Disaster in the Making

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.

By Asif 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.

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