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After Sri Lanka, Pakistan heading towards bankruptcy

Pakistan, World Bank, Rupee, Sri Lanka

Economy

After Sri Lanka, Pakistan heading towards bankruptcy

After the World Bank has denied to provide further loan to Sri Lanka by branding the country as “bankrupt”, Pakistan now is on the verge of embracing the same fate.

According to media reports, exchange value of US dollars to Pakistani rupee is continuing to drop, while it already has dropped more than 14.50 percent which is considered as worst in five decades.

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During early July, the value of Pakistani rupee was 204.89 against US dollar in the inter-bank market, while by July end it has been 239.37 rupee.

Since the start of 2022, the rupee has lost over 30 per cent of its value, according to the Foreign Exchange Association of Pakistan

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Back in May 1957, Pakistani rupee slumped by 57 percent while the government had to readjust the exchange rate from 4.77 to 11 per dollar.

Chaotic domestic politics and falling foreign exchange reserve are the prime reasons behind Pakistan’s current economic catastrophe.

According to the Economic Times, with the depleting foreign currency reserves and rising inflation, Pakistan is on the brink of economic collapse and heading towards a path similar to the economic downfall of Sri Lanka.

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“Pakistan’s central bank, State Bank of Pakistan (SBP) has sent out an SOS to the government that falling foreign exchange reserves could negatively impact the country’s ability to import. The decline in Pakistan’s forex reserves, which fell to USS8.24 billion on 17 June 2022”, the European Times said in a report.

“This trend is likely to continue due to pressure of debt servicing and other payments in the near future. To preserve diminishing forex reserves, the SBP has advocated a temporary ban on the import of all non-essential goods. However, the greater challenge today, is the risk posed by rising fuel imports which impact Pakistan’s energy security. In the long run, the risks of Pakistan going the Sri Lankan way are, therefore, all too close and real”, the report added.

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According to the UNDP, Pakistan is facing a debt in excess of USD 250 billion.

“This cost-of-living crisis is tipping millions of people into poverty and even starvation at breath-taking speed and with that, the threat of increased social unrest grows by the day”, UNDP head Achim Steiner.

Some financial pundits and economists have sounded the alarm that a default risk and the debt crisis are not hypotheticals; however, the government and some analysts insist that Pakistan’s economic ship will not sink.

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Pakistani analysts said, as things stand, Pakistan is unlikely to default on its foreign debt. Pakistan has enough foreign reserves to continue to service its debt obligations. Pakistan’s external financing challenge is more strongly tied to the import bill, than the debt servicing obligations.

Much of Pakistan’s foreign debt is to other countries and international financial institutions, like the IMF, as opposed to commercial debt which makes managing obligations easier for the government.

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A case in point is that much of the debt owed to Saudi Arabia and China are often rolled over easily.

A country defaults when it cannot pay the debt amount after all usual trade and services receipts and payments are met.

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Pakistan’s bond repayment of US$1 billion is due in Dec 2022, and not immediate, while the total gap is around US$4 billion, over the course of many months.

By December 2022, the Pakistani finance ministry, is expected to have arranged over US$5 billion (IMF US$1.2 billion, friendly countries US$3-4 billion cash deposits/rescheduling with oil and gas on deferred payments, sell-off of assets with buyback arrangements), followed by World Bank and Asian Development Bank and other donors with their long-term project and program funding/debts, offsetting total financing needs for a typical year.

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Pakistan has a US$1 billion repayment due in December 2022, which may not be an issue, once the inflows mentioned above are materialized in August-September this year.

In addition, Pakistan’s current account deficit will be much lower in the coming months (from US$2 billion to around/below US$1 billion), given the decline in oil and food prices globally, and excessive bans or delays on imports.

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All in all, this will slow down the economy; growth in imports, and the supply of US dollars will be much more than what it is now.

Having mentioned all the above, these will all be temporary respites and ad-hoc/stop-gaps, Pakistan needs structural reforms, stability, and policy consistency with priorities defined, planned, and properly executed.

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If failed, the country will soon face a much bigger and unmanageable economic crisis which would turn Pakistan into a bankrupt nation.

This is not only the case of Pakistan. Every other under-developed and developing nation needs to learn from this crisis, unless they want to become bankrupt like Sri Lanka.

Sohail Choudhury is the Executive Editor of Blitz

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