The blessings of a looming default

I have no expertise of any kind on the economy, other than some layman’s common-sense sense of it and some thoughts on the likely way forward in the present situation. There is a lot of talk about the looming default over our repayment liabilities to multiple international creditors. After we decipher default per se and its likely implications, if and when Pakistan defaults, this piece would venture into the unchartered terrain of post-default Pakistan.

So, first of all, what is default? According to Investopedia; “Default is the failure to make required interest or principal repayments on a debt, whether that debt is a loan or a security.” Default by a country – called sovereign default – can be due to various reasons like political unrest and instability, economic mismanagement (as in case of Pakistan) or a banking crisis. Greece, in 2015, defaulted on IMF’s $1.73 billion repayment and ultimately ended up securing additional debt relief funding from the EU to pay the IMF.

As of January 2023, Pakistan’s public debt is around Rs62.46 trillion ($274 billion) which is around 79% of its GDP. Pakistan’s foreign exchange reserves currently hover around $5.82 billion, and it has to repay creditors more than $8 billion in the quarter ending March 2023. Foreign remittances on the average are $2 to 2.5 billion in a month. So, the government’s confidence to meet its obligations does not seem misplaced, if it can control its import bill and reach out to the Gulf and Saudi friends for deferred payment on POL products.

Pakistan’s domestic debt increased by 18.7% to Rs31.40 trillion whereas our foreign debt jumped 30.2% in the last year, according to State Bank of Pakistan. So much for the PML-N’s stabilising performance. However, the fact remains that repayments to foreign creditors would be a tight balancing act for ‘any’ government in power, as there is no fiscal space and no magic wand. The present cabal at least has better relations with the Gulf, KSA, China and the US/West.

Second, what happens if Pakistan does default? As in personal finance, a default earns borrower negative remarks, lowers investor/creditor confidence and plummets credit rating. Technically, a default ‘exposes borrowers to legal claims’ limiting their future access to credit and loans. It also makes future credit more expensive due to higher interest rates. Our creditors ‘may’ resort to ‘garnishment’ – a legal process where creditors can ask a third party to deduct payments directly from our dues.

In Pakistan’s case, recovery prospects would depend, partially whether the debt is secured or unsecured. Mortgaging national assets as collateral for securing credit, as reported in the press, remains an explorable grey area. Unlike company/corporate debtors, a country in default usually cannot be forced to repay its obligations through arbitration. However, it does face other risks and problems such as non-opening of Letters of Credit (LC) for imports/exports and exclusion from the international banking system, disabling local-bank issued debit/credit cards internationally etc.

Theoretically, restricted imports might be a blessing for Pakistan, as most imports are luxury items and non-essentials (food, cosmetics, etc), that we can do without and/or produce locally without much problem. The only problem would be import of raw material, as Pakistan’s economy is import-dependent, and this restriction may hit at our official exports. However, as a consequence our informal economy, which is manifold larger than the formal/documented economy, will grow. The size of this undocumented economy is anybody’s guess, but it is fairly large, resilient and Pakistan’s real lifeline.

So, a default would lead to a much-needed official belt-tightening, hitting at the ashhrafiyya-privilege, reducing their clout and importance; and enhance informal trade leading to local manufacturing and self-reliance. Pakistan’s Covid-induced restrictions had led to improved local production and manufacturing. It is badly needed, as our traders, not only import non-essential items; they find it easier to import and resell even ordinary products, after scaling up the price, rather than getting into manufacturing.

As an example, it was ironic to find no local alternative to tiny Italian-made brass nozzles, required to convert piped gas-fired heating system over LPG. The imported nozzles were not only hugely expensive, these could have been conveniently produced indigenously, even by local kharadias (ironsmiths) at a fraction of a cost. A list of imports shows mind-boggling array of items that can be locally manufactured. We need to extensively purge the import list and force the industry and traders to come towards manufacturing and local production. And this country has immense potential.

Additionally, no default and no sanctions can curtail traders intending to make a profit, and getting around restrictions and bottlenecks. The most punitive US/Western sanctions against Russia over Ukraine are busted effectively by a vigorous supply line through Georgia and Azerbaijan etc with nationals from many countries making a profit.

Third, the likelihood of default. In one’s reckoning, a default is not likely. Creditors would never like to lose money and/or accept delay on their dues in a bankrupt Pakistan. Our ashhrafiyya too stands to lose from this eventuality, being a stakeholder in foreign money. And lastly, the global movers and shakers would not want to destabilise a nuclear Pakistan that can become a bigger problem in default than it already is.

Fourth, so what is the likely way forward? Domestically, the simpler solution is to purge the import list ruthlessly; making imported items that can be locally produced hugely expensive; while letting in the raw-materials that are critical for export-oriented manufacturing. The government should also announce incentives for manufacturing and local production/indigenisation. Corruption by ‘all’ concerned departments at the points of entry needs to be reined in. SBP should exercise stringent forex control, with the government punishing those responsible for dollar flight while ensuring fiscal discipline…as some possible quick fixes.

Internationally, we need to sit with the leading creditors like IMF and World Bank to restructure our loan liabilities. They would do it, as there are no easier and palatable alternative repayment options. Thanking friends like Saudi Arabia and the UAE, who provide deposit rollover and enhancement in our times of need, we need to approach China for a vigorous follow-up and completion of CPEC projects that can revive and resuscitate economy, especially our exports.

Without wishing for a default, it may not be such a bad thing after all, if push comes to shove. And it may be a blessing in disguise.

Published in The Express Tribune, January 19^th, 2023.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.