Pakistan’s crisis is only going to worsen: What happens if the country defaults

Pakistan is in big trouble. The country is facing its worst economic crisis, which comes after last summer’s deadly floods. The much-needed International Monetary Fund (IMF) bailout is elusive as Islamabad struggles to meet terms. It is staring at a strong credit risk as foreign exchange reserves hit “critically low levels” and the possibility of a default is real. What has Fitch said? New York-based global ratings agency Fitch on Tuesday downgraded Pakistan’s long-term foreign currency issuer default rating (IDR) to “CCC-“ from “CCC+”, citing further worsening in liquidity and policy risks. The downgrade reflected a sharp deterioration in external liquidity and funding conditions, along with the decline of foreign exchange (forex) reserves to “critically low levels,” Fitch said. “We expect reserves to remain at low levels, though we do forecast a modest recovery during the remainder of FY23, due to anticipated inflows and the recent removal of the exchange rate cap,” the agency said. Fitch said it expects Pakistan to successfully conclude the ninth review of the IMF programme, and the downgrade is a reflection of the large risks to continued programme performance and funding, in the run-up to this year’s elections, according to a Press Trust of India report. “Default or debt restructuring is an increasingly real possibility, in our view,” Fitch warned. Also read: Pakistan crisis: Can the country be saved from collapse?

What happens if Pakistan defaults Pakistan has a large exposure to commercial debt and default means they are unable to repay part or the whole of it. A report in Pakistan daily Dawn said, “In the simplest terms, a default for a country such as Pakistan with significant exposure to commercial loans implies defaulting on commercial debt. Bilateral debt can be refinanced, whereas multilateral debt typically has long-term maturity cycles, making commercial loans the primary determinant of a country’s susceptibility to default.” If Pakistan’s reserves had plummeted to the point where it would have defaulted on its commercial debt, it would have prompted the central bank to deny commercial lenders’ debt repayment or service payments, the Dawn report explains. Also read: Explained: Why IMF and Pakistan are unable to come to terms over bailout as economic crisis worsens As the dollar inflow decreases, it limits the country’s ability to import goods, thus impacting economic output and leading to higher inflation. If the economy shrinks because of industrial losses, it will leave businesses with no choice but to lay off people, leaving some with no money to spend. Economists call such situations characterised by slow growth but high unemployment and inflation “stagflation”, the Dawn report says. According to research by Islamabad-based economist Asad Aijaz, avoiding default even by a little margin is very different from actually defaulting because operations may continue as usual as soon as a multilateral organisation like the IMF come with some cash in hand. [caption id=“attachment_12157092” align=“alignnone” width=“640”] A worker fills gas into a car at a CNG station, in Peshawar, Pakistan. Cash-strapped Pakistan nearly doubled natural gas taxes in an effort to comply with a long-stalled financial bailout, raising concerns about the hardship that could be passed on to consumers in the impoverished country. AP[/caption] What’s happening with the IMF and Pakistan? Former Pakistan prime minister Imran Khan launched the current bailout package in 2019. As a part of its $6 billion bailout plan, the government is requesting a vital instalment from the fund of $1.1 billion now to avoid defaulting. IMF was in Pakistan last week as the country sought a bailout, but after 10 days of negotiations, the talks ended without a staff-level agreement. Pakistan PM Shebaz Sharif has said that the bailout requirements are “beyond our wildest dreams”. “The IMF conditions which we have to fulfil… are beyond our imagination… But we don’t have any other option.” IMF resident representative Esther Perez Ruis said that the agency was concentrating on programmes to restore internal and external sustainability, especially to enhance the fiscal position. The influx would alleviate the dire need for foreign currency and open doors to other sources of assistance, such as those from multilateral and bilateral donors. Without the bailout, Pakistan inches closer to bankruptcy. The talks between IMF and Islamabad resumed virtually on Monday. [caption id=“attachment_12157112” align=“alignnone” width=“640”] Ishaq Dar was chosen as Pakistan’s new finance minister in September. The IMF gave the minister a ‘very tough time’ in the talks, according to Prime Minister Shehbaz Sharif. AFP[/caption] What’s Pakistan doing to secure the bailout? The country will impose new taxes worth 170 billion rupees this month o secure the bailout, despite warnings that the new tariffs could exacerbate the country’s spiralling inflation. “The imposition of more taxes means tough times ahead for the majority of Pakistanis, who are already facing higher food and energy costs, but there is no other way out if Pakistan needs IMF loans and Pakistan desperately needs them,” Ehtisham-ul-Haq, a veteran economist, was quoted as saying by the media. According to Haq, Pakistan’s inflation rate of 26 per cent will rise to 40 per cent following the imposition of new taxes. However, in an interview, he stated that “life will become more difficult for the common man if Pakistan fails to restart the IMF bailout without further delay”. [caption id=“attachment_12157272” align=“alignnone” width=“640”] Graphic: Pranay Bhardwaj[/caption] Imtiaz Gul, a senior Pakistani political analyst, said that the government is likely to raise taxes on those who already pay them. “There is a need to broaden the tax base,” he said, but raising taxes “will result in price increases for all essential items.” Apart from additional taxes, Pakistan is also likely to reduce subsidies on electricity, gas and other commodities. This comes after two big decisions already taken by the country: A rise in fuel prices and lifting the artificial upper cap on the currency after which it Pakistani rupee fell overnight by 15 per cent and overall by 35 per cent over the last year. Will a bailout help Pakistan avoid default? A bailout alone with not help the country . Pakistan has received financial aid of $10 billion from China, the United Arab Emirates, and Saudi Arabia in the form of deposits and credits, according to a report by The Indian Express. While the UAE and Saudi Arabia provided some relief, China has refused to budge. According to the IMF, 30 per cent of Pakistan’s total foreign debt is owed to China , which amounts to roughly $30 billion. This is three times more than its IMF debt and is greater than its borrowings from the World Bank and Asian Development Bank combined, ThePrint reports. It also has to pay $1.1 billion to Chinese IPPs for power purchases. Islamabad attempted to renegotiate the purchase power agreements with China but the latter did not agree. [caption id=“attachment_12157122” align=“alignnone” width=“640”] Inflation is high in Pakistan and if the country defaults, it will be impossible for the economy to recover. AP[/caption] Author TN Ninan writes in Business Standard that if the IMF opens its taps, China and some Gulf countries are likely to follow.“All of them have bailed out Pakistan repeatedly, but Islamabad has kept coming back for more. Creditor fatigue has therefore come up against debtor credibility, even as China has shown (as it did in Sri Lanka) that it is as hardnosed as any creditor when a borrower-country seeks a renegotiation of loan terms,” he says. But loans might only provide a breather to Pakistan. If the country does not mend its way, make its economy viable, and its politics stable, it’s likely to be stuck in the trap. With inputs from agencies Read all the Latest News , Trending News ,  Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.