Why Pakistan would not default

The political discourse in Pakistan is revolving around the fears of the country defaulting on its foreign payments. With the country reeling from a historically high inflation rate, unprecedented interest rate, dangerously low foreign exchange reserves, etc, it is quite normal for such fears to spring up. But the facts and ground realities do not support the assumption that Pakistan would default.

Pakistan has been in talks with the IMF for revival of a bailout package. An IMF delegation that visited Pakistan from January 31 to February 9 to hold discussion under 9^th review of the Extended Funds Facility (EFF) concluded: “IMF team welcomes the commitments of the Prime Minister to implement policies needed to safeguard macroeconomic stability and thanks to the authorities for constructive discussions.”

Progress over policy measures includes strengthening fiscal position; reducing untargeted subsidies; scaling up social protection; helping the most vulnerable; making exchange rate market-determined, enhancing energy provisions; preventing further accumulation of circular debt; and seeking financial support from external partners. It has been mentioned that Pakistan needs improvement in its sustainable development as well. There has been a considerable progress in the negotiations with IMF and Pakistan hopefully will get a $1.1 billion tranche under the $6.5 billion bailout package awarded in 2019.

Also, since most of Pakistan’s debts are bilateral or multilateral, they can be rescheduled; and commercial loan repayments are not too much to lead the country towards a default as was the case with Sri Lanka.

Here, it is important to understand the nature of debts and loans. When the revenue generated by a government does not cover its expenditures then governments — in developing countries in particular — obtain loan from other governments, states, multilateral financial institutions, commercial banks and private capital markets for developing infrastructure, supporting foreign exchange reserves, etc. Such loan payments are made with sovereign guarantees to the lender to repay with a certain interest rate and terms and conditions.

The default on repayment is more about a state not willing to pay, instead of a state not being able to pay. When a country declares default, it actually declares its inability or unwillingness to make repayments. This decreases the credit rating of that country to get further loans. While a state not having the capacity, but willingness to make repayments, is able to get its loan rescheduled.

In this context, bilateral creditors and multilateral institutions are more likely to restructure the loan repayments. Restructuring means that a government which is not able to pay the loan on time negotiates with the lenders to reschedule payments. This ultimately provides space to the borrower state to recover and strengthen economy. According to Pakistan’s debt profile, a total of $126 billion is availed as multilateral, bilateral and commercial loans. Multilateral loans constitute 48% of the total, including from the World Bank, IMF and other lending institutions. Bilateral loans constitute 30% of the total debt while commercial loans only 22%.

Furthermore, the strategic factor cannot be ignored. Pakistan is located in the neighbourhood of the world’s fastest growing economy, China. Pakistan is also a gateway for global trade through central Asia. Pakistan is the 5^th most populated country of the world and is a nuclear power. International players still need Pakistan’s support due to its strategic location. Hence the international community — friendly countries in particular — are unlikely to let down Pakistan.

In the light of above factors, the likelihood of Pakistan defaulting on its foreign obligations is very low.

However, it must be noted here that Pakistan is in a classical debt trap and needs effective economic reforms and policies to come out of it. Pakistan needs to promote its local industry to cut down on its imports and be self-sufficient, leading to an increase in exports.

Published in The Express Tribune, April 5^th, 2023.

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