What will happen if Pakistan stops paying its debts?
Pakistanis fear grave consequences, including potential shortages of food, medicine, and fuel, in the event of a default.
In the case of a sovereign default, ISLAMABAD fears that food, medicine, fuel, and the currency needed to import and purchase these basic products will become severely scarce, triggering a cascade of economic and social catastrophes for the Pakistani people.
There is little time left for Prime Minister Shehbaz Sharif to decide whether or not to release a populist budget that would further irritate international creditors. To avoid the impending default, his only other choice is to develop a long-term stable economic revival framework.
We’re praying that the administration has the wherewithal to get the economy out of this hole and prevent a default. In the event of a sovereign default, however, consumers would be unable to afford staples like food and medicine, and both public and private importers would need hard currency to bring in supplies.
Hyperinflation after a sovereign default will eat away at the purchasing power of the average person’s salary, while interest payments and exorbitant expenditures will eat up the government’s revenues.
Despite the claims of Pakistan’s authorities that their country has never defaulted on its debts, this is not the case.
Extreme political and economic issues led to Sri Lanka’s first default in April of last year. Pakistan is also experiencing similar pressures that are leading the country closer and closer to a default.
About 147 governments have declared sovereign debt default since 1961. According to KTrade, KASB’s research engine, recent examples include Argentina, Sri Lanka, Russia, and Lebanon.
The capital city of Colombo has bustling restaurants and well-stocked grocery stores. Zeinab Badawi, writing in the Financial Times this past February, warned travellers not to be fooled by visits to the country’s core mountain region or its little settlements.
Islamabad is similarly deceived, with politicians and urban elites convinced that Pakistan will not default.
The external liquidity of Pakistan is expected to be sufficient to meet financing needs through June, according per an analysis by JP Morgan Chase Bank dated May19. However, default chances in fiscal year 2023-24 increase dramatically. According to the report’s findings, “at some point in the second half of 2023, Pakistan faces the material risk of running out of usable reserves to meet foreign obligations.”
Pakistan’s Finance Minister Ishaq Dar says his country is not in risk of default.
Many people now look to Sri Lanka as an extreme example of what may happen when a country with a weak financial foundation takes on too much debt. The circumstance in Pakistan is not unique.
The Finance Times claims that although Pakistanis are robust, Sri Lankans “now seethe with anger.”
The amount of debt repayments due in the month of June alone exceeds Pakistan’s current foreign exchange reserves of $4.1 billion.
Pakistanis should prepare for disaster.
The people of Pakistan face an uncharted existence if their government does not make proper plans to clear the $25 billion debt in the next fiscal year, with or without the help of the International Monetary Fund (IMF).
250 million people’s standard of living will inevitably plummet. Due to import limitations established by the Sharif regime to prolong default, food, fuel, and medication are already in short supply and will only get worse. The fluctuation in the exchange rate will cause the rupee’s value to continue to fall, resulting in hyperinflation. Companies that rely on imported raw materials may suffer if the government is obliged to enforce import reductions.
According to a report published last week by Arif Habib Research, sovereign default causes severe economic instability, damages investor trust, and restricts access to international financial markets. The likelihood of a sovereign default rises in the absence of a breakthrough with the IMF, whose approval typically determines backing from friendly countries.
Financial meltdown
The major victim of a default would be the rupee, which has dropped to Rs313 to a dollar on the open market.
As people rush to buy dollars in anticipation of a possible currency crisis, the value of the rupee will fluctuate wildly.
No credit cards will be issued, and all overseas purchases must be made with cash.
The pre-default exchange rate for the Sri Lankan rupee was close to 200. Before the official default announcement on April 12, it dropped to 322, then afterward it dropped to 370. After obtaining a bailout from the IMF in March of this year, however, the currency gradually recovered to 298 to a dollar.
Since Pakistan’s economy is so dependent on imports, this would have devastating effects on the country. If the currency is devalued, hyperinflation will result. The exchange rate shock will drive up the price of all imported goods, from fuel to beans to pharmaceuticals.
Restriction of Trade
There are substantial discrepancies with the reported 0.3% growth in Pakistan’s economy during the current fiscal year. Import restrictions enacted by the government to prevent default contribute to the stagnant development rate.
In April, the import bill dropped to $3 billion, from an average of $6.5 billion per month before. Although this has prevented default, it has caused factories to shut down and product shortages.
If the government goes into default, it will lose the ability to import anything worth more than $3 billion on credit.
Importing gasoline, machinery, and medicines will become extremely difficult if Pakistan defaults on its debt. The World Bank estimates that 80 percent of Pakistan’s imports are made up of raw materials, intermediary goods, and necessities.
Consider the repercussions on one’s life if they want to import a product but are unable to do so because the bank requires them to pay in advance. The availability of liquid funds will decrease.
According to Arif Habib, exports will also be harmed by the lack of raw materials, energy constraints, and the cancellation or shifting of export orders to more reliable competitors.
Hyperinflation
Currency devaluation is one cause of the 36.4% inflation rate that Pakistanis are currently experiencing, which is the highest it has been in 59 years. Price hikes will accelerate after a default as consumers compete for a smaller supply of commodities.
Pakistan will be shut out of international banking and financial markets.
The government’s inability to obtain sufficient amounts of foreign loans to satisfy the lender is one of the causes for the delay in achieving a staff level agreement with the IMF. If there is a default, foreign commercial banks will either not lend to the government or demand unfeasibly high interest rates.
Budget assistance loans from multilateral lenders including the World Bank, the Asian Development Bank, and the Asian Infrastructure Investment Bank could be withheld from Pakistan unless the country restructures its debts with its creditors.
National banks will feel the effects of a sovereign default as well, as they have more than 60% of their balance sheets invested in government debt. Their loans to the government, including the principal, will be at risk.
Recession is imminent.
In addition to the National Accounts Committee-approved growth figure of 0.3%, there are reports of information sources and anomalies in the statistics indicating that Pakistan’s economy actually contracted by at least 0.5% even before default.
A default would exacerbate the contraction, which would have negative effects across the board, including higher unemployment and deeper poverty. This may lead to increased political instability and civil unrest.
Pakistan is not yet doomed.
Domestic and international debt restructuring decisions made in a timely manner can help avert economic and social disaster. A rescue from China might buy some time, but it won’t solve the underlying problem.
In order to receive a $3 billion loan from the IMF, Sri Lanka and its international creditors had to settle on a plan to restructure the country’s foreign debt due to China, India, Japan, and commercial bondholders.
After economist Atif Mian suggested debt restructuring on Saturday, the Ministry of Finance issued a statement rejecting the idea.
“While comparing the experience of Ghana and Sri Lanka, he (Atif Mian) has concluded that Pakistan should “take decisive moves, aggressively restructure, and take daring acts. The Finance Ministry has stated that this is a “veiled suggestion to declare default.”It went on to say that this is an unwarranted theoretical objection.
