In case of default, Pakistan will confront insurmountable challenges that will further worsen the overall economic conditions, affect the imports and will create the shortage of basic goods and commodities in the crisis-hit country.
ByAsif Javed | June 2023
The economic condition of Pakistan, particularly over the last few months, has been quite dismal. Facing challenges at multiple fronts, the country is fast moving towards the sovereign default despite hyperinflation, coupled with a slew of harsh measures being taken by the incumbent PDM government at the directives of the International Monetary Fund (IMF).
As things currently stand, Pakistan’s foreign exchange reserves have plunged to low levels, which cannot even cover the country’s import requirements. To make things worse, the rise in external debt obligations over both short and medium terms, are creating a default risk. As of April 20, 2023, for instance, net reserves worth $10,498.9 million have now reduced to $4,462.8 million, while the global rating agency downgraded Pakistan’s credit rating for the second time in the last four months, which is not a good sign.
On a year-to-year basis, the inflation rate was recorded at 36.4% in April 2023. The inflation rate in urban and rural areas was 33.5% and 40.7% respectively while the Consumer Price Index (CPI), especially in the food category, rose to a whopping 46.8% and 52.2% in urban and rural areas, the highest inflation rate since 1964.
In addition to that, incessant currency devaluation and rising energy prices have escalated the inflation rate even further, making it almost unbearable for ordinary citizens to cope with the crisis-like situation. Employing a makeshift approach, the State Bank of Pakistan has increased the policy rate to 21%, however, the desired outcome of curbing the inflation cannot be achieved. The IMF, on the other hand, has again made it clear in its recent statement that Pakistan needs a tight monetary policy with further increase in policy rate to control the current rate of inflation.
In the recent past, external debt and liabilities increased considerably. The IMF report projected that external debt will be around $136 billion in 2023 while it may increase to $144 billion in 2024. Till June 2026, Pakistan needs to repay $77.5 billion in terms of external debt, which is no doubt a major burden on the economy. The repayments are to be made to China’s financial institutions, not to exclude Saudi Arabia and some other private creditors. Bilateral debt can be rolled over while debt from multilateral organizations usually has a long-term maturity cycle, which makes default’s vulnerability primarily dependent upon commercial loans.
Debt servicing is another factor that will exert an additional pressure on the economy in the short to medium term. For the next fiscal year, debt servicing will be around $24.6 billion, including about $14.5 billion short-term debt repayments together with $8.2 billion in long-term debt repayments. Besides the economic instability, the devastating floods in 2022 caused colossal damages of around $40 billion. According to the United Nations International Children’s Emergency Fund (UNICEF), more than 20.6 million people, particularly in Sindh and Balochistan, required humanitarian assistance after the devastating floods. The natural calamity made it even more difficult for the incumbent government to meet the IMF’s conditions with regards to the increase in energy prices and introducing new taxes.
The Macro Poverty Outlook (MPO) for Pakistan projected that Pakistan’s growth rate will slow down to 0.5% this year, while inflation is projected to be around 27% in the current fiscal year. Large-scale manufacturing sector in Pakistan has also shown dismal growth with a 5.56% decrease during July-February of FY 2022-23, compared to the same period in the previous fiscal year. The report also highlighted that the country may miss fiscal and debt reduction targets during the current fiscal year, whereas the conditions could become worse in the next fiscal year since the country’s consolidated budget deficit will jump to 8.3% of GDP. Pakistan’s agriculture sector may also lose around $3 billion due to its negative growth rate of 3.5%.
The possible scenario for Pakistan is to acquire new loans and request for debt rollover, which seems unlikely due to its consecutively poor credit ratings. The other option is to contain debt, which will decrease the repayment pressure, create fiscal space, spare dollars and it will thus improve the current account balance.
In May, the IMF Chief said that “Pakistan had not yet reached the default level and it would not, but the country required a sustainable policy framework to avert such risks.” The IMF is working with the government of Pakistan to make sure that the policies are in line to tackle the unsustainable debt level. To acquire the next IMF funding, the government needs to give an assurance that the balance of payment deficit is fully financed for the next fiscal year. Besides, the other requirements to be met include market-determined exchange rate and decrease in fuel subsidies.
To come out of the ongoing economic crisis, the government should devise an effective expenditure management strategy to control the fiscal deficit by boosting economic activities and facilitating the industry. Also, the revival of the agriculture sector is important to ensure food availability and price control.
Pakistan needs the IMF programme along with assistance from China and the Middle East countries. In case of default, Pakistan will confront insurmountable challenges that will further worsen the overall economic conditions, affect the imports and will create the shortage of basic goods and commodities in the country.
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