Technically, Pakistan has not defaulted on its debt because it hasn’t missed — or even delayed — any payment to its creditors. Yet it certainly has fallen into ‘arrears’.
For example, last week, the global International Air Transport Association complained that Pakistan was second among the top five markets that have restricted or stopped foreign airlines from repatriating their ticket sales revenues of nearly $225 million to their home countries. So, technically, we haven’t defaulted but simply fallen into arrears.
This is just one of the many examples of how the country’s central bank is struggling to protect its liquid foreign currency reserves, which were reported to have sunk to the four-year low of $6.7 billion on December 2 following the payment of $1bn Sukuk bonds.
Ask a foreign company executive, and they will tell you how difficult it has become for their shareholders to repatriate their dividends or profits.
This is happening on top of the administrative actions by the State Bank of Pakistan to restrict imports to prevent the existing foreign exchange stocks from disappearing. So you cannot blame the markets if they don’t respond to the attempts of finance minister Ishaq Dar and central bank governor Jameel Ahmed to reassure them that Pakistan can meet all its future external debt payments.
Indeed, the reports of Pakistan ‘facing the risk of (actual) default’ are exaggerated. So are the government’s claims of a hunky-dory situation. In last week’s episode of the State Bank of Pakistan podcast series, the governor admitted that overall the situation is challenging as he blamed the war in Ukraine, a historic increase in international commodity prices and monetary tightening pursued by central banks as major global challenges to the national economy.
In 2019, our reserves were our own, but today, each dollar is borrowed, leaving us at the mercy of friendly countries for survival
“As a result of this, developing countries, including Pakistan, are facing difficulties in raising funds from international financial markets. Furthermore, on the domestic front, the economy is impacted by floods which have created (additional) challenges for Pakistan.
However, the government and the central bank are taking measures to overcome these challenges, and all debt repayments are on track, and the country’s foreign exchange reserves are expected to increase in the second half of the current fiscal year.“
There’s no doubt that the global economic environment in the wake of the Covid pandemic and the Ukraine war has exacerbated Pakistan’s economic troubles and dollar liquidity crunch.
The present crisis originates from fiscal profligacy, the wasteful excessive expenditure of successive governments as we have lived beyond our means for decades.
Tenure insecurity means no government takes the tough decisions to fix the economic mess. Lavish wasteful subsidies are showered to keep voters happy — the fuel subsidies given by the previous government and the delay in the increase of domestic gas prices by the incumbent ruling alliance are two recent examples of this fiscal profligacy.
Years of excessive spending without collecting enough taxes — again to keep the powerful lobbies happy — has created an inefficient and uncompetitive economy ridden with huge debt we don’t have the means to pay back unless others lend us more money to keep us afloat.
In the past, we would get easy bailouts from the international community. Now the world is reluctant to risk its money unless we prove to them that we are ready to own our mess and put our house in order. This is quite obvious from the difficulties the government faces in getting the promised cash from the multilateral, bilateral and commercial creditors.
Ishaq Dar’s frustration with the International Monetary Fund for delaying disbursement of the next tranche of nearly $1.2bn is understandable because he doesn’t want to take painful measures like raising gas prices and taxes in an election year after his party’s battering by rival PTI in the PML-N’s old fortress of Punjab.
This is despite the fact that the budget targets have become irrelevant in the last five years due to soaring inflation, exchange rate devaluation and devastating floods.
“We will have to pay a steep cost to prevent this economy from imploding. Yet our government and people are still in the same old business-as-usual mode,” says Fahad Rauf, head of research at Ismail Iqbal Securities.
In an obvious reference to the declining foreign exchange reserves as well as details of debt rollovers, expected loan extensions, debt payments made so far and future dollar inflows given by the central bank governor in the podcast, Mr Rauf rightly stresses that the financial situation has become so critical that the economic numbers have become irrelevant and lost their meaning.
“The qualitative difference between the reserves’ situation in 2019 and now is that at that time, whatever we had was our own. Today, each dollar we have is borrowed; we are currently maintaining negative reserves. So we are now at the mercy of certain friendly countries for our survival. If they pump in more dollars, we will survive the crisis and not default.”
Islamabad may receive planned foreign assurances that Pakistan will meet its debt repayment obligations this year. But what happens in the next fiscal year and after? The unfortunate reality is that we as a nation are not ready to accept the precariousness of our situation and continue to live beyond our means.
Political compulsions mean that the government is not educating the public about the true state of economic health. No measure has been implemented for energy conservation or reduced consumption. The supermarkets continue to showcase imported items that we can easily do without purchasing.
As Mr Rauf says, there is no easy way out of the current economic mess. We will have to pursue a low-growth path for many years to avoid the recurrence of a similar crisis. That will be very painful for the people and have profound social consequences. But the consequences of not following that path will be more painful.
Published in Dawn, The Business and Finance Weekly, December 12th, 2022