Why Pakistan and Egypt are too big to fail to a Sri Lanka-style economic crisis

Both are suffering a severe currency crisis fuelled by unsustainable spending and unaccountable borrowing from lenders that include the IMF and China

But analysts say economic and political partners will ensure they ‘sail through’ the crises by imposing austerity, which carries its own consequences

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An employee counts banknotes at currency exchange in Cairo. The Egyptian pound has lost half its value against the US dollar since March, following a devaluation demanded as part of a US$3 billion IMF loan agreement. Photo: AFP

Published: 11:00am, 5 Feb 2023Updated: 3:08pm, 5 Feb 2023

Before he left for college in 2020, Ajalan Ali remembers queuing for up to an hour at a market in Rawalpindi, near Pakistan’s capital Islamabad, to receive a breakfast of deep-fried puffed puri bread, stewed chickpeas and aniseed-infused potato curry, all washed down with a tall glass of sweet butter milk.

So his “heart sank” when, upon returning to the market with his father late last month, he saw only a handful of customers and none of the super sweet, ghee-soaked mithai for which the market was renowned. Even the pickled mango for his breakfast had to be brought in from elsewhere.

“This is where I grew up,” the 22-year-old student at Sabanci University in Turkey told This Week in Asia. “Now it’s empty. Dead. I’m devastated.”

Pakistan is in the midst of a cost of living crisis that’s seen the price of ingredients such as ghee, cooking oil, milk, sugar and eggs – all used to make mithai – practically double over the past three years alongside soaring gas and electricity rates.

Cooks fry fish at a market in Rawalpindi. The price of many basic ingredients has practically doubled in Pakistan over the past three years. Photo: AFP

Inflation hit a 48-year high of 27.5 per cent in January, slashing customer demand against a backdrop of falling foreign exchange reserves and the rupee’s depreciation.

It’s a similar story in Egypt, where inflation was running at 21.9 per cent in December and many young people are “having to put their dreams on hold, as getting married or buying a house or a car is now beyond their means,” said Shahira Amin, a Cairo-based non-resident senior fellow with the Atlantic Council think tank’s Scowcroft Middle East Security Initiative.