by Malik Muhammad Ashraf in The Nation, Dec 16, 2022
To say that Pakistan’s economy is in the doldrums would be an understatement. It is perilously perched on the edge of a precipice. However, the fears being expressed by some quarters that the government might soon face a situation of default on its loan obligations is an exaggerated assessment.
This is corroborated by the fact that the government instead of refusing to pay has already arranged a one-billion-dollar maturity amount along with interest regarding Third Pakistan Sukuk which matures on December 5. The next obligation in this regard would be a 10-year $ 1 billion international bond due to be paid in April 2024. So the fears for immediate default are misplaced for now at least. But Pakistan for sure is galloping towards a serious financial crisis.
Depletion of foreign exchange reserves for a country like Pakistan which has to import oil, gas, palm oil, medicines, raw cotton, wheat, and other materials required for running its industrial machine, is a very alarming situation. The consequences of the dwindling foreign exchange reserves are that the foreign banks are refusing to open LCs and charging an 8 percent premium for their confirmation. This extra burden will have to be shared by consumers and the industry-leading to higher prices.
Economists also allude to another worrying factor in this regard. According to Dr. Furrukh Saleem, a prominent economist, “Pakistan’s five-year Credit Default Swap (CDS) that was trading at 1,000 bps in May did shoot up to 9,253 bps on November 18. The CDS has existed since the 1990s and the outstanding CDS amount now hovers around $60 trillion. Pakistan’s five-year CDS is thinly traded and in no way means that Pakistan is about to default. What Pakistan’s CDS is showing is that ensuring Pakistan’s debt has now become prohibitively expensive. What that also means is that the government of Pakistan in the current scenario will not be able to sell debt in the international market. What that means is that Pakistan’s access to the international bond market has been shut. That indeed is serious.”
The obtaining situation is a sequel to the inability of the successive regimes to effect structural changes conducive to the macroeconomic transformation that ensures sustained economic development in the country. The focus has been on micro-economic achievements through excessive short-term borrowing that led to a snow-balling increase in the current account deficit which ultimately leads to excessive pressure on foreign exchange reserves causing macroeconomic instability.
As the economy failed to generate surpluses, the reckless borrowing mounted unbearable pressure on the current account due to the enhanced cost of debt servicing and repatriation of profits. Resultantly since independence—barring a few years—Pakistan was never able to present a surplus budget. All economic variables and indicators have remained under stress. The often-discussed default threat may not crystallise into reality but the continued dependence on external borrowing may push the economy toward an unenviable situation.
There is an imperative need for immediate course correction and setting directions that facilitate macroeconomic structural changes. There seems no way out of the permeating economic quagmire except this strategy. Meanwhile, matters with the IMF also need to be sorted on a priority basis seeking help from friendly countries like China, Saudi Arabia, and the UAE.
Economic development is not dependent only on the traditional four factors of production. For the combination of them to succeed and produce promising results, the country needs continued political stability. Unfortunately, in addition to purely economic mismanagement and unimaginative economic policies pursued by successive regimes, political instability has also immensely contributed to the economic meltdown which is now really hurting.
The current ambiance of political confrontation is also hampering the efforts to effect the much-needed turnaround. On top of that, the impact of the global economic situation is also putting tremendous pressure on the economies of third-world countries including Pakistan.
While it may not be possible to ward off the debilitating influence of global economic nosedive and hydra-headed inflation, something substantial can surely be done on the domestic front to ease the situation. First of all, in the obtaining situation, it is utmost necessary to persuade all the political leaders and parties to commence a dialogue for devising strategies for the resolution of contentious political issues and systemic changes that would ensure perennial political stability in the country.
In regards to the economic health of the country, it is also an inescapable imperative to devise a national economic agenda enjoying the consensus of all the stakeholders which must be followed by any party winning the franchise of the people to run the affairs of the state. It should be made a constitutional obligation.
Perhaps it would be a good idea to invite economists of international repute to interact with politicians to firm up economic priorities and the adoption of the national economic agenda. The sooner it is done the better. It is time to abandon false egos and give preference to national interests over narrow political agendas.
Meanwhile, strict austerity measures coupled with substantial cuts in non-development expenditures have to be effected to ease the situation to some extent. The beginning can be made by reducing the size of the cabinet and making it obligatory for the ministers and bureaucrats to travel in economy class while going for official business.
There is also a need to control borders with Iran and Afghanistan to check the smuggling of food items and flight of dollars from the country, banning the import of luxury items immediately.
The rate of the dollar against the rupee also needs to be contained by devising a proper system to regulate the Exchange companies dealing in selling and buying the dollars and other currencies.
For mitigating the woes of the public and sparing energy for industries that are vital for the development of the country, the government should encourage citizens to install solar panels for their domestic needs wherever possible.
The banks may be asked to finance those undertakings on easy terms. Even the big industrial concerns may be asked to generate their electricity. Business hours must also be curtailed to save on energy.
https://www.nation.com.pk/16-Dec-2022/the-impending-financial-crisis
