Economic default on the horizon Share:

 As of February 2023, Pakistan's Consumer Price Index (CPI) has reached a 50-year high of 35.1% year-over-year, according to the Bureau of Statistics. This shows that the expense of a shopper products crate has expanded by 35.1% beginning around 2015-2016. The rupee has decreased in value to a new low of 278.9 dollars per rupee, and unfamiliar money FICO ratings like those provided by Fitch and Moody's have decreased, resulting in a loss of financial backing certainty. For instance, Moody's has downgraded Pakistan's credit rating from Caa1 to Caa3, indicating that the nation has a lower chance of recovering from its debt and a higher probability of default. This year, the nation will also have to pay back $7 billion in net external debt, including a $2 billion loan to China.

In the midst of its struggle to repay its debt, the nation is currently plagued by a rapid depreciation of the dollar, low investor confidence, skyrocketing inflation, and falling foreign reserves. The likelihood of generating any funds that could be used to repay the external debt is diminished by each of these factors. In light of the aforementioned macroeconomic indicators, it is being determined that Pakistan is on the verge of a public financial default. In order to determine how the 23rd largest economy in the world reached this critical point, it is essential to examine the events and factors that contributed to the current economic disaster.

The PTI claims that an activist was killed in Lahore during a police crackdown. To begin, the available macroeconomic data indicate that the COVID-19 pandemic has brought about economic collapse around the world. There has undoubtedly been a significant skew in almost all of the world's economies, even though the damage has not been uniform across nations, with some economies reaching their lowest point and others experiencing a rapid decline in growth. Numerous economies have also entered recession as a result of the pandemic, which has led to high unemployment rates, wage reductions, supply chain bottlenecks, less demand for tourism, and skyrocketing inflation. The recovery process will not be uniform, as predicted by the World Development Report 2022; To resuscitate their crippling economies, developing nations like Pakistan will require significantly more time and effort.

Shortly after the pandemic's lockdown phase ended, the Russo-Ukrainian Conflict erupted, posing a threat to global geopolitics and the fragile global economy. Costs of transitional goods, unrefined components, as well as fuel and energy, have increased as a result of the discouragement of the store network from Russia and Ukraine to parts of Europe and Asia since the conflict began. The crisis has plunged the European Union into an energy crisis as a result of the severe shortage of natural gas and fuel. Additionally, supply operations have been hindered and transportation costs have increased as a result of the worldwide rapid rise in oil prices.

Pakistani inflation rose after the war in Ukraine raised global prices: Because Pakistan has historically been a source of both imports and exports for Ukraine, the SBP governor is not immune to the effects of the conflict. It is essential to keep in mind that prior to the conflict, Ukraine was a regular exporter of wheat and fuels to Pakistan, including LNG, oil, and coal, in addition to being a major global exporter of fuel and staple foods. EU sanctions on Russia and Russia's subsequent blockade of Ukrainian ports have hampered the supply of these exports. Pakistan now has to pay a lot more to import fuels like LNG, and even on its own, it has to pay a lot more for transportation and high utility bills. As a result, Pakistan's energy sector appears to have endured prolonged inflationary pressure.

Pakistan's final economic blow came from the devastating floods in October 2022. These floods affected approximately 33 million people across the country and killed approximately 1730 people. The World Bank estimates that these floods cost the economy $15.2 billion in total, with approximately $16.3 billion needed to rebuild damaged structures and assist flood victims in getting back on their feet. Additionally, billions of dollars were lost in the housing, transportation, and agricultural sectors. Pakistan's GDP growth rate should be impacted by these floods, further reducing the country's capacity to repay its debt in light of its already troubled economy.

Pakistan's economy is currently experiencing difficulties as a result of structural issues, a lack of foreign funding and investment, and low unemployment rates, in addition to the aforementioned factors. Pakistan's developing economy has been particularly hard hit by the pandemic's negative effects because of these circumstances, which have highlighted the country's prior economic vulnerabilities. Additionally, the country's unstable sociopolitical structure and rival political parties discourage foreign investment.

Another illustration of this issue affecting Pakistan's economy is the import of luxury goods, cosmetics, automobiles, and even food that Pakistan is highly capable of producing on its own due to its abundant agricultural resources. Although it is not always true that imports are fundamentally bad for the economy, an economy that only imports and has a very low level of commodities can fall into an import/export imbalance, which has negative effects on the country's trading scale. Due to its persistently low export levels, Pakistan is currently in exactly this situation. We are more likely to purchase imported goods even as a nation. Take, for instance, the recent adoration that Pakistanis have for Tim Hortons, a Canadian-based multinational coffee chain. In the midst of a worsening economic crisis, is it acceptable for a nation to wait in long lines outside of a foreign coffee shop? In contrast to China, purchasing foreign goods is regarded as an economic sin in Pakistan. Furthermore, Pakistan's limited domestic business, which significantly contributes to the Pakistanis' obsession with foreign brands, is not vindicated by this. Our domestic industry requires immediate support and funding to supply the local markets with high-quality goods. Consequently, nothing would need to be imported at all.

The question of whether the nation will default is still up for debate. Pakistan's Federal Minister for Finance, Mohammad Ishaq Dar, defies any possibility of default by slamming anti-state elements and attempting to spread false rumors to create panic in the country. Countries like India are already convinced that our economy will be completely destroyed. He made it clear that State Bank (SBP) Forex Reserves have been rising despite the timely payment of pending external dues. The SBP's forex reserves were $1 billion lower four weeks ago. 

The good news is that the government is trying to negotiate a deal with the International Monetary Fund (IMF) and other nations like China, and the rupee is rising against the dollar. In addition, the government has taken corrective measures such as raising taxes and banning luxury imports, both of which tend to maintain the prices at which the economy operates. The bad news is that the good news doesn't last forever. Even if we steer clear of this economic calamity, we will still face similar challenges in the future; A nation might be able to avoid a quick financial slump by taking on debt and relying on unidentified subsidies to keep the economy going, but in the long run, doing so is not only pointless but also extremely detrimental. To ensure that we never again face a situation of such extreme economic dependence, permanent measures that aim to direct the use of these foreign funds for the energy, agricultural, industrial, and foreign sectors are required to increase the country's growth rate and, as a result, free the nation from the debt trap it has been in for several decades.