Experts say there may be bargaining chip emanating from nuclear power crisis

Is Pakistan going via Sri Lanka? The broad macroeconomic indicators for the two countries point to similarities in the economic outlook of the two countries on the subcontinent.

Sri Lanka, which is in political crisis, is also facing a massive external debt crisis. It took loans to prop up its infrastructure and energy sectors, but failed to achieve return on investment. For its foreign debt and liabilities of $51 billion, it will have to pay around $4.5 billion annually till 2025 as debt service (principal + interest) from its foreign exchange reserves, according to data from the Central Bank of Sri Lanka.

The island nation is also heavily import-dependent, with a roughly 40% difference between import and export figures. This basically means that the country needs additional substantial foreign exchange reserves to ensure the supply of essential commodities from abroad.

With increasing debt servicing every year, major foreign exchange earners, tourism and remittances declining, Sri Lanka has less than $2 billion in its foreign exchange reserves. In May, the country had only $50 million of usable foreign exchange reserves which was not enough to even arrange for imports for a day. The rapid economic fallout saw Sri Lanka defaulting on foreign loans in May.

Pakistan is also facing a similar crisis. The country has a huge foreign debt of about 130 billion dollars. In fiscal year 2011, the country paid out $13.424 billion in debt servicing, according to State Bank of Pakistan (SBP) data. For the three fiscal quarters of 2022, this amount has already crossed $10.885 billion and is expected to reach over $14 billion.

Like Sri Lanka, Pakistan is also an import-dependent economy, but to add to the problems, the export-import gap is huge and the situation becomes even more precarious when there is an imminent crisis on the foreign exchange reserves front. The country’s foreign exchange reserves have come down to a mere $9 billion, which is enough for only six to seven weeks of imports.

In fiscal year 2021, according to State Bank of Pakistan data, the country’s exports stood at $25.639 billion, while imports stood at $54.273 billion, a huge gap of about $30 billion. For fiscal year 2022, it was more than $40 billion, with imports at $72.048 billion and exports at $32.450 billion. In June 2022, the country’s imports stood at $7.038 billion as against the export figure of $3.118 billion.

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The next quarter is going to be crucial for the country, as economic calculations are stacked against it, especially after the decision to lift restrictions on non-essential and luxury items under pressure from some political elites and importers’ lobbies. The import figures may increase, which could put pressure on the fall in forex reserves.

The only solution to this problem would be to take on even more loans and try to restructure the existing loan repayment options.

Pushan Dutt, professor of economics and political science at INSEAD, Singapore, believes that although the current economic crisis in Pakistan is indeed in a dire shape, the country may escape the fate of Sri Lanka, due to geopolitical reasons, between India and China. Thanks for the rivalry and the Pakistan-China Connect.

“While the debt level in absolute terms is similar to that of Sri Lanka, Pakistan has a larger economy, so the debt to GDP ratio is smaller. Also, the country has a lot of foreign exchange borrowings and we have seen examples of capital flight before. Now China has a lot of debt, so it may get debt relief for geopolitical reasons,” he said.

According to the World Bank dataset, Pakistan’s GDP for 2021 is $339.4 billion in consecutive 2015 US dollars, nearly four times higher than Sri Lanka’s GDP of $92.1 billion. Pakistan’s debt to GDP ratio is still less than 100%. It was 84% ​​in 2021, says related data from Trading Economics, while IMF analysis says Sri Lanka’s debt to GDP ratio reached 119% in 2021.

Support from Islamic countries and China

Pakistan may also get support from other Islamic countries, says Jawad Nayyar, an economist, industrialist and tech entrepreneur based in Pakistan, while stressing that the country will not go the Sri Lankan way. “Pakistan has some geopolitical advantages that only a few others enjoy. These include cordial relations with most of the MENA region, North Africa, and Asian and Far Eastern economies. ,

Pakistan is a founding member of the Organization of Islamic Cooperation. The OIC has 57 countries as its members spread over four continents. Pakistan is the second largest state in the organization and, in fact, the only Islamic nation with nuclear power, which can be supported from within.

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On 1 May, Saudi Arabia agreed to bail out Pakistan with financial assistance of $8 billion. The oil facility (oil on deferred payment) from Saudi Arabia was doubled to $2.4 billion. The existing Saudi deposits of $3 billion were rolled over by June 2023 and Pakistan is also expected to receive additional deposits of over $2 billion.

On June 22, Pakistan signed a $2.3 billion loan agreement with a Chinese consortium of banks. In addition, Beijing has already repaid $7 billion in debt to help Pakistan deal with its economic crisis.

Pakistan is also expected to get $1.2 billion from the IMF in August from its bailout package. A report by Nikkei Asia said that Pakistan’s army chief General Qamar Javed Bajwa has actually requested the US to pressurize the IMF for an early loan disbursement. The country also hopes that the IMF can unlock more funding with the claim that it has met the conditions set by the IMF to be eligible for further bailout assistance.

While things are looking bad for Pakistan, it will not be as dire as Sri Lanka where a standard currency crisis has turned into political turmoil. Pakistan has a floating exchange rate, so there will be no sharp correction. But like Sri Lanka, it runs a huge trade deficit that worsens as fuel prices rise and borrows in dollars. Inflation is on the rise so the overall infrastructure looks bad.

Another Pakistani, now based in the US, thinks otherwise. Fida Mohammad, Professor of Sociology at the State University of New York, says that Pakistan is trapped in a debt trap and the value of Pakistani currency is decreasing day by day. According to him, Pakistan is more likely to default and if things turn out like this, will go bankrupt.

What led Pakistan for this?

Fida Mohamed’s response points to the global opinion of Pakistan as a military-run state with deep corruption and that most of the economic damage is self-generated. “Yes, the whole country is unstable. The army behind the scenes controls everything, including the judiciary. The judiciary legitimizes deep state (military establishment) corruption. Socio-political anarchy gives greater political advantage to the military, and they are the beneficiaries of anarchy.”

The step has been taken to remove the ban imposed on the import of non-essential and luxury items despite the shortage of foreign exchange in the country. The rush to create new economic avenues through credit also becomes a burden when the country is importing more than twice its exports, when its total reserves in current US dollar terms according to the World Bank dataset are estimated at $20 billion. does not exceed.

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The figure of foreign debt on Pakistan has doubled in the last 10 years. Its game-changer project, the China Pakistan Economic Corridor (CPEC), a $62 billion infrastructure and energy roadmap, looks good on the data, but questions arise when we see it being built again on Chinese debt.

According to a report by a panel set up by the Government of Pakistan, corruption is also a deep hindrance and has not spared CPEC projects. Pakistan crossed the 100th rank in Transparency International’s Corruption Perception Index in 2004 and has seen a steady decline since then. It was ranked 140th out of 180 countries in 2021. A more perfect number means a more corrupt state.

Nuclear power the only saving grace?

Jawad Nayyar says that Pakistan is a nuclear power country which can also come as a security cover for it. “Pakistan is a nuclear power and the world cannot tolerate a bankrupt Pakistan simply because a debt of a few hundred million dollars cannot be refinanced.”

Richard Gardner, CEO of Modulus, a US-based high-performance enterprise for fin-tech solutions and AI, and a globally renowned financial analyst, says nuclear power will eventually come to save Pakistan from becoming the next economic default nation in Asia. can. “While Pakistan is certainly in a dangerous position, the country has a huge advantage over Sri Lanka. Of course, it has the advantage that it is a nuclear power, and, until proven otherwise, I think we have to assume that the IMF and other international institutions will make significant efforts to ensure that countries don’t pay their debts. Don’t make a mistake. ,

Former Pakistan Prime Minister Imran Khan admitted in 2019 that his country still has around 30,000 to 40,000 terrorists and 40 terrorist groups operating within the borders and that no country would want a nuclear-armed terrorist group in Pakistan in the future. The question of nuclear weapons safety becomes paramount in a politically unstable Pakistan, which continues to default on its economic debt.

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