NationalVOLUME 18 ISSUE # 25

Entangled in vicious debt cycle

Asking someone for a loan is really embarrassing, no matter if it is at the level of an individual or a nation. And one loses self-respect, according to a perspective, if the lender refuses to oblige the request. And now, it is widely felt that Pakistan, as a nation, has lost its self-respect, in the wake of the international lending agency denying it a loan despite fulfilling all harsh conditions. Even the Prime Minister of Pakistan has told its people time and again that the IMF was making them rub their nose in the dirt for sanctioning a loan.

Why the international lending agency is treating Pakistan this ‘cruel’ way is not very strange. On February 28 this year, Moody’s Investors Service, an American business and financial services company, downgraded the government of Pakistan’s debt obligations ratings from Caa1 to Caa3, which indicated poor standing subject to very high credit risk. That is, if any lending agency is ready to advance money, it is highly likely that Pakistan will not service the loan.

According to financial wizards, the decision to downgrade the ratings was prompted by Moody’s assessment that “Pakistan’s increasingly fragile liquidity and external position significantly raises default risk to a level consistent with a Caa3 rating.” That is, Pakistan’s avoidance of default would be a near miracle.

In fact, the current major challenge to the country sprouts from depleting foreign exchange reserves, which are just around $4 billion, after the commercial loan facility of $1.3 billion ($700 million and $500 million) extended recently by the Industrial and Commercial Bank of China for the rest of this fiscal year. China does not influence its banks to make debt restructuring.

The country has not reached this precarious financial condition in one year, or one decade. It is regrettable that every government did its bid to push the country to the brink of a financial disaster. Columnist Ayaz Amir says in his recent Urdu column that the nation has been stuck in a vicious loop of borrowing loans to pay back the previous debts. He recalls that the nation has seen the rule of Ayub Khan, Yahiya Khan, Zulfikar Ali Bhutto and Ziaul-Haq. People have seen the governments of dictators and they all had one thing in common: take loans to solve the problems and then take more loans to pay back the previous loans.

Regrettably, the vicious cycle is still intact and that Pakistan has reached a point where no one is ready to continue lending money to the nation currently. Finance Minister Ishaq Dar believes that the signing of the staff-level agreement (SLA) with the IMF would pave the way for Pakistan’s securing finances from other bilateral and multilateral partners, including the rollover of the $3 billion China SAFE deposits and the rest of the total $3.3 billion refinancing from Chinese commercial banks. But, the IMF is delaying signing of the SLA on one pretext or the other and demanding more foreign financial assurances for lending the loan.

The unavoidable situation is compelling Pakistan to sustain its economy through commercial loans available at a comparatively higher interest rate. That is, in order to avoid one crisis, Pakistan is falling into a bigger disaster. Pakistan already owes China a $30 billion loan, including a commercial one. If Pakistan is financially indebted to a single country, it is China. On the loan front, it is apparent that Pakistan is heading for the inclusion of China and exclusion of the IMF in the long run.

However, Moody’s goes beyond the financial sphere and asserts that “weak governance and heightened social risks impede Pakistan’s ability to continually implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments.” The statement means that Moody’s sees no respite in Pakistan’s economic woes. The same is the warning Moody’s has issued to any lender.

According to Dr. Qaiser Rashid, a financial analyst, one can find some space shared between weak governance and heightened social risks if a sample of the last decade (2013-2023) is taken into account. Pakistan experienced frequent and protracted sit-ins staged by both political and religious forces, together or one after the other. Protesters themselves discredited Pakistan in the eyes of foreign investors. The whole episode embodied the hybrid regime experiment, buttressed by the prime intelligence agency. Thus Pakistanis themselves marred the economic credibility and financial future of Pakistan.

The American business and financial services rating company also asserted that the “Pakistani government’s relatively large footprint in the economy would not let the economy be stable.” This point poses a major challenge to the scheme of running the government, which considers privatisation detrimental to national security. Furthermore, privatised institutions disappoint the government sector, which has fattened on exceptions and protocols.

The rating company says that till the end of the current fiscal year, ending June 2023, Pakistan’s external financing needs are around $11 billion including the outstanding $7 billion external debt payments due. The remainder is mainly the current account deficit. It simply means that Pakistan has to service the loan of around $2 billion a month. This point is further validated by Moody’s assessment that “Pakistan’s external financing needs for the fiscal year 2023-24 are around $35-36 billion. Pakistan has about $25-26 billion worth of external debt repayments (including interest payments).” The average is the same: Pakistan has to service a loan of around $2 billion a month. The state of affairs would continue for the next five years. The gigantic question is: if the country will ever be able to break the vicious debts cycle?