Pakistan Reader# 492, 29 December 2022
On 28 December, Ishaq Dar, finance and revenue minister commented on the ‘rumors’ of Pakistan defaulting on its external debt obligation. He asserted that Pakistan has all the resilience and will to survive the challenge. He linked the rumour mongers with dirty politics and recollected how the PML-N in 2013 turned the tide in Pakistan’s favour in similar economic circumstances.
Is Pakistan likely to default?
The following paragraphs discuss two scenarios on Pakistan’s economic default..
Scenario-01: If Pakistan defaults…
This would be preceded by a failed IMF programme. If Pakistan does not abide by benchmarks and conditionalities, that would indicate rising public expenditure on subsidies and reduced spending in the public sector development programme. The power sector debt would spiral out, and private distributors would lose confidence in the government’s capability to pay back.
Such a scenario is unavoidable at this juncture when the investment environment is subdued across the world, and the sovereign bond targets are not subscribed in their full valuation. No government can afford that. The currency may further depreciate as the investment will not find Pakistan attractive enough to extract returns. Obtaining a line of credit may further become difficult for banks in obtaining imports. There will be a shortage of fuel, power, medicines and food.
The above would be ripe for a civil war, which the Establishment in Pakistan may not be able to afford right. Lack of support from allies and friendly countries could be another external factor that could push Pakistan to default. . If UAE, Saudi Arabia and China refuse to roll back the debt obligation, Pakistan will default.
Scenario-02: If Pakistan survives…
If Pakistan does not default, it would mean a harsher and stronger conditionalities to keep the IMF on its side. The forex reserve may again go above the USD ten billion as the IMF support unpack external financial support from creditors. That will put Pakistan’s economy back in confidence to repay its debt service obligation – likely to be around USD 8.3 billion.
Of the total USD 8.3 billion debt servicing in Jan- -March, USD two billion are to be paid back to commercial creditors. Rest are bilateral and multilateral creditors; in the past, there have been debt rollover by them. Pakistan not defaulting scenario will come with strings attached. The government will have to restrain statutory regulatory orders; in the past, they have profited the domestic political economy. Price rationalization in energy could be another string; it would mean the consumers will have to pay more. This will keep the inflation in double digits. Pakistan has to work on its public sector enterprises and move forward with the privatization process, which is not happening now.
To conclude, whether Pakistan defaults or not, the government will face a tough situation in 2023. For the ruling PDM, facing the elections in 2023, the bigger worry is a political default, than an economic one. This government is more worried about losing political capital.