What is the Pakistan bankruptcy risk? Under the waters, is Pakistan at risk of bankruptcy like Sri Lanka?
Pakistan is often presented as a future Sri Lanka, in reference to the resounding bankruptcy of this small South Asian state more than 4 months ago. Indeed, the heavy rains that are falling on the country constitute an economic disaster for Islamabad. In addition, they come at the worst possible time for the country's finances. But the parallel has its limits.
More than 1,000 victims, torrents of water that wash away everything in their path, destroying roads, buildings and flooding hundreds of thousands of hectares of plantations in a country that still depends a lot economically on its agriculture.
Pakistan has been bending for more than three months under the weight of rains that leave it no respite. If the humanitarian disaster becomes ever more apparent, the authorities warn that this monsoon of historic intensity will also leave deep economic sequelae.
Pakistan bankruptcy risk
“It will be very expensive for us. Preliminary estimates suggest that the economic impact [of the floods] will exceed $10 billion," said Ahsan Iqbal, minister of Planning and development, interviewed by Reuters news agency on Monday, August 29. This amount covers only reconstruction efforts that are expected to "take at least five years”" Ahsan Iqbal said.
But the summer monsoon is also likely to blow up prices. According to Pakistan's national disaster management agency, more than 800,000 hectares of plantations have been destroyed since the heavy rains began. This disappearance of some of the crops of rice, dates, or chickpeas “will have a strong impact on the price of foodstuffs when inflation was already the number 1 problem”" emphasizes Subhan Ullah, economist at the University of Nottingham. Inflation was above 20% before the start of the monsoon season.
“The floods have particularly affected the regions of Punjab or Sindh, considered the food granaries of Pakistan, and shortages are beginning to be felt in the country's markets which are leading to a rise in prices”" notes Reuters. And this is just the beginning. “We will have to import these fruits and vegetables, which means an additional increase”" adds Subhan Ullah.
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But these spoiled harvests will not only have a negative impact on the cost of foodstuffs. ”Nearly 45% of cotton plantations have been destroyed," says Ahsan Iqbal. This is very bad news for the national economy since it is an essential raw material for its textile industry, representing more than 60% of Pakistani exports.
The bad weather is therefore an economic disaster in itself for Islamabad. But they also come at the worst possible time for the country's finances. Heavily indebted, with almost empty national coffers and rampant inflation, Pakistan is in an economic situation that is not unlike that of Sri Lanka, which went bankrupt in April 2022.
Islamabad has to repay, this year, nearly $ 24 billion in debt to various international creditors, such as the International Monetary Fund (IMF), the World Bank or the Paris Club (informal group of public creditors). Problem: the foreign exchange reserves in the state coffers fell, in June, below the $ 10 billion mark. “This is a threshold below which it is generally estimated that a country has entered a serious crisis”" observes Juvaria Jafri, a specialist in economic policies of developing countries at the University of Cambridge.
The roots of Pakistan's economic evil are multiple and stem as much from "economic mismanagement for years as from structural problems of tax collection," emphasizes Subhan Ullah. But the situation has deteriorated markedly after the Covid-19 pandemic and especially due to “the war in Ukraine, the consequences of which have particularly weighed”" adds the economist from the University of Nottingham.
Pakistan bankruptcy risk revealed
It is mainly the explosion of energy prices that have hit Pakistan's finances, because the country "imports most of its electricity needs”" recalls Subhan Ullah.
Another factor comes from the IMF: Pakistan had negotiated, in 2019, a financial aid package of six billion dollars, which was blocked for three years. The international institution asked Islamabad to put an end to subsidized gasoline prices that were very expensive for the state, but allowed the government to limit the impact of rising prices at the pump.
Last May, the government finally agreed to the IMF's terms. As a result, gasoline prices have risen suddenly and massively, lowering the purchasing power of millions of Pakistanis. Enough to slow down the pace of an already weak growth.
But the economic horizon is not completely dark: on Monday, August 29, the IMF agreed to release a first tranche of one billion dollars from the 2019 aid package. ”It's a breath of fresh air that takes the risk of a default away," says Subhan Ullah.
Admittedly, this billion dollars may seem very meager in the face of Pakistan's mountain of debts. But “if we take a closer look at how this debt is structured, we realize that the parallel with Sri Lanka is probably exaggerated because the risk of a default is not as imminent”" says Juvaria Jafri. There is, in fact, only about a billion dollars of debt that must imperatively be repaid before the end of the year, “the payment deadlines for everything else can be renegotiated,” says Jawwad Farid, a Pakistani public finance expert who is very active and followed on Twitter.
Pakistan bankruptcy risk statements
In addition, “there are always friendly countries like Saudi Arabia or Qatar that can lend more money”" says Subhan Ullah. Riyadh should thus renew a three billion dollar loan to Pakistan, the Financial Times assures. Islamabad hopes that Qatar, China and the United Arab Emirates will lend more than four billion dollars to Pakistan, the British financial daily adds.
So many leads that should allow Islamabad not to sink. But, it's also moving back to jump better. In particular, we should expect very tense future negotiations with the IMF, says Juvaria Jafri. The organization “will demand more austerity in exchange for its loans, and the government will be very reluctant to accept them”" she assures.
The reason: the 2023 Pakistani general election. The Prime Minister, Shehbaz Sharif, is "currently under pressure, especially for his management of the floods”" recalls Subhan Ullah. The last thing he would want would be to implement austerity measures imposed by the IMF and therefore necessarily unpopular. Shehbaz Sharif has no intention of making such a gift to his main political rival, former Prime Minister Imran Khan, who intends to make his big return to power thanks to these elections.
# Pakistan bankruptcy risk #
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