This Friday, PM Shehbaz Sharif appealed to the Paris Club—a group of wealthy nations—for the rescheduling of $10 million worth of debt so that the government could focus on rehabilitating the 33 million people displaced due to the floods. The effect of this was an immediate loss of confidence and fears of debt default, driving US dollar bonds like Eurobond and Sukuk towards higher yields and lower prices. This worrying state of affairs is bound to get much worse once creditors ask for repayments that the state simply cannot afford to give right now.
As soon as the plea for debt relief was made, global investors feared that Pakistan was close to defaulting on foreign debt payments. This resulted in the prices for each of these bonds to slump, and their yields to skyrocket. What this means is that once creditors file for repayments, Pakistan will have to funnel out billions that could have been allocated to flood relief or rehabilitation schemes for the affectees. Following these tough financial circumstances, there has been immense debate as to how our government can rescue itself. Strategies like restricting loans should be considered by the state. At the same time, creditors can be informed of the urgent need for funds to manage the national natural disaster. Their repayments can be redirected towards flood relief campaigns or investment in climate-change resilient infrastructure that is bound to be a stable investment for the long-term.
What remains crystal clear is that our economy is not in a position where it can make these repayments to countless creditors scattered across the globe. We are already in immense debt and this may be enough to deprive us of finances that are paying for the rehabilitation of flood victims. It is imperative that the confidence of the investors is regained through informed proposals focused on reinvesting in the country.