Plummeting foreign exchange reserves, mounting burden of external debt and debt servicing obligations, rupee in free fall, rampant price rise, low tax to GDP ratios, heavy loans from China for infrastructure projects, political turmoil! Add to it the disruptions caused by the pandemic and the Ukraine conflict.
Yes, all these characterize the Sri Lankan economy. But no, we are not talking about Sri Lanka here. All these also characterize the Pakistan economy today. Does this mean that Pakistan is also at risk of a grave economic crisis with the kind of dramatic political upheaval seen recently in Sri Lanka?
There are so many similarities to the Sri Lankan situation that one could infer that an economic crisis may overwhelm Pakistan. However, there are also important differences.
For example, in Sri Lanka foreign exchange reserves had fallen from $ 3 billion a year ago to less than $ 1 billion, with liquid reserves down to almost zero, making it impossible for it to import even essentials like fuel and food from abroad, and compelling it to default on the upcoming external debt repayments of $ 7 billion. In Pakistan, the decline has been from $ 20 billion last year to less than $ 9 billion now. This is currently just enough to cover a month’s imports. Though not as desperate a situation, it is perhaps less comfortable than it seems. Media reports estimate Pakistan’s total upcoming external debt repayment obligations in the current financial year to be around $ 21 billion!
Inflation in Pakistan is running at 21%, which is high, but less than the skyrocketing 54% in Sri Lanka. Essential goods are still available, though there is an advisory to cut back on less essential imported items like tea. Tax GDP ratio is low, just 10%. As in Sri Lanka, the phenomenon of low direct taxes and high subsidies to the better offdoesn’t leave the Pakistan Government much room for manoeuvre. For example, even the funds for making a budget provision in the current year for an 11% increase in defence expenditure (deemed to be of high priority) had to be found by matching cuts in other developmental sectors, notably health and education.
Then there is the China factor. Sri Lanka has been hit hard by relying on high cost Chinese loans for funding infrastructure projects of doubtful economic benefit. To the extent that, due to inability to repay the debt, China took an 85% share and full control of the deep-water port of Hambantota that had been financed with Chinese loans. Pakistan is even more reliant on this source of funding, with debt to China forming as much as 27% of its total external debt, compared to about 10% in the case of Sri Lanka. However, so far it has fortunately not had to hand over assets to China in repayment of debt.
Yes, signs of an imminent economic crisis are there, a crisis that can cause much distress to the people of Pakistan, as it did in Sri Lanka. However, the Pakistan economyhas historically muddled along, with a little help from its friends. Three of these friends stand out. They are - the U.S. (and the multilateral financial institutions dominated by it), China and Saudi Arabia.
The role of the International Monetary Fund (IMF) is to be the world’s central banker and provide financial support to countries for tiding over foreign exchange crises. The Sri Lankan government had surprisingly refused to seek assistance from multilateral institutions as their crisis unfolded. Pakistan has had no such hesitancy. In the past, whenever Pakistan has had repayment problems or started running out of foreign exchange, it has turned for support to the IMF/World Bank. Notably, IMF financing usually comes along with advice to the borrowing country to put in place a structural reform programme so that such crises do not recur.
In the last thirty years, Pakistan has received IMF support 22 times. Each time, reforms such as reducing subsidies, raising taxes, bringing about discipline in expenditures have been agreed to as part of the IMF-advised programmes to overcome the crises. Most of these programmes have not been completed. Consequently, Pakistan has had to keep going back for more money. The Western countries that dominate decision-making in IMF have tended to be indulgent.
Currently, the Government is said to be negotiating with the IMF a loan of US $ 1.5 billion under the Extended Fund Facility. Indications are that the funds are immediately needed. Unusually, the Pakistan army chief reportedly made a direct appeal to the deputy secretary of state of the U.S. Government to help get the IMF loan expedited!
China has also been generous with Pakistan, unlike in the case of Sri Lanka. No additional funding was offered by China to Sri Lanka to tide over their crisis even though the Government had requested for their support. Further, China has not yet even rolled over Sri Lanka’s repayments on existing debt service obligations, despite assurances.
In the case of Pakistan, China rolled over $ 4.2 billion debt repayments in March 2022, and provided an additional loan to Pakistan of $ 2.5 billion in June. Of course, this assistance comes with much stiffer terms and shorter repayment periods compared to IMF/World Bank funding.
Another rich friend that Pakistan is relying upon is Saudi Arabia. Pakistan is reportedly hoping to receive a loan of $ 8 billion from Saudi Arabia along with a line of credit for importing oil.
So, is Pakistan likely to go the Sri Lanka way? Probably not this time. With repeated IMF support, and ever increasing loans from its all-weather friends, Pakistan is likely to be able to survive the current crisis for the time being.
However, without any significant change in the fundamentals, debt will keep ballooning, and external repayment obligations will continue increasing. There will inevitably be more crises in the future, each more severe than the last. At some point the situation will become unsustainable, friends notwithstanding. If corrective steps are not taken now, Pakistanwill be facing future economic bondage. Because, as an ancient proverb puts it
“The rich rule over the poor, and the borrower is slave to the lender”.
(The author is a former civil servant who has also served with the World Bank. He writes by invitation for RK)