How Pakistan’s massive power outage has reaffirmed fears of a Sri Lanka-style economic collapse

A day after Pakistan’s nationwide power outage, the country’s energy minister said on Tuesday that power supply had been fully restored.

Most of Pakistan’s 220 million people were left without electricity on Monday after the overburdened national grid failed. The outage caused major disruption, forcing hospitals to switch to back-up power generators. Many people were left without drinking water because electricity-powered pumps could not be used.

The disruption caused by the outage was so severe that it drew an apology from Prime Minister Shehbaz Sharif. However, such blackouts have become frequent in Pakistan. This was the second major outage in four months, and there was a blackout of similar proportions in January 2021.

With rapid depreciation of its currency, mounting debt and a shrinking foreign exchange reserve, Pakistan has been forced to cut imports of essentials such as fossil fuels that are needed for energy production. The increasing frequency and the severely disruptive nature of such outages despite this has led to concerns of an economic collapse.

On the edge

Pakistan’s economic woes are serious. A rapid depreciation of the Pakistani Rupee has made imports more expensive and led to the ballooning of external debt, which in January stood at $274 billion – nearly 79% of the country’s gross domestic product. Adding to this, massive floods in the country between July and October left behind damages estimated to be more than $30 billion.

The Federation of Pakistan Chambers of Commerce & Industry’s businesspersons panel suggests this is one of the worst economic crises the country has seen. Pakistan’s total liquid foreign exchange reserves reportedly stood at just $11.7 billion as of late December, having halved in 2022. This covers barely a month’s total imports.

To cut import costs, there have also been attempts to generally manage consumption. For example, between May and July, the government had briefly banned import of non-essential and luxury products. In June, the country’s planning minister Ahsan Iqbal had also urged people to drink less tea to help cut imports of the revered national staple.

As a result, Pakistan has been seeking financial assistance from friendly nations and global lenders such as the International Monetary Fund to be able to import essentials. However, it has not managed to meet its funding needs so far.

While its traditional partners Saudi Arabia and the United Arab Emirates, among others, have promised support so far, the major disbursement of $6 billion under an IMF programme has been delayed amid continued negotiations on the bailout conditions. Additionally, for flood recovery alone, Pakistan needs at least $8 billion over the next three years.

Emergency moves

The money Pakistan has not received from lenders is crucial for importing fossil fuels. Much of Pakistan’s electricity is generated using imported fossil fuels.

Therefore, the country has also been finding ways to conserve electricity to cut fuel imports. To this end, the cash-strapped government had earlier this month ordered shopping malls and markets to close by 8:30 pm, and restaurants and wedding halls by 10 pm. Similarly, all government departments were ordered to reduce electricity consumption by 30%. Pakistan’s defence minister Khawaja Asif said this would help the country save $273 million.

Additionally, many parts of Pakistan also face regular and scheduled temporary power outages called “load shedding”. These are geared to conserve power, thereby cutting the cost of fossil fuel imports needed to produce the electricity.

It was this necessary energy-saving strategy, Pakistan’s energy minister Khurram Dastagir suggested, that backfired and led to the nationwide blackout on Monday. “As an economic measure, we temporarily shut down our power generation systems,” Dastagir said. However, authorities were not able to restart the systems all at once on Monday morning.

Concerns about an economic collapse

The frequency and scale of blackouts, such as the one on Monday, despite cost-cutting measures have led to concerns that Pakistan could witness a total economic collapse similar to Sri Lanka’s. Such concerns are captured in reports of people experiencing food shortage, hoarding cooking gas cylinders, panic buying petrol and hospitals running short of some medicines.

For a year now, Sri Lanka has been reeling under what has been widely described as its worst economic crisis. Colombo declared bankruptcy in July and is still working to get out of the crisis. At the peak of its crisis in March, Sri Lanka too had been forced to impose its longest power cuts in 26 years due to its inability to import fuels