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(PART 3)

1. Is Pakistan going to default?-Our Opinion


In presence of skyrocketing inflation, massive devaluation of the Pakistani rupee against
major world currencies, increasing fuel prices, and the drying up of foreign currency
reserves, the economy of Pakistan is highly vulnerable. Surrounding all of these challenges is
the fear of a debt default. In Pakistan, however, it has been politicized and raised to such a
level of concern and debate that it sounds like the Holocaust.
Various narratives about threat or possibility of default. Moreover there has been debate
about its consequences. For some it is horrendous but for others it might be a blessing in
disguise.
Now if we were to ask whether our country has defaulted the answer would not be simple.
Technically, we do not have enough reserve to pay back our debts but general perception is
that we have not been defaulted yet or might avert default. The right statement would be that
Pakistan is on the brink of default and/or at least in the danger zone as inflation is rising, the
dollar getting stronger, cost of borrowing mounting and global growth decelerating. Several
international financial institutions and economists are raising the alarm about the catastrophic
debt crisis of Pakistan. The political instability, complicated domestic policies, and a difficult
external environment have pushed the country to a challenging economic juncture.

In vulnerable economies, a small political shake-up can disturb a country’s entire dynamics,
slowing down the pace of economic activity, creating a sense of insecurity in the financial
sector, and diverting the nation’s progress toward economic security. All of this can result in
another set of problems.
This is exactly what happened in Pakistan when the coalition government came into power
corridors. The coalition government faces mountainous issues: skyrocketing inflation,
massive devaluation of the Pakistani rupee against major world currencies, increasing fuel
prices, and the drying up of foreign currency reserves.
Surrounding all of these challenges is the fear of a debt default. Default on sovereign debt is
a difficult situation for any country and its donors, but it is very much part of the global
economic system, and there have been some countries that have defaulted on sovereign debt
in recent years, as mentioned above.
In Pakistan, however, it has been politicized and raised to such a level of concern and debate
that it sounds like the Holocaust. According to one school of thought, default by Pakistan at
this stage may actually lead to better fiscal discipline and more responsible economic
governance, while the other side of this debate is portraying the potential default in a very
bleak manner.
Now if we were to ask whether our country has defaulted the answer would be no but
Pakistan is on the brink of default and/or at least in the danger zone as inflation is rising, the
dollar getting stronger, cost of borrowing mounting and global growth decelerating. Several
international financial institutions and economists are raising the alarm about the catastrophic
debt crisis of Pakistan. The political instability, complicated domestic policies, and a difficult
external environment have pushed the country to a challenging economic juncture. We have
discussed the deteriorating economic conditions of Pakistan but there are certain aspects that
make us hopeful that we might survive the enduring threat
 Major macroeconomic indicators are comparatively better than previously
defaulted states
Indicators Ghana Sri Lanka Pakistan
Default Period Dec 2022 Apr 2022 _
GDP USD’bn 77 87 377
External Debt to 37.0 37.0 31.0
GDP %
Fiscal deficit % -7.4 -11.6 -7.9
of GDP
Inflation YOY % 50.3 18.7 12.1
GDP growth % 4.1 -8.4 6.0

 Less reliance of Pakistan on Bonds or Euro-dollars


Pakistan has lower external debt to GDP of 31 percent compared to the sample of default
countries (avg external debt to GDP of 59 percent). High external debt exposes the country’s
public finances to exchange rate shocks whereas dependency on Eurobond makes refinancing
debt very challenging. The absence of both factors makes Pakistan’s debt mix less vulnerable.
Pakistan may not be in the default situation as Sri lanka and others have faced but it is not very
far off as there are some parallel symptoms like dynastic politics, populist decisions like import
bans, narrow export base, and unnecessary expenditures. If we compare both countries on the
repayment capacity, Pakistan has a small proportion (almost seven percent) of its foreign debt in
international bonds like Sukuk and Eurobond. The rest of the debts are a composition of
bilateral, multilateral, and commercial debt, which can be rolled over from time to time.
However, the Sri Lankan situation was different where the majority of foreign debts was
acquired through floating international bonds whose repayment was a must to avoid default and
could not be rolled over.

 Political cost for the current administration/government


Whereas, due to the significant political cost and the upcoming elections, the current government
will use all available means to prevent such a situation. The unrelieved economic problems have
been caused by inconsistent economic policies, the pursuit of the wrong priorities, and bad
governance. This is why Pakistan has not materially developed over the last 75 years. As per
SBP Governor Jamel Ahmad, the current economic crisis of the country is predominantly caused
by devastating floods and exacerbated by some exogenous factors like global recession, the
Ukraine-Russia war, and the commodity super-cycle. However, he has provided assurances that
Pakistan will repay all its loans on time. “Pakistan will continue to make timely loan payments
while inflows are expected to increase significantly in the second half of the current fiscal year,”
Jameel said in a podcast. He is giving statements that are heavily reliant on the generosity of
friendly countries for survival.

 Pakistan still has potential to do better


Much of Pakistan’s political history consists of decisions that were made without
contemplating the economic consequences. Furthermore, many previous governments were
unable to succeed in the economic domain because they lacked an adequate and top-tier team
of economists capable of developing long-term economic policies. Agriculture is one of the
major sectors of Pakistan’s economy, with a contribution of 24 percent to the Gross National
Product and 19 percent to the Gross Domestic Product (GDP).
This sector is the backbone of the economy as it provides sustenance for the whole
population and contributes to foreign trade. It also employs at least half of the Pakistani
labour force. With the development of the agriculture sector, the country will become self-
sustainable in food. The export potential is also huge and can bring valuable foreign
exchange.

 Multilateral and bilateral donors are still hopeful


Multilateral and bilateral donors are still hopeful for an economic recovery in Pakistan and
would rather bet on it than a default and losing repayments, albeit for some years.

 Geo-political relevance for the global community


Pakistan’s international partners would not like such a situation due to the potential negative
implications for internal and external security.

Due to the aforementioned reasons, Pakistan’s default on its sovereign debt may be avoided or
delayed in the current year, i.e., 2023. It is neither a time to be complacent nor is such a situation
favorable. A patient in a coma or in the ICU is more of a concern than any other situation.

Must Read
https://www.moneycontrol.com/news/world/in-depth-what-pushed-pakistan-to-the-brink-of-
economic-collapse-why-it-concerns-india-9955201.html
https://tribune.com.pk/story/2396605/the-blessings-of-a-looming-default

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