NOMURA, a top financial services company based in Japan, has included Pakistan among seven countries threatened by a currency crisis, raising the perceived risk of default in the next 12 months. The other countries comprise Egypt, Romania, Sri Lanka, Turkiye, the Czech Republic and Hungary. The bank said 22 of the 32 states covered by its early warning index, Damocles, have seen their risk rise since May. The index is based on eight indicators that produce an overall score to assess the level of a country’s vulnerability to a currency crisis. Nomura has called the situation an “an ominous warning sign of the growing broad-based risk in EM [emerging market] currencies”. The report may sound alarming, but it isn’t in fact. Although EMs remain more vulnerable, even the G7 economies show that all but Japan now have Damocles scores above the threshold led by America and Britain.

That Pakistan is included in the list is no surprise. Facing unprecedented balance-of-payments troubles over diminishing foreign exchange cover and drying dollar inflows, the country has been unable to control soaring inflation or rectify the weakening exchange rate. Limited fiscal space means the government is not in a position to help millions of flood victims by warding off hunger and disease, let alone begin reconstruction of damaged infrastructure across the country. On top of that, the political turmoil is deepening negative perceptions about the near- to medium-term economic and currency outlook. It is nothing short of a miracle that a nation of 220m souls has not experienced a full-blown currency crisis like Sri Lanka so far. In spite of being based on Pakistan’s key economic and financial data, the Nomura model still signifies perceived risks, just like the credit default swap, rather than something imminent. But, as an economist has been quoted as saying that “a crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought”, we never know when perceptions turn into reality. Finance Minister Ishaq Dar has consistently brushed aside concerns about defaulting on foreign payments. However, nervous investors and markets need more than mere reassurances from him. The start of the next IMF programme performance review for early disbursement of the Fund’s stalled tranche and other multilateral assistance would do a lot to stamp out negative perceptions of a looming default crisis.

Published in Dawn, November 24th, 2022