Pakistan is suffering from a major economic turmoil; this is evident by the persistent devaluation of the rupee, record-high inflation, and balance of payment crises. Just like the recent situation in Sri Lanka, each day, Pakistan is moving towards a default.
Pakistan is experiencing a risk of defaulting as a result of economic and political turmoil and negligence. The government has gone above and beyond to find a solution after reaching this extreme condition of going into default.
Agency21 International will be highlighting the debt issues Pakistan is currently facing to give a clearer picture of whether the country is heading towards a default or not.
Is Pakistan Heading Towards Default?
Rumour has it that Pakistan is heading towards default. But is it true that the nation is welcoming Sri Lanka’s economic fate as well?
Sri Lanka’s foreign exchange reserves hit a record low in May. The country stopped making its debt payments and entered a severe economic crisis. Sri Lanka was heavily indebted and had more than $7 billion in foreign debt that needed to be repaid to various creditors this year.
It barely possessed $1.6 billion worth of foreign exchange reserves, nevertheless. They were, therefore, unable to pay for the importation of goods they needed and pay off foreign debt.
Now, is Pakistan heading towards a default? Many people on social media are equating the current economic crisis with that of Sri Lanka, but there is no real basis for these similarities.
Contrary to the ongoing belief, the Pakistani government will be able to come to a solution to this problem. The government will be able to meet its $33.5 billion in external finance demands this year, despite claims to the contrary from various economists, according to the acting governor of the State Bank.
The acting governor of the State Bank reassured that Pakistan’s fiscal standing is far superior to that of Sri Lanka and other defaulting countries.
Pakistan’s Economy & Debt
The current dollar rate has gone up to Rs 235.44 depicting a major decrease in the value of the Pakistani Rupee. Investors are now unsure of their investments as the rupee devaluation has been sparked by the chaotic movements in the currency markets and the shrinking foreign exchange reserves.
The Acting State Bank Governor recently predicted that the rupee will stabilize at roughly 200 against the dollar once funds start to trickle in from the IMF and other friendly countries.
The overall foreign exchange reserves of the nation are $13 billion, of which $9.2 billion are in the foreign exchange account and $3.8 billion are in gold, according to the central bank. In light of these numbers, the central bank has an adequate safety net to close the funding gap for this fiscal year.
How is Pakistan Safe From Defaulting?
Although the news of Pakistan defaulting is circulating over the internet, the State Bank of Pakistan (SBP) has to say otherwise. The economic situation of Pakistan is not as bad as it is rumoured, and the government has been taking extreme measures to curtail any harmful foreseeable crisis. Here is how:
Increasing Fuel and Gas Prices
To protect the economy from going bankrupt, the government of Pakistan increased fuel and gas prices to prevent further debt issues.
By taking this step, the government was able to control the upcoming risk of defaulting, just like that of Sri Lanka. It is said that the situation of Sri Lanka has been going towards defaulting, however, no timely step was taken which ultimately led to such a massive economic downturn.
Flexible Exchange Rate
Let’s look at Sri Lanka’s situation– when the economic crises hit them, they kept their currency overvalued which completely jeopardised their economic and financial situation.
On the contrary, Pakistan devalued its currency at the right time, making it easier to deal with the risk of default. Evidently, a lot of potential damage was already controlled.
The Pakistani government altered its macroeconomic policies by controlling its imports during the economic turmoil to prevent massive chaos from happening.
A ban was imposed on luxury goods to reduce the number of imports entering the country. The economy is dependent on imported commodities, however, Pakistan’s government strategically imposed restrictions on luxury goods to curtail the increase in import bills.
The current debt payable for Pakistan is estimated to be around $38 billion. To get out of the prevailing debt situation, the government increased the price of gasoline and petrol by 30 rupees per litre in the previous week.
Even though its payable debt is equivalent to that of Sri Lanka’s, Pakistan is in a much better position to pay off its debts and stabilise its economy.
The Bottom Line
Undoubtedly, Pakistan is going through a tough economic situation, and it will take months to stabilise the balance of payments and the persistent rise in prices.
The government has no choice but to work on its microeconomic and macroeconomic policies to save the economy from going bankrupt and minimise the country’s current account deficit.