The Challenges of Pakistan’s Debt Crisis!
Pakistan has found itself in the eye of the storm yet again due to its mounting external debt that has kick started a debt crisis for the country, and has put it amongst the nations suffering a downtrodden economy. Moreover, this has further contributed to the adversaries within the nation, and has created an atmosphere of instability, and panic. It is currently in the list of 52 countries that are facing a debt crisis, and the situation seems to be getting worse for the country.
Pakistan’s economy has always been on the shaking ground largely due to the troubling domestic politics that has never seen a peaceful and stable government. The nexus between the army and government in addition with the state funded terrorist activities especially in Afghanistan and India, has made way for looming corruption rackets, along with misplaced priorities. This has also resulted into weak industrial and investment sector as the government could never keep the economy on track. It largely survived on the aids and grants that the countries like the United States and China provided it due to their own political interest in the region. However, as the political situation in and around Pakistan has changed, so has the economic situation. It could no longer piggy back on the cold war like threat against India, as the growing Chinese adversaries has pushed India into the kitty of United States. This has worked against the economic harmony that Pakistan had with the United States, and has in check all the “aids” that were ever given to them. Moreover, the pandemic has added insult to injury. It has broken the backbone of the country, and it seems unrecoverable in the near future.
The two years of the pandemic caused Pakistan’s economy extremely dear. There has been rising stock, massive unemployment, high inflation and negative growth. The country's external debt has risen to $ 119.8 billion. All other resources are being devoured by debt servicing. It was $93 billion in 2018. The rise has been very significant and has multifold repercussions. The debt payment has exceeded $12 billion, and has consumed 75% of of FBR taxes. It is expected that Pakistan would spend nearly $27.8 billion by 2023 to World Bank, IMF, ADB and China in debt service payment.
Despite Pakistan's Prime Minister's requests to the international community for a comprehensive debt reduction, the G-20 nations granted Pakistan temporary debt relief worth $1.8 billion. This includes repayments of $1.47 billion in principal and $323 million in interest on the loans. This is nothing against the mammoth challenge that faces Pakistan and a momentary respite. Despite the fact that all stakeholders including the G20, the World Bank, and the IMF - agree that the Debt Service Suspension Initiative (DSSI) is insufficient and inappropriate, the lenders are not very welcoming of it. It's vital to keep in mind that the legislation is contingent on an agreement with the IMF, which isn't worth the hassle. Rating agencies, on the other side, have increased the prospect of downgrading countries' sovereign ratings through the Debt Service Suspension Initiative.
Pakistan's high level of debt has rendered it more vulnerable to economic shocks and weakened it politically in the eyes of powerful external lenders. Pakistan's ability to spend in education and healthcare has also been severely hampered. The human development index shows extremely poor performance by Pakistan, and it is being assumed that if the economic crisis continues to be escalating this way, the country would be pushed towards an internal crisis, or civil war. The inflation coupled with unemployment and poor facilities from the government’s end especially in the wake of a pandemic might cause unrest within the general public, which if not checked within the given time, would cause the state’s system to collapse, and Pakistan might end up being under army’s control, or dictatorship, one more time. Therefore, the economic crisis is not just economic anymore, they have far deeper and worse links to it.
This situation has been no hidden fact from the world. Recently, a report by “Global Risks 2022” has suggested that Pakistan faces five risks, out of which debt crisis ranks the first. This is followed by climate change, inability to fix price trajectories, issues arising from cyber security, and human instilled environmental damages.
While the challenges mounted against Pakistan are endless, it needs to give maximum attention to bring its economy back on track. Firstly, Pakistan needs to increase its foreign direct investment. Pakistan has shown good results when it comes to FDI, and has earlier attracted countries like China ($229.5 M), United Arab Emirates ($222.4M), and the United States ($238.5M). However, these investments suffered ill fate due to the energy crisis and political instability along with the negative image of being a terrorists sponsoring nation. Pakistan needs to fix both of these, and create a safer, friendlier and economically viable environment for the investors. Moreover, ever since it has been on the grey list of FATF, its image and economic gains has suffered tremendously. It needs a massive image buildup to invite investors. Secondly, Pakistan needs to work on increasing the remittances. Remittances has been a big support for countries to fix their debt crisis as it brings foreign currency, and contributes generously in the development of the country. Pakistan generally receives it during religious events especially in the West Asia, United Kingdoms and United States. Thirdly, Pakistan needs to keep in check its Balance of Payments, which has been in a bad shape for almost three decades now, which has a direct effect on the ever growing external debt. To address the balance of payments problem, the Pakistani government must expand its export base, which is currently quite limited, as well as depreciate the Pakistani Rupee versus the dollar due to currency volatility. Lastly, the reducing the budget deficit is important. Servicing Pakistan's external debt will create a bigger difficulty for the country's existing spending. Pakistan's big deficit is growing as a result of the country's reliance on external borrowing rather than non-debt generating inflows such as foreign direct investment and exports. The increase in the budget deficit is attributed to low tax collection and inefficiency within the tax system. Government spending on public services can be cut to lower the budget imbalance. Increases in the tax base can assist the government collect income while also boosting economic growth, which is the most effective approach to boost revenue. Pakistan will be able to pay off its external debt and the interest it has accrued as a result of its borrowing with the help of this revenue.
However, the intelligentsia in Pakistan is demanding a debt repayment cancellation, or relaxation as was offered to Germany in 1953 by international community. They believe that Pakistan is no longer capable of repaying these loans. Moreover, they are demanding that illicit financial inflows from developing countries to developed countries, as well as offshore tax havens, must be halted. It will be difficult for Pakistan to avoid default without urgent and considerable debt relief from all creditors, as well as local steps such as a public debt audit and a massive decrease in non-development expenditures.
There seems no repairing of the Pakistan’s economy any time soon. Furthermore, almost all countries have suffered economically due to the pandemic, hence, they seem in no mood to let go off the debts. Therefore, Pakistan needs to buckle up and address these economic challenges head strong and straight in order to keep their country from slipping into a civil war instigated by economic failure.
References
1. Pakistan Faces Debt Crisis as Its Top Risk Followed by Cyber Security Failure: WEF Report. REPUBLIC, January .2022.
2. Pakistan faces debt crisis as its top risk followed by cyber security failure: WEF report (republicworld.com)
3. Report sees debt crisis as top risk faced by Pakistan. DAWN, January 2022.
https://www.dawn.com/news/1668995/report-sees-debt-crisis-as-top-risk-faced-by-pakistan
4. Pakistan in a perfect debt spiral with the worst impacts of the pandemic. CADTM, November 2021.
https://www.cadtm.org/Pakistan-in-a-perfect-debt-spiral-with-the-worst-impacts-of-the-pandemic
5. Debt crisis in Pakistan, Jubilee Debt Campaign.
https://jubileedebt.org.uk/countries-in-crisis/debt-crisis-pakistan
6. Pakistan’s external debt and liabilities swell by 6% YoY to $116.4bn during Jan-Mar FY21. LINK NEWS, May 2021.
https://mettisglobal.news/pakistans-external-debt-and-liabilities-swell-by-6-yoy-to-116-4bn-during-jan-mar-fy21/
7. Pakistan caught in debt trap, FRONTLINE, March 2021.
https://frontline.thehindu.com/columns/pakistan-caught-in-debt-trap/article34006098.ece#!
8. Pakistan Debt Crisis Intensifies as Economic Mismanagement Continues Unabated. The WIRE, February 2021.
https://thewire.in/south-asia/pakistan-debt-crisis-intensifies-as-economic-mismanagement-continues-unabated
9. The debt mountain. TRIBUNE, December 2021.
https://tribune.com.pk/story/2334566/the-debt-mountain
Pic Courtesy-Abuzar Xheikh at unsplash.com
(The views expressed are those of the author and do not represent views of CESCUBE.)
