ISLAMABAD - The Ministry of Economic Affairs has noted that Pakistan’s risk of default is low mainly due to the revival of the International Monetary Fund’s programme, loans from multilateral and bilateral development partners and issuance of bonds in the international market.
“Pakistan’s risk of default is low mainly due to the following reasons. First, Pakistan is already in the IMF program and has recently reached a staff level agreement to avail USD
1.18 billion. Second, major multilateral and bilateral development partners have shown commitments to provide USD 8.7 billion during the current financial year. It is also expected that Pakistan will be able to generate USD 14.1 billion from other sources such as issuance of Bonds/Sukuk, foreign commercial borrowings, Naya Pakistan certificates, etc,” the ministry noted in its recent report ‘Is Pakistan Closer to Sri Lanka? A Comparative Analysis’ here yesterday.
Thus, according to the report, the total expected inflows for the FY 2022-23 are $22.8 billion. Third, remittances from the Pakistani diaspora have always provided a sustainable cushion to meet external currency demands and which have shown an increasing trend. Fourth, Pakistan has good economic relations with China, UAE, and Saudi Arabia. History has shown that in crisis situation, these countries have provided significant support. Finally, the government is cognizant of the default risk and initiated appropriate measures like taxing the wealthy, reducing subsidies, and re-adjusting the fuel, electricity, and gas prices to reduce the burden on the exchequer.
In addition, Japan, Greece, Italy, and Singapore are some of the countries with the highest debt to GDP ratios but they have sustainable economic indicators. In this regard, the IMF describes the usability of debt ratios as “Debt ratios should be considered in conjunction with key economic and financial variables, in particular expected growth and interest rates, which determine their trend in medium-term scenarios”. Foregoing in view, the macroeconomic indicators in respect of Pakistan’s economy as described above are relatively better than that of Sri Lanka. In conclusion, it can be stated that Sri Lanka’s heavy reliance on the tourism industry and then the tourism sector’s collapse, devastated the foreign earnings of the economy. Political expediency compelled politicians to take unwise economic and policy decisions whose cost is now being paid by the entire nation. To show smooth running of government affairs, they continued to borrow from the market at high-interest rates which ultimately made it default on its debts. In the case of Pakistan, the borrowing from multilateral and bilateral sources (i.e. concessionary loans) keeps its debt servicing relatively lower than that of Sri Lanka. Furthermore, Pakistan’s strategy to handle the pandemic crisis, better level of foreign exchange earnings and reforming the economy under the IMF program will most likely prevent it from going into default.