Is default an option for Pakistan?
KARACHI: Keeping the government’s well-worn assurances aside, the International Monetary Fund (IMF) has yet not released the $1.2 billion tranche direly needed by Pakistan.
While the country’s nuclear arsenal is not under threat, it is a testament to the fear of default that such questions are being raised. However, what would happen if the promised funds do not materialise?
“Is Sri Lanka better after default?” the taboo question was voiced aloud by former Federal Board of Revenue (FBR) chairman Shabbar Zaidi, who seemed to think so in an interview with Dawn, a thought recently echoed by former president Asif Ali Zardari.
“Sri Lanka is better off on all economic indicators. Their production is improving, their consumption habits are better, their exchange rate has stabilised, and their politics are less in flux. The default made them realise the country’s problems and take the hard decisions,” Mr Zaidi says.
As controversial a statement as this is, Sri Lanka’s exchange rate appears to become less mercurial. Since it defaulted in April 2022, the Sri Lankan rupee has stabilised — it was 325 Sri Lankan rupees to a US dollar then and it is 342 Sri Lankan rupees as of last week, a depreciation of 6pc. Pakistani rupee, on the other hand, has depreciated by 54pc.
However, similar to Dar bowing under Fund’s pressure to have a free exchange rate, Sri Lanka also plans to ensure its rupee is fully market-driven. Since March 7, it has shifted to an ad hoc pegging arrangement that is leading to a continued depreciation of the currency.
As per Bloomberg, Sri Lanka’s inflation rate eased for the fifth straight month to 50.6pc last month after peaking at nearly 70pc last year. Thankfully, Pakistan is not facing a rate that high (as yet), but its Consumer Price Index is expected to continue to rise to 30pc. Its short-term inflation, measured by the Sensitive Price Index, hit an all-time high at 45.64pc for the week ended March 16.
“My analysis of Sri Lanka is not what the average Pakistani perceives. Sri Lanka has gone through a very dark period. Yes, it is awful for the country to default, but my question is, what is the technical difference: they could not import oil or open letters of credit and Pakistan is going through the same thing,” says the former FBR chairman.
But, according to the New York Times, just because the South Asian nation is calmer does not mean things are better. While long fuel lines have disappeared, two out of five households spend 75pc of their household income on just food purchases. Charity Save the Children estimates that half of Sri Lankan households are cutting their children’s food intake.
Sri Lanka has suffered through punishing IMF conditions, including a recent 100 basis points increase in the policy rate, to avail a $2.9bn bailout package. However, while things have stagnated in Sri Lanka, they are not getting worst post-default, whereas the same cannot be said for Pakistan’s indicators.
Moody’s recently downgraded Pakistan’s rating to Caaa3 — as per the company’s rating scale, only Ca (very near default) and C (defaulted) are below the country’s current standing. Sri Lanka is a step lower than Ca.
“I am not saying that Pakistan should default; the fear of bankruptcy is the fear of the unknown. While thousands died because of the Tamil Tigers issue, no deaths were caused by the default. Default is a taboo, but that is not the case,” says Mr Zaidi.
We have not had a sovereign debt default — which is when the government is unable to pay off its loans — but technically we are in a state of default, he adds.
Another example Mr Zaidi gives is Argentina. “Many countries, such as Argentina, have defaulted, but their economy recovered, and they still receive foreign direct investment (FDI) flows,” he says.
The Latin American country has been extended nearly $44bn under the Extended Fund Facility, the Fund’s largest-ever under that credit window. However, Argentina is a serial defaulter — it has defaulted nine times in its history, including three times during the past two decades. In 2001, the government defaulted by a whopping $132bn of federal sovereign debt. Its latest default was in May 2020.
Not an example to be emulated, Argentina’s policy rate is a staggering 78pc amidst inflation that has crossed 100pc. It’s growth rate is extremely volatile — in 2020 it was negative 9.94pc before jumping to 10.4pc in 2021 and stabilising to 4pc in 2022. It is also rated Ca by Moody’s.
It still became part of China’s Belt and Road Initiative in February 2022 though it is considered an ally of the United States. And Mr Zaidi is right; post-default, its FDI inflows stabilised — in 2021, they increased to $6.6bn from $4bn in 2020.
The German Ambassador Alfred Grannas once said Pakistan is important because it has ‘interesting’ neighbours. The country’s political ties and geo-strategic location seem to ensure that friendly countries park just enough in reserves to ward off default by a hair’s breadth.
While Pakistan has not officially declared its inability to pay off its loans, it is borrowing or rolling over debt to continue to stay afloat.
If Pakistan was to default tomorrow, everything that is happening: high inflation rate, high price of fuel, volatile exchange rate, and food scarcity would be exacerbated. Sri Lanka’s examples seem to indicate that, in that case, the country will sink further into a state of hunger and apathy, waiting for a better tomorrow based on borrowed funds.
Argentina’s history indicates that inflation, high-interest rates, and volatility will plague the country for decades even if investments (always iffy for Pakistan, even in more robust economic times) continue to flow in. The ditch the country has dug itself into cannot be escaped from in the short or medium term. Its repercussions may continue to haunt the next generation.
Published in Dawn, March 19th, 2023