced a prolonged civil war from 1983 to 2009, which affected economic development and national stability.

Pakistan, meanwhile, suffered enormous human and economic costs during its prolonged campaign against terrorism following the events of September 11, 2001.

The source estimates that Pakistan suffered more than $150 billion in economic losses and tens of thousands of deaths during this period.

Long-term insecurity placed pressure on investment, development and public finances.

Rampant Corruption

Corruption is identified as a major institutional weakness in both Pakistan and Sri Lanka.

It damages state capacity, weakens public trust and undermines economic decision-making.

In Pakistan, corruption has affected multiple areas of governance, including:

• Government administration
• Police
• Judicial institutions
• Healthcare
• Education
• Public-sector management

The source similarly links Sri Lanka’s crisis with allegations of corruption and concentration of political power.

Wrong Priorities of the Ruling Elite

The political and economic experience of Pakistan and Sri Lanka reflects concerns about elite priorities and weak public-oriented policymaking.

In Sri Lanka, economic distress eventually contributed to large-scale demonstrations and political upheaval.

Pakistan did not reach the same level of social breakdown during the period discussed in the source, but political and economic uncertainty remained serious.

The broader lesson is that governments must formulate policies that address essential elements of human security and public welfare.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic had a severe impact on both economies.

Sri Lanka was particularly vulnerable because of its dependence on tourism and foreign remittances.

Pakistan also faced substantial economic pressure because of the global slowdown and its reliance on imported petroleum products, industrial inputs and external financing.

Pakistan, however, maintained a more diversified export base that included:

• Textiles
• Food products
• Small industrial products
• Services

Remittances from overseas Pakistanis also remained an important source of foreign exchange.

Political Instability & Turmoil

Political instability aggravated economic difficulties in both Pakistan and Sri Lanka.

In Sri Lanka, economic collapse contributed directly to political upheaval.

Pakistan also experienced a period of intense political instability, constitutional disputes and economic uncertainty.

Political uncertainty reduces investor confidence, delays reform and makes long-term economic planning difficult.

Debt Trap – Dependency Syndrome

Both countries developed a heavy dependence on external borrowing.

Pakistan repeatedly relied on financial assistance from:

• China
• Saudi Arabia
• United Arab Emirates
• International Monetary Fund
• Other international financial institutions

Such financing can provide temporary support but does not eliminate structural weaknesses.

Sri Lanka similarly accumulated significant external liabilities, including loans from China, Japan, India and other international creditors.

Heavy borrowing eventually became unsustainable and contributed to Sri Lanka’s sovereign default.

The central lesson for Pakistan is that repeated borrowing cannot substitute for stronger exports, fiscal reform and domestic revenue generation.

Balance-of-Payments Crisis & Current Account Deficit

Pakistan and Sri Lanka both faced recurring balance-of-payments problems.

The Russia-Ukraine conflict further increased fuel and commodity prices, placing additional pressure on import bills.

Pakistan’s current-account position deteriorated significantly during the period discussed in the source.

Sri Lanka also experienced persistent current-account weaknesses.

Both economies demonstrated a recurring pattern:

1. Imports rise
2. Current-account deficit widens
3. Foreign-exchange reserves decline
4. Currency comes under pressure
5. Inflation rises
6. External assistance is sought

Temporary improvements have repeatedly failed to eliminate the underlying structural problems.

Depleting Foreign-Exchange Reserves

Declining reserves represent one of the clearest similarities between Pakistan and Sri Lanka.

When a country’s reserves fall rapidly while imports and external debt payments remain high, its ability to meet international obligations weakens.

Sri Lanka eventually reached a point where reserves became insufficient to finance essential imports.

Pakistan also experienced repeated periods in which reserves fell to levels covering only a limited number of months of imports.

IMF programmes, financial support from friendly countries and other temporary measures periodically helped restore reserves, but structural vulnerabilities remained.

Exchange-Rate Depreciation

Falling foreign-exchange reserves placed considerable pressure on the currencies of both Pakistan and Sri Lanka.

During 2022, both the Pakistani rupee and Sri Lankan rupee depreciated significantly against the US dollar.

Currency depreciation increased the domestic cost of imported:

• Fuel
• Food
• Industrial inputs
• Machinery
• Energy

This created additional inflationary pressure and increased the local-currency cost of external debt servicing.

Skyrocketing Inflation

High inflation became another major similarity between the two economies.

The source notes that inflation reached extremely high levels in Sri Lanka during 2022, while Pakistan also experienced severe inflationary pressures.

Inflation reduced household purchasing power and increased the burden on lower- and middle-income groups.

Rising food, fuel and energy prices also increased the risk of social and political instability.

Key Similarities Between Pakistan and Sri Lanka’s Economic Crises

• Depleting foreign-exchange reserves
• Political instability
• Dynastic political structures
• Growing external debt
• Dependency on external financing
• Balance-of-payments pressures
• Current-account deficits
• Currency depreciation
• High inflation
• Weak revenue collection
• Low tax-to-GDP ratios
• Import dependence
• Dependence on imported energy
• Populist and financially unsustainable policies
• Subsidy culture
• Governance weaknesses
• Corruption
• Effects of COVID-19
• Political protests and instability
• Weak productive capacity

Ways Out to Manage Pakistan’s Economic Crisis

Economic progress cannot be sustainably imported or permanently financed through borrowing.

Long-term economic stability requires consistent policies, institutional capacity and competent governance.

The source proposes a broad strategy based on three major principles:

Deregulate, Devolve and Digitize.

1. Broaden the Tax Base

Pakistan needs to increase tax collection by expanding the tax base and bringing undertaxed sectors into the formal system.

A stronger revenue base can reduce fiscal deficits and create additional space for development and infrastructure spending.

2. Promote High-Value Exports

Pakistan must strengthen its export sector and move towards higher-value goods and services.

Export diversification is essential for improving the current account and reducing dependence on remittances, aid and external borrowing.

3. Reform the Energy Sector

Pakistan’s energy sector remains one of the largest sources of fiscal and economic pressure.

Instead of relying heavily on subsidies, the country needs to reduce the overall cost of energy through:

• Improved energy mix
• Efficient power plants
• Reduced transmission losses
• Better recovery of electricity bills
• Improved governance

4. Manage Circular Debt

Circular debt creates major financial pressure on the power sector and the wider economy.

Pakistan requires reforms that improve efficiency, reduce losses and ensure sustainable pricing.

5. Develop a Long-Term Industrialisation Policy

Industrialisation should become a central component of Pakistan’s economic strategy.

The country needs a long-term industrial framework capable of improving productivity, employment and exports.

Special Economic Zones can be used to attract foreign investors and establish new manufacturing facilities.

6. Attract Foreign Direct Investment

Pakistan should improve the business environment to attract long-term foreign direct investment rather than relying excessively on foreign loans.

Investment policies should provide:

• Regulatory certainty
• Infrastructure
• Efficient taxation
• Ease of doing business
• Legal protection
• Policy continuity

7. Ensure Political Stability

Political instability has repeatedly disrupted economic policymaking.

A broader political consensus is necessary on major economic reforms that must continue beyond individual governments.

Economic recovery requires predictable governance and continuity of policy.

8. Strengthen Accountability

Corruption weakens institutions, wastes public resources and damages investor confidence.

Pakistan therefore requires a strong and impartial culture of accountability.

9. Digitize the Economy and FBR

Digitalisation can improve documentation, tax collection and transparency.

A more effective digital tax administration can:

• Expand the tax net
• Reduce tax evasion
• Improve documentation
• Increase transparency
• Reduce administrative discretion

10. Develop Small and Medium Enterprises

Small and Medium Enterprises can play a major role in job creation and economic diversification.

Greater access to banking, microfinance and credit can strengthen SMEs.

The inclusion of women in financial services should also be prioritised.

11. Utilise Pakistan’s Youth Bulge

Pakistan’s large young population can either become an economic asset or a major social challenge.

Investment is needed in:

• Education
• Vocational training
• Digital skills
• Entrepreneurship
• Employment creation

12. Strengthen Trade Connectivity

Regional and international trade connectivity can provide Pakistan with greater access to markets.

Improved links with Central Asia, China, the Middle East and neighbouring regions can strengthen Pakistan’s position as a trade and transit hub.

13. Restructure the Budget

Pakistan should improve public expenditure management and ensure that budgetary resources are directed towards productive and socially necessary sectors.

14. Expand Clean Energy

Greater reliance on domestic and renewable energy can reduce dependence on imported fuels.

Solar, wind and other clean-energy sources can improve energy security while reducing pressure on the balance of payments.

15. Social Development and Poverty Alleviation

Economic reform must protect vulnerable households.

Targeted social protection should accompany fiscal reforms so that adjustment does not disproportionately affect lower-income groups.

16. Maintain Balance-of-Payments Stability

Pakistan must reduce the recurring gap between foreign-exchange earnings and expenditures.

This requires:

• Higher exports
• Competitive industries
• Stable remittances
• Lower unnecessary imports
• Greater investment inflows

17. Resolve Policy Vacuums

Pakistan requires consistent and long-term economic policies rather than repeated short-term responses to crises.

Structural reform must continue regardless of political changes.

Lessons Pakistan Can Learn from Sri Lanka

Sri Lanka’s crisis demonstrates how economic problems can rapidly become political and social crises when public confidence collapses.

Pakistan therefore needs to act before economic stress reaches such an extreme stage.

The principal lessons include:

• Do not allow external debt to become unsustainable
• Maintain adequate foreign-exchange reserves
• Avoid abrupt and poorly designed economic policies
• Strengthen revenue collection
• Protect productive sectors
• Improve governance
• Control corruption
• Maintain political stability
• Reduce dependence on external borrowing
• Build public confidence through transparent policymaking

Conclusion

Pakistan and Sri Lanka are not identical economies, and Pakistan possesses greater economic scale, a larger agricultural base and different sources of foreign exchange.

Nevertheless, the similarities highlighted in the source provide serious warnings.

Both countries have faced external debt pressures, falling foreign-exchange reserves, exchange-rate depreciation, inflation, political instability, governance weaknesses and structural balance-of-payments problems.

Sri Lanka’s experience demonstrates that prolonged economic mismanagement can eventually trigger severe political and social consequences.

Pakistan still has an opportunity to avoid such an outcome, but this requires timely and sustained reform.

The country needs a comprehensive economic framework based on taxation reform, export development, industrialisation, energy-sector restructuring, better governance, political stability and stronger institutional accountability.

Most importantly, Pakistan must move away from a cycle in which every external financing crisis is temporarily resolved through another loan.

Sustainable economic progress cannot be borrowed indefinitely. It must be built through productivity, institutional reform, domestic revenue generation and consistent long-term economic policymaking.