Pakistan is not an independent country because it is a client state of the IMF and World Bank. No country can make an independent economic policy if it is entangled in a debt trap. Pakistan has received 22 IMF programs since 1958. Our economy is totally controlled by American think tank policies since its inception.
The reason for the poor economic condition is simple. Pakistan cannot make its economic policy based on national needs and ground reality goals. Rather, it is forced to pursue targets set by the IMF, the World Bank, and other creditors. Lenders only make policies for the country to protect their loans and interest.
Through IMF Pakistan has taken one program every three years. Despite taking so many programs, Pakistan has not made any significant economic development. Rather, his debts are increasing year by year. Currently, Pakistan’s debt-to-GDP ratio is 93 percent.
According to the Economic Freedom Index prepared by the Heritage Foundation and the Wall Street Journal, Pakistan is ranked 135 out of 180 countries in 2020. Pakistan’s performance on government integrity, judicial effectiveness, fiscal health, property rights, and financial and labor freedom is extremely poor because people like Hafeez Sheikh are in the country to protect the interests of the IMF and World Bank. No power in the country can remove them from their positions.
This clearly shows that even after the passage of 75 years, Pakistan has not become completely independent. For the past few weeks, there has been constant talk in the media and financial circles about the possibility of Pakistan defaulting on its bilateral and multilateral debt repayment obligations. Speaking of urgency, as of last week Pakistan had successfully averted the immediate threat of default on its foreign debt.
The central bank paid $1 billion against the sukuk maturing on December 2, three days before the original payment date. The timely payment allayed fears that the country would default on its debt. Along with this, Saudi Arabia has extended the term of its $3 billion deposits in the State Bank of Pakistan.
However, in the long run, the risk of default still remains, unless the country manages to restructure a large portion of its foreign debt. According to an estimate, Pakistan’s external debt service obligations over the next three years (current fiscal year, FY23 to FY25) total $73 billion. As things stand, Pakistan’s foreign exchange reserves have declined sharply over the past few months to $7-8 billion at present. With such meager reserves, the possibility of repaying the huge debt seems very unlikely. Debt repayment is due to large external debt (external debt and liabilities) that has increased over the last seven years from $65 billion in FY15 (24 percent of GDP) to $130 billion in FY22.
Pakistan’s total debt and liabilities (domestic and external) increased from Rs 19.9 trillion (72 percent of GDP in FY15) to Rs 60 trillion (90 percent of GDP) by June 2022. In the given circumstances, what are our options to restructure the loan? The prospects in this regard are not very encouraging. Negative factors include a large external financing gap, challenging global financial markets, and ongoing political instability in the country. The situation is further complicated by rapidly depleting foreign exchange reserves and the widening of the external funding gap.
On top of this, Pakistan’s borrowing options have further shrunk after international credit rating agencies downgraded its outlook to negative and downgraded its debt to junk status. The situation has raised the country’s borrowing costs, in addition to effectively closing the door on floating Eurobonds. To begin with, experts say, Pakistan will have to reschedule debt with its bilateral creditors, especially China, which accounts for 30 percent of the government’s external debt.
It is pertinent to mention here that the government will have to embark on a new and larger IMF program to implement the much-needed rescheduling. Commercial lenders, Eurobond investors, domestic lenders, and others may or may not be affected by this rescheduling, which largely depends on the negotiations.
Similarly, Pakistan’s credit rating, which was recently downgraded by Moody’s (from B3 to Caa1), may also be adversely affected. It should be noted that in this regard, other countries such as Argentina, Angola, and Zambia also worked on debt restructuring. In the past, Pakistan also restructured its Eurobonds and restructured parts of Paris Club payments after the 1998 nuclear tests.
The new IMF program, along with debt restructuring, will impose strict conditions on the country, including tighter monetary, exchange rate, and fiscal policies. In this way, the economic development of Pakistan will be slow. Also, the rupee will remain under pressure, while interest rates will remain high. According to government sources, to meet the immediate challenges, Pakistan has arranged financing of $32 to $34 billion from multilateral and bilateral lenders to meet the needs of the current fiscal year.
This includes the rollover of $21.1 billion in loans. This will help in bridging the current account deficit and improving foreign exchange reserves. For the current fiscal year, the government has estimated $7.7 billion in loans from multilateral agencies. A World Bank budget support loan of about $1.1 billion also remains outstanding, although Pakistan claims it has met conditions for a $450 million loan, but no date has yet been set for a World Bank board meeting.
