FeaturedNationalVOLUME 18 ISSUE # 01

Default fears: Perceived or real?

Pakistan’s perceived risk of sovereign default has increased after a worsening dollar crunch and delay in talks with the International Monetary Fund. The country’s credit default swap has widened to 64.2pc from 52pc at the beginning of November, which shows waning investor confidence in Pakistan’s ability to pay back its bond-holders of $1b Sukuk which will mature next month. The situation is serious. However, default fears or rumours are not new in the country. Every new government in Pakistan blames its predecessors of bringing the country to bankruptcy. The fear has been used by successive governments for their political gains.

Though successive governments have used the threat to malign their rivals, it is not incorrect to say that Pakistan has been facing serious economic problems for many decades now. Many experts believe that Pakistan has actually defaulted because it has to seek financial assistance from other countries and international financial institutions to run its affairs. However, it has consistently been able to receive international grants, assistance and loans, which keep it afloat. But the situation has reached a point where it will be difficult for the country to continue its policies and it will have to run its affairs through its own resources.

The government has withdrawn subsidies on electricity and fuel and taken necessary steps to improve the economy but the country’s default risk has still increased. Pakistan’s perceived risk of default, measured by the 5-year credit default swap (CDS), worsened further and hit 75.5pc, because of uncertainty over the International Monetary Fund’s (IMF) ninth review. According to data released by Arif Habib Limited, a noted brokerage house, Pakistan’s 5-Year CDS increased from 5,620bps on November 14 to 7,550bps on November 15, an increase of a whopping 1,929.6bps.

Except low foreign reserves, Pakistan’s other economic indicators are not so bad. The reserves held by the State Bank of Pakistan (SBP) increased by $3 million on a weekly basis, clocking in $7.96 billion as of November 11. Total liquid foreign reserves held by the country stood at $13.8 billion. Net foreign reserves held by commercial banks clocked in at $5.84 billion. “During the week ended on November 11, the SBP’s reserves increased by $3 million to $7,959.5 million,” the central bank said.

On the other hand, a downward trend in Pakistan merchandise export proceeds continued for the second consecutive month, according to data of the Pakistan Bureau of Statistics. The country’s exports shrank by 3.77pc in October to $2.37 billion from $2.64b in the corresponding month last year. On a month-on-month basis, export proceeds decreased by 3.07pc.

However, the import bill in the first four months of the current fiscal year (July and October) stood at $21.01b against $25.08b last year, indicating a decline of 16.21pc. The import bill increased by 43.45pc to $80.51b during 2021-22, up from $56.12bn a year ago. As a result of the decline in imports, the trade deficit in October fell by 42pc to $2.26b this year from $3.90b over the corresponding month last year. In the first four months, the trade deficit dipped by 26.59pc to $11.46b this year from $15.62b over the corresponding months of last year.

The current account deficit during the first four months of the current fiscal year stood at $2.8b, narrowing by 46.82pc from $5.3b during July-October 2021. The central bank said a continuous decline in imports helped improve the current account deficit.

The inflows of foreign currency on account of workers’ remittances sent home by overseas Pakistanis hit an eight-month low at $2.22 billion in October. The State Bank of Pakistan reported that the remittances had decreased by 9.1pc to $2.22 billion in October in comparison with $2.44 billion in September. This was 15.7pc low in the month under review compared with $2.63 billion received in the same month last year. Cumulatively in the first four months (July-October) of the current fiscal year, remittances dropped by 8.6pc to $9.90 billion compared with $10.83 billion in the same period of the previous year.

As former Prime Minister Imran Khan is raising the issue of default in his rallies, the government believes he is talking about it for political point scoring. Finance Minister Ishaq Dar ruled out any prospects of Pakistan defaulting on its international payments and reiterated that it was committed to making all its payments on time without any delay. In a video massage, he rejected “baseless and irresponsible” statements and rumours about the country’s economy, saying the government had arranged for all international payments for the next one year. “When such rumours are spread through social media and various sources, they not only affect Pakistan’s economy and economic interests, but also impact the affairs and transactions with bilateral and multilateral partners,” he regretted.

The finance minister also ruled out that Pakistan would not be able to pay the $1 billion sovereign bond (sukuk) in December. “This is baseless and contrary to facts, Pakistan has never defaulted on its international payments and will never come close to it,” he maintained.

The government also informed the National Assembly that the country was not facing any danger of default. “There is no possibility of default. We were worried when we took over the government because at that time the IMF programme had been suspended and external finances were hard to receive. However, the situation has improved after the government took some very difficult decisions and the IMF programme was revived,” State Minister Aisha Ghaus Pasha informed the National Assembly.

Ostensibly, the country is not facing any default risk, but it needs foreign financial assistance to run its affairs. The situation has continued for decades. The country will have to increase its earnings through exports to stand on its feet.