Author : Sushant Sareen

Expert Speak Raisina Debates
Published on Feb 06, 2023
Avoiding a debt default is virtually impossible, but this crisis can be an opportunity for Pakistan to redeem itself
Pakistan’s troubles are an opportunity to make it a normal country

Pakistan no longer confronts a crisis of government or governance; it is now contending with a crisis of state. What is now at stake is the very survival of the state of Pakistan. The political stasis, governance paralysis, security situation sliding out of control are all mutually reinforcing the imminent economic meltdown. Even this could have been managed provided someone had had a roadmap, or a plan, to pull the country out of the death spiral in which it is caught. Instead, what they have are half-baked plans best summarised as ‘waiting for Godot’. The focus is only on getting around the immediate crisis, ie, avoiding default. There is a hope and a prayer that once default is avoided, everything else will work itself out.

Reimagining is fine, but where is the plan?

There is no dearth of hifalutin prescriptions for ‘reimagining Pakistan’. But these are suffused with generalities, not with the specific policy and administrative steps—the building blocks—required to fix the economy and to make Pakistan a sustainable and viable state. Pakistanis think that if they can forge unity and evolve a consensus, they will be able to come up with a plan. What they don’t understand is that a consensus can be evolved around a plan, not a plan around a consensus. For now, Pakistanis remain in denial about how bad their situation is and what has brought them to this pass. Worse, they continue to harbour delusions that they will be saved because they are too dangerous to be allowed to fail, and because their friends will save them, or, at least, keep them afloat.

Pakistanis think that if they can forge unity and evolve a consensus, they will be able to come up with a plan.

Debt servicing > Revenue

To understand how badly broken the economy is, how deep the structural crisis, and how default can only be postponed (by a few months at best, and if they are lucky then by a year or so) and not prevented, take a look at their fiscal math. The budget for FY23 estimated a net federal government revenue of PKR 5.03 trillion. Debt servicing for the entire year was estimated at PKR 3.95 trillion. But with interest rates going up by over 300 basis points, the new estimate of debt servicing is PKR 5.2 trillion. In other words, the entire revenue of the federal government will go into debt servicing, and still fall short. Everything else—defence, running the government, development expenditure etc.—will be paid through borrowing more money. The situation is only going to worsen with hikes in power tariffs, fuel prices and taxes, and the Pakistani rupee crashing. Some economists estimate that as a result of these measures, inflation could go up to anything between 35-40 percent. This will put more pressure to raise interest rates, which, in turn, means debt servicing could go up higher still. Clearly, this is an unsustainable situation and something will have to give.

In a Debt Trap

Over the last 25 years, Pakistan’s debt has been doubling roughly every five years. Before the military dictator usurped power in 1999, the total debt of Pakistan was PKR 3.06 trillion. By the time General Musharraf left and the PPP government assumed power in 2008, the debt had touched PKR 6.7 trillion. In 2013, when the PML government came into power, the debt had risen to PKR 16.3 trillion. The PMLN government left a total debt of PKR 29.8 trillion in 2018 for the incoming PTI government. In just four years, the PTI government more than doubled the debt to PKR 62.5 trillion. But growth has been rather anaemic during this entire period. While debt was increasing by around 14 percent per annum on average, GDP was growing only by around 3 percent per annum on average. It was also during this period that Pakistan had a windfall in the form of massive debt rescheduling after the 9/11 attacks. But this opportunity was frittered away by Pakistan and the restructuring necessary to make the economy viable never happened. With growth faltering, the revenues couldn’t match the rising needs for debt servicing. At the same time, because the revenues were not rising fast enough, the governments were forced to take more debt to meet their expenses. The result is a debt-trap that Pakistan has walked into with its eyes wide open.

Downsizing the State

Successive governments have resorted to kicking the can down the road. But, now, things have reached a dead-end. There is no place or space left to kick the can. The only option is to carry it; something that is easier said than done. It will mean massive restructuring of the economy, literally rebuilding it from scratch. It involves allowing inefficient companies surviving on government subsidies to close. It means slashing subsidies and freebies to elite sections of society. Sectors that have not been taxed or have been taxed lightly will now have to be brought into the tax net. Exemptions and concessions given to special interest groups—industrialists, Military Inc., landed elite etc.—will have to become history. The state will have to contract. Ministries will have to be shut down. And the mother of all challenges, the bloated defence budget, will have to be cut, and the military downsized. Clearly, making Pakistan a viable state is going to be a tall order; something that everybody would like to avoid for as long as possible.

Pakistan's nose is already under water and the economy is holding on to its breath, desperately counting as precious time passes and it becomes more and more difficult to not drown.

Running on fumes

In the immediate context, however, Pakistan’s entire focus and struggle should be on how to somehow keep afloat. For all practical purposes, Pakistan's nose is already under water and the economy is holding on to its breath, desperately counting as precious time passes and it becomes more and more difficult to not drown. The foreign exchange reserves are already down to under US $3 billion, just enough to finance two weeks of imports. The Rupee has crashed and is trading for PKR 283 to a dollar in the open market. The black market rate is around PKR 290 to a dollar. Because imports are not coming in, the supply chains are grinding to a halt. Many industries have stopped production. The floods have destroyed the cotton crop and Pakistan desperately needs to import cotton so that its biggest export—cotton textiles—doesn’t suffer. But there is no money to import the cotton with. Nobody is ready to lend money to Pakistan—not the banks, not its ‘friends’ (not even its all weather friend and biggest creditor China). Pakistani bonds are being traded at default rates. Reports suggest that, in the next couple of weeks, fuel supplies will run out. Telecom companies are also warning that services will suffer because of inability to import equipment. Without belabouring the point, it is enough to say that whatever can go wrong is going wrong.

IMF is not a panacea

Pakistan knows that its only option to avoid default is to fall at the International Monetary Fund’s (IMF) feet. But the IMF is demanding reforms that are making the Pakistanis balk. They still think that they can negotiate some concessions from the IMF. But, for the first time, the IMF is sticking to its guns and refusing to relent—so far at least. The reason is that Pakistan has consistently violated its commitments to the IMF, which is now no longer willing to cut Pakistan any slack. Imposing the IMF conditions on power tariffs, on new taxes to raise revenues and reduce the fiscal deficit, and on floating the rupee will all inflict enormous pain. With 2023 being an election year, implementing the IMF conditions will be nothing short of political suicide. But not implementing these conditions means certain default and the total eclipse of the economy.

Imposing the IMF conditions on power tariffs, on new taxes to raise revenues and reduce the fiscal deficit, and on floating the rupee will all inflict enormous pain.

But, wait. Getting back on the IMF programme is only a short-term measure. The IMF Extended Fund Facility (EFF) programme ends in June 2023. The entire exercise for now is to survive the next six months. Once the IMF loan comes, it will unlock Saudi, UAE, Chinese and, perhaps, Qatari money. But all of this will only tide things over till the end of FY23, i.e. June 2023. Life will, however, not come to an end with the fiscal year because the next fiscal, i.e. FY24, will be even tougher to traverse. As per the IMF calculations, Pakistan has debt obligations of around US $75 billion in the next three years, with around US $25 billion due in FY24. Meanwhile, the domestic and external debt Pakistan has been taking will keep adding to the debt servicing obligations. By the time the next fiscal starts, Pakistan will need to go in for another IMF programme—the 23rd one—which will be even tougher than the existing programme. Pakistan's ‘friends’ are also unlikely to open the purse strings once again next year, and the year after, and so on and so forth.

In any case, the scale of the problems are so big that these infusions will work, at best, to keep the economy on life support, but will do nothing to make the economy come out of the ICU, much less the hospital. The bottom-line is that there is no way Pakistan can meet its debt obligations. Simply put, the current IMF programme can delay default but will not solve Pakistan's problem.

A Plan for Rescuing Pakistan

That Pakistan cannot pay its debts is by now a no-brainer. The choice before Pakistan is either to default now, or a few months later. Politically, both options are equally bad. Avoiding default now means administering extremely bitter medicine, which, if it doesn’t kill the economy will certainly kill the politics of the incumbents. Defaulting now will, of course, mean almost immediate death of both the economy and of politics. The other option for Pakistan is to seek debt restructuring and rescheduling. Pakistanis would, of course, argue that the world needs to write off their debt. But even they know that’s not going to happen.

The existential crisis Pakistan faces is an excellent opportunity for both Pakistan and the international community to bring it back from the brink and make it a normal country that is not a threat for its own people or for its neighbours or even for the region and the world.

The option before Pakistan is to choose between debt default and debt restructuring – the first is like a crash landing in which no one knows who and what survives or what can be retrieved; the other is more like a hard landing in which there is serious damage but chances of survival are higher. In this scenario, the second option is, perhaps, more desirable. But both the options involve a long and extremely painful process of recovery during which Pakistan will require a lot of assistance from multilateral institutions as well as bilateral partners. This is where the international community has a golden opportunity to push for making Pakistan a normal country.

The Five Rs Plan

Any rescue package for Pakistan needs to be based on what can be called a Five Rs plan.

  1. RESTRUCTURE the economy (some of the measures have been outlined above but there are many more that need to be taken)
  2. Undertake social, political and governance REFORM and ensure human rights, minority rights, and an end to religious persecution especially of the Ahmadi community and the Hindus, Sikhs, and Christian minorities. Pakistan will need to end all legal and constitutional discrimination against ethnic, religious and linguistic minorities and crack down on forcible conversions of religious minorities.
  3. RENOUNCE terrorism and take credible, visible and verifiable action against terrorist groups of all types. No more distinctions between good and bad Taliban, nor let any leeway be given to local and regional terrorist groups. Rein in Islamist extremist organisations. But a monitoring mechanism will have to be put in place to ensure that Pakistan doesn’t cheat on these commitments like it did with FATF, which took it off the ‘grey list’ even though the AML/CFT networks haven’t been dismantled and terror organisations haven’t been reined in.
  4. RESTRAIN AND REDUCE the nuclear arsenal. Make the control and command system more transparent. Pakistan will not be required to dismantle the nuclear programme (that’s a deal killer) but will have to stop using nuclear weapons as a tool for diplomatic blackmail or even a currency in negotiations. It is unconscionable for Pakistan to have the world’s fastest growing nuclear arsenal when it is desperately seeking bailout packages from rest of the world.
  5. In return for the above 4 Rs, the fifth R – RESCHEDULING AND RESTRUCTURING – of Pakistan's debt will be agreed upon. Pakistan's debt burden will be significantly reduced and the economy will be given a kickstart with generous assistance packages from the international community.

A win-win

Nobody really wants to see a country of 240 million people go belly up. But nobody is willing to underwrite Pakistan indefinitely or tolerate Pakistan as an ‘international migraine’. The existential crisis Pakistan faces is an excellent opportunity for both Pakistan and the international community to bring it back from the brink and make it a normal country that is not a threat for its own people or for its neighbours or even for the region and the world. But for this to happen, it is imperative that the 5 Rs plan is sequenced properly, monitored rigorously, and implemented robustly. To let Pakistan off the hook without a quid pro quo, or even on the basis of some post-dated promise that Pakistanis are quick to make but never honour would tantamount towards blowing up a great chance to make it a normal country.

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Author

Sushant Sareen

Sushant Sareen

Sushant Sareen is Senior Fellow at Observer Research Foundation. His published works include: Balochistan: Forgotten War, Forsaken People (Monograph, 2017) Corridor Calculus: China-Pakistan Economic Corridor & China’s comprador   ...

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