Pakistan is on the verge of bankruptcy

Pakistan is currently passing through the phase of 1991. Pakistan’s central bank’s foreign exchange reserves have dropped to an eight-year low of more than $5.5 billion, enough to pay for only three weeks’ worth of imports, weakening the currency against the dollar. , making foreign debt repayment and imports costlier.

To avert a balance of payments crisis and loss of confidence, and avoid defaulting on foreign debt repayments, Islamabad is seeking to borrow more from friendly countries, and with the IMF to release assistance on the Extended Fund Facility The Conversation Must Start Quickly (EFF) founded in 2019.

But Pakistan is not India. The peculiar circumstances of that country rule out the possibility of India doing anything close to what it demonstrated in 1991.

The IMF and Pakistan signed a $6 billion bailout in 2019 which was recently topped with $1 billion. To comply with the terms of that loan, the IMF has proved difficult to take the policy actions necessary to keep the program alive. Downgrading outlook for the economy, sovereign rating agencies have warned about Pakistan’s ability to meet its IMF programme.

IMF wants Pakistan to take fiscal measures to meet budgetary targets, reform power and energy sectors and review subsidies in farming and export sectors, not only for bailouts and temporary relief but also for medium to long-term economic essential steps stability and revival, and poverty reduction.

These economic reforms will remain elusive. There is no political appetite for reforms, absolutely necessary for steady economic recovery, complete policy capture by oligarchs, landowners, army, bureaucracy and politicians, who work only to secure their own gains. Will continue to do

The absence of land reforms in post-independence India means that the society is highly feudal. The people of Pakistan are largely poor, illiterate, naive and completely submit to feudal ways. The strong control of the oligarchy over the status quo is unlikely to be challenged. Furthermore, the power of the state weighs heavily on anyone who tries to challenge its authority.

And yet, Pakistan will not go bankrupt. One, because the world cannot allow a nuclear country like Pakistan to go bankrupt and fall into disrepair. Pakistan’s economic fragility could have serious geopolitical consequences and could destabilize the region. Therefore, global resources will be deployed to arrest the collapse of Pakistan’s economy.

and also because of humanitarian crises caused by epidemics and floods.

And two, because this is not a case of a failed state. In contrast, the state in Pakistan is very strong. It will adequately administer aid and secure lines of credit to avoid economic collapse.

Both of these were on display this week as Islamabad pledged more than $9 billion from international donors to recover from devastating floods in July-August 2022 that affected 33 million people, nearly half of them children. At the International Conference on Climate Resilient Pakistan, jointly hosted by Pakistani Prime Minister Shehbaz Sharif and UN Secretary-General Antonio Guterres.

Multilateral agencies have helped create a resilient recovery, rehabilitation and reconstruction framework that requires $16.3 billion. The economic damage was estimated at more than $30 billion, which Pakistan, which is already battling a financial and economic crisis with extremely high inflation, cannot afford.

Earlier, in June 2022, a consortium of state-owned banks in China, Pakistan’s close military and economic ally, lent it $2.3 billion to help it avoid foreign payments default and keep the IMF program alive (as mint snap view wrote earlier).

The risk of default is severe. International lenders are reluctant to help, as is China’s father US, but for how long is hard to say given the reliance on Pakistan to manage the situation in Afghanistan. The United Arab Emirates has already agreed to lend Islamabad $1 billion and take forward an existing $2 billion line of credit. Help will also come from Saudi Arabia where Pakistan’s armed forces help protect the Holy Mosque in Mecca. Help can also be expected from China, which can count on only one ally in the world, Pakistan.

After all, what Pakistan desperately needs is reform. Its committed and untouchable spending on the military and debt service leaves little fiscal space in the budget for development spending.

Yes, the world is facing an increasing climate crisis. But Pakistan’s climate disaster is in many ways also of its own making. The elite are plundering its fragile ecosystem, building hotels and resorts there.

The mainstay of its industry, textiles, is in need of modernization to beat competition from Bangladesh and Vietnam. There is no skilled workforce to power the IT sector. Irrigation systems and road networks are an advantage, and the agricultural sector is productive. But in today’s world economic power comes from manufacturing skills and state-of-the-art services.

The country is heavily dependent on imports. It doesn’t even make paracetamol.

Finance Minister Ishaq Dar’s assurance to IMF officials during the Geneva conference about Islamabad working on IMF reforms should be taken with a pinch of salt.

Pakistan will keep moving from one crisis to another, but it will survive. The devastation Sri Lanka is witnessing will never happen again. There will be no protest or commotion by the public at Rashtrapati Bhavan. Nor will it repair and reform in the footsteps of Bangladesh.