Chitral Today
Latest Updates and Breaking News

What if Pakistan defaults?

ISLAMABAD: Catastrophic economic and social crises await Pakistanis in the event of a sovereign default, which may result in shortages of food, medicines, fuel, and the cash needed to import and purchase these essential goods.

Very little time remains for Prime Minister Shehbaz Sharif to make a swift PPP decision on whether to proceed with his plans to unveil a popular budget that would further antagonise international creditors. His second and only option should be to find a long-term durable economic revival framework, which is now a prerequisite to avert the looming default.

We hope that the government will be able to steer the economy out of the crisis and avoid default. However, in the case of a sovereign default, people will lack sufficient money to purchase consumable goods, and the government and private importers will require hard cash to import everything from pulses to medicines and from crude oil to cooking oil.

The government’s revenues will be consumed by interest payments and high costs, while hyperinflation, following a sovereign default, will erode the purchasing power of the common man’s salary.

Pakistan is not unique in this regard, despite its leaders proudly claiming that it has never defaulted except on one occasion.

Sri Lanka also defaulted in April last year for the first time in its history amid extreme political and economic crises. Similar factors are currently present in Pakistan and are gradually pushing it toward a default situation.

Since 1961, approximately 147 governments have defaulted on their sovereign debt. Recent examples include Argentina, Sri Lanka, Russia, and Lebanon, according to KTrade, a research engine of KASB.

“Restaurants in the capital, Colombo, are full and markets well stocked. Travels around the central mountain region and the small villages are also deceptive,” wrote Zeinab Badawi in the Financial Times this February.

A similar deceptive situation exists in Islamabad, where policymakers and urban elites believe that the country will not default.

According to JP Morgan Chase Bank’s analysis on May 19, Pakistan is likely to have sufficient external liquidity to cover financing needs until June. However, default risks increase significantly in fiscal year 2023-24. The analysis further noted that “at some point in the second half of 2023, Pakistan faces the material risk of running out of usable reserves to meet foreign obligations.”

Finance Minister Ishaq Dar denies that Pakistan carries a high risk of default.

For many, Sri Lanka has become an extreme example of the consequences excessive borrowing can have on vulnerable countries. Pakistan’s situation is no different. 

Pakistanis are said to be resilient, just like the Sri Lankans who, according to the Finance Times, “now seethe with anger.”

Pakistan’s foreign exchange reserves are dangerously low, standing at just $4.1 billion, which is equivalent to the debt repayments due in June alone. 


Read full article here.

You might also like

Leave a comment

error: Content is protected!!