Is Pakistan going the way of Sri Lanka? Major macroeconomic indicators for both countries point to similarities in the economic prospects of the two nations of the subcontinent.
Mired in a political crisis, Sri Lanka is also facing a serious external debt crisis. It took out loans to accelerate its infrastructure and energy sectors, but failed to get the return on investment. According to data from the Central Bank of Sri Lanka, for its external debt and liabilities of $51 billion, it has to pay about $4.5 billion a year until 2025 in debt servicing (principal + interest) from its foreign exchange reserve.
The island nation is also heavily dependent on imports, with a difference of around 40% between import and export figures. This basically means that the country needs sufficient additional foreign exchange reserves to ensure the supply of essential items from abroad.
With an increase in debt service each year, coupled with a decline in large foreign exchange earnings, tourism and remittances, Sri Lanka has less than $2 billion in its foreign exchange reserve. In May, the country had only $50 million in usable foreign exchange reserves, which was not even enough to organize one-day imports. Rapid economic decline saw Sri Lanka default on its external debt in May.
Pakistan faces a similar crisis. The country has a massive foreign debt of around $130 billion. In FY21, according to figures from the State Bank of Pakistan (SBP), the country paid $13.424 billion in debt service. For the three fiscal quarters of 2022, the amount has already crossed $10.885 billion and is expected to reach over $14 billion.
Like Sri Lanka, Pakistan is also an import-dependent economy, but to add to the problems, the gap between exports and imports is huge and the situation becomes even more precarious when there is an impending crisis on the frontline. foreign exchange reserves. The country’s foreign exchange reserve has been reduced to about $9 billion, enough for six to seven weeks of imports.
In the financial year 2021, according to figures from the State Bank of Pakistan, the country’s exports were worth $25.639 billion while imports were much higher at $54.273 billion, a huge gap of almost 30 billions of dollars. For fiscal year 2022, it was even higher at $40 billion, with imports at $72.048 billion and exports at $32.450 billion. In June 2022, the country’s imports stood at $7.038 billion against an export figure of $3.118 billion.
The next quarter is going to be crucial for the country with economic calculations against it, especially after the decision to lift the ban on non-essential and luxury items under pressure from some political elites and the importer lobby. Import figures could rise, adding pressure to lower foreign exchange reserves.
The only solution to this problem will be to take out even more debt and restructure existing debt repayment options.
Pushan Dutt, Professor of Economics and Political Science at INSEAD, Singapore believes that even though the current economic crisis in Pakistan is really in a tough shape, the country can avoid the fate of Sri Lanka, due to geopolitical reasons, the India-China rivalry and Pakistan -China connects.
“While debt levels in absolute terms are the same as in Sri Lanka, Pakistan’s economy is larger, so the debt-to-GDP ratio is lower. At the same time, the country has a lot of foreign currency borrowing and we have already seen cases of capital flight. Now a lot of the debt is held by China, so it can get debt relief for geopolitical reasons,” he said.
Pakistan’s GDP in 2021, according to the World Bank dataset, is $339.4 billion in constant 2015 US dollars, nearly four times larger than Sri Lanka’s GDP of $92.1 billion. of dollars. Pakistan’s debt-to-GDP ratio is still below 100%. It was 84% in 2021, according to corresponding data from Trading Economics, while IMF analysis indicates that Sri Lanka’s debt-to-GDP ratio reached 119% in 2021.
Support from Islamic countries and China
Pakistan can also get support from other Islamic countries, believes Jawad Nayyar, a Pakistan-based economist, industrialist and techpreneur, while stressing that the country will not follow Sri Lanka’s path. “Pakistan has certain geopolitical advantages that only a few others enjoy. These include cordial relations with most of the MENA region, North Africa and the Asian and Far Eastern economies.
Pakistan is the founding member of the Organization of Islamic Cooperation. The OIC has 57 member countries spread over four continents. Pakistan being the second largest state in the organization and, in fact, the only Islamic nation with nuclear power, can find support from within.
On May 1, Saudi Arabia agreed to bail out Pakistan with $8 billion in financial aid. Saudi Arabia’s petroleum (deferred payment oil) facility was doubled to $2.4 billion. Existing Saudi deposits worth $3 billion have been rolled over to June 2023 and Pakistan is also expected to secure additional deposits of over $2 billion.
On June 22, Pakistan signed a loan agreement with a Chinese consortium of banks for $2.3 billion. On top of that, Beijing has already rolled over its debt worth $7 billion so far to help Pakistan deal with its economic crisis.
Pakistan also expects to receive $1.2 billion from the IMF in August through its bailout package. Pakistani army chief General Qamar Javed Bajwa actually asked the United States to pressure the IMF for early disbursement of the loans, according to a Nikkei Asia report. The country also expects the IMF to release more funds by claiming that it has met the conditions set by the IMF to be eligible for additional bailout assistance.
While things look bad for Pakistan, it won’t be as bad as in Sri Lanka where a standard currency crisis has turned into political upheaval. Pakistan has a floating exchange rate, so there won’t be a sharp correction. But like Sri Lanka, it has a large trade deficit that is worsening with soaring fuel prices and has borrowed in dollars. Inflation is skyrocketing, so global fundamentals look bad.
Another Pakistani, now based in America, thinks otherwise. Dr. Fida Mohammad, a sociology professor at the State University of New York, says Pakistan is in a debt trap and the Pakistani currency is losing value every day. According to him, Pakistan is more likely to default and, if things go the same way, will be bankrupt.
What led Pakistan to this?
Dr. Fida Mohammad’s reaction underscores the global view on Pakistan that it is a military-ruled state with deep corruption and much of the economic damage is self-generated. “Yes, the whole country is destabilized. The military behind the scenes controls everything, including the justice system. The judiciary legitimizes deep state (military establishment) corruption. Socio-political chaos gives more political clout to the military, and they are the beneficiaries of anarchy.
For example, the decision to lift the ban imposed on the import of non-essential and luxury items, even if the country lacks foreign currency. The rush to create new economic avenues through loans as the country imports more than double its exports also becomes a burden when its total reserves data did not exceed $20 billion in current US dollars according to the World Bank data set.
Pakistan’s external debt figure has doubled in the past 10 years. His groundbreaking project, China Pakistan Economic Corridor (CPEC), a $62 billion infrastructure and energy roadmap, looks good on the data, but raises questions when we see it is again built on Chinese loans.
Corruption is also a deep bottleneck and it has not even left CPEC projects, according to a report by a panel appointed by the Pakistani government. Pakistan broke through 100th place in 2004 on Transparency International’s Corruption Perceptions Index and has seen a steady decline thereafter. It was in the 140th position in the list of 180 countries in 2021. The higher the absolute number, the more corrupt the state.
Nuclear power, the only saving grace?
Pakistan is a country with nuclear power which can also be a safeguard for it, says Jawad Nayyar. “Pakistan is a nuclear power and the world cannot afford a bankrupt Pakistan just because a few hundred million dollars of debt cannot be rolled over.”
Richard Gardner, CEO of Modulus, a US high-performance Fin-Tech and AI solutions company, and world-renowned financial analyst, said nuclear power could finally prevent Pakistan from becoming the next nation. economy by default in Asia. “While Pakistan is, most certainly, in a perilous position, the country has a major advantage over Sri Lanka. The advantage, of course, is that it is an atomic power, and until proven otherwise, I think we have to assume that the IMF and other international entities will go to great lengths to s ensure that the country does not default on its debt.
Former Pakistani Prime Minister Imran Khan admitted in 2019 that his country still has around 30,000 to 40,000 terrorists and 40 terrorist groups operating within the borders and that no country would want a terrorist group with nuclear weapons in Pakistan in the future. The question of the safety of nuclear weapons becomes paramount in a politically destabilized Pakistan which is still defaulting on its economic debt.
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