Is strategic default a pathway towards economic rejuvenation?

Reliance on external financing to sustain domestic expenditure creates precarious debt trap

Nadeem M Qureshi May 27, 2024
Experts said the benchmark five-year credit default swap was still high at 17.44% compared to the range of 4-6% during the days of economic stability. PHOTO: FILE


Pakistan’s external debt has burgeoned into a formidable economic challenge, posing significant hurdles to its sustainable development and fiscal stability. As the nation grapples with the burden of mounting debt, there arises a pressing need to critically assess the feasibility of repayment from conventional revenue streams.

This article elucidates the complexities surrounding Pakistan’s external debt and advocates for a strategic default as a pragmatic pathway towards economic rejuvenation and self-reliance. Pakistan’s external debt, comprising both public and private borrowings from foreign creditors, has surged to alarming levels in recent years, reaching approximately $113 billion. With a substantial portion allocated towards servicing interest payments, the debt burden has exacerbated fiscal constraints, hindering investments in crucial sectors such as healthcare, education, and infrastructure.

The reliance on external financing to sustain domestic expenditure has created a precarious debt trap, impeding the nation’s capacity for autonomous economic growth and possibly threatening its continued existence.

The conventional avenues for debt repayment, predominantly reliant on export revenues, remittances, and foreign investments, have proven insufficient in offsetting the escalating debt obligations. Pakistan’s trade deficit, coupled with declining exports and volatile remittance inflows, exacerbates the strain on foreign exchange reserves, constraining the ability to service debt obligations. Moreover, the reliance on short-term borrowing to finance long-term projects amplifies rollover risks, increasing the vulnerability of the economy to external shocks.

In light of the insurmountable challenges posed by Pakistan’s external debt, a strategic default emerges as the only pragmatic recourse to break free from the shackles of perpetual indebtedness. By strategically defaulting on unsustainable debt obligations, Pakistan can reallocate scarce financial resources towards domestic investments aimed at fostering economic growth and social development.

This strategic default, albeit a contentious proposition, offers the only viable pathway towards economic sovereignty and self-reliance. Following a strategic default, Pakistan must embark on a comprehensive economic restructuring agenda aimed at fostering sustainable growth and reducing reliance on external financing. Investments in human capital development, infrastructural enhancement, and technological innovation are imperative to unleash the latent potential of the domestic economy.

Moreover, fostering a conducive business environment and promoting entrepreneurship can stimulate private sector participation, thereby catalysing economic dynamism and job creation.

Central to Pakistan’s economic resurgence is the judicious utilisation of domestic resources to fuel inclusive growth and alleviate poverty. Leveraging the nation’s vast agricultural potential, enhancing industrial productivity, and tapping into renewable energy sources can foster resilience and reduce dependency on imports. Furthermore, initiatives aimed at enhancing tax compliance and curbing corruption are indispensable to augment state revenues and mitigate fiscal deficits.

While a strategic default will evoke strong reactions from foreign creditors and investors, it is imperative, for us as a country, to recognise the broader ramifications of perpetuating an unsustainable and constantly ballooning debt burden. Such a strategy can only lead to total economic collapse and endanger the very existence of the state.

It is alarming that the government of Prime Minister Shehbaz Sharif seems oblivious to the threat posed by the spiralling debt burden. Instead, in a bizarre departure from reality, it and its acolytes pat themselves on the back for “successful” negotiations with the International Monetary Fund (IMF).

The “success” of these negotiations means that Pakistan has to take on more debt even to repay its obligations on previous debt!

A continuation of this policy will lead inexorably to, what in aviation terms, is an aerodynamic stall from which recovery is not possible. A crash is the only possible outcome. Even a first year student of economics will have no trouble understanding this reality.

Part of the problem is that Finance Minister Muhammad Aurangzeb is a brilliant banker with a long career in banking. His previous job was chief executive officer of Pakistan’s largest bank. You may wonder why having a star banker running the finance ministry should be a problem. The answer is that the word “default” is anathema to all bankers. Their training has ingrained into their psyche and soul that default must be avoided at all costs. It is simply not an action that their programming allows them to contemplate.

In normal times, Aurangzeb would have been a good man for the job. But these are not normal times. Pakistan must default to save itself. Our external debt is the proverbial elephant in the room. And if PM Sharif and his acolytes continue to ignore the undeniable presence of this beast, he will sooner rather than later bring the room down upon them. And upon the rest of us.


Published in The Express Tribune, May 27th, 2024.

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