FeaturedNationalVOLUME 18 ISSUE # 21

Widening structural cracks

Pakistan’s structural weaknesses, including low investment levels, limited fiscal space, and a weak regulatory environment, have further contributed to the country’s economic challenges. Moreover, its economy is heavily reliant on the agricultural sector, which is vulnerable to natural disasters and climate change.

Two recent reports by the World Bank and the Asian Development Bank highlight structural weaknesses, and policy challenges facing the country’s economy. They also note that Pakistan’s policy challenges, such as the slow implementation of structural reforms, the lack of progress in addressing fiscal imbalances, and the high level of public debt, have further weakened the country’s economic growth prospects. The World Bank has cut Pakistan’s GDP forecast to just 0.4pc on rising rates and limited fiscal space. According to the Asian Development Bank, Pakistan’s gross domestic product (GDP) growth is projected to slow to 0.6pc in FY23 from 6pc last fiscal year as the economy struggles to recover. Its latest report noted that climate change poses a grave challenge to Pakistan’s economic, social, and environmental development. Overall, the ADB report highlights that Pakistan’s economic growth will remain sluggish in the short term, and structural reforms, increased investment, and improved governance will be essential to achieve sustainable economic growth in the long run. The government and policymakers will need to focus on addressing the various challenges facing the country’s economy, including those highlighted by the ADB report, to promote economic growth and stability.

Another disturbing report came from a US-based think tank, which said there is a real danger of Pakistan’s default. It warned that amid skyrocketing inflation, political conflicts, and rising terrorism, the country is facing the risk of a default due to its massive external debt obligations. The United States Institute of Peace (USIP) report identifies factors that are important to consider “if authorities want to pull Pakistan out of the economic abyss.” It noted that the major repayments in the next three years are to Chinese financial institutions, private creditors and Saudi Arabia. “The country faces near-term debt repayment pressure as the external debt servicing burden is $4.5 billion from April to June 2023. The major repayments are due in June when a $1 billion Chinese SAFE deposit and a roughly $1.4 billion Chinese commercial loan would mature. Pakistani authorities hope to convince the Chinese to refinance and roll over both debts, something the Chinese government and commercial banks have done in the past,” it noted.

The think tank warned that even if Pakistan manages to meet the obligations, the next fiscal year will be more challenging, as the debt servicing will rise to nearly $25 billion. This includes: $4 billion Chinese SAFE deposits, $3 billion Saudi deposits, $2 billion UAE deposits, $1 billion repayment on a Eurobond in the fourth quarter, $1.1 billion of long-term commercial loans to Chinese banks. The report forecast that in 2024-25, Pakistan’s debt servicing is likely to be around $24.6 billion, which includes $8.2 billion in long-term debt repayments and another $14.5 billion in short-term debt repayments; this includes major repayments to Chinese lenders of $3.8 billion. In 2025-26, the debt servicing burden is likely to be at least $23 billion; that year Pakistan is to pay back $8 billion in long-term debt, including repaying $1.8 billion for a Eurobond and $1.9 billion to Chinese commercial lenders. It suggested that in order to repay its debt and avoid a sovereign default, Pakistan’s earnings from exports, foreign direct investment (FDI) and remittances inflows are vital.

However, inflows from the three sources are projected to stay subdued compared to the import bill as well as the mounting debt repayment pressure. Over the next three years, imports are likely to be higher than the total dollar amount of exports and remittances, which will lead to a current account deficit requiring external financing. Meanwhile, FDI is projected to remain subdued as well. In recent years, investment has averaged a dismal $2 billion annually due to the challenging business environment and frequent policy changes; similar levels of investment are the best case for the next few years. Investor sentiment has also been impacted by the government’s recent restrictions on the movement of capital outside the country. The report suggested that the economic managers of Pakistan have only two options to address its external debt burden. The first is to take fresh loans and seek rollovers of debt — however, the country’s ability to access the sovereign financing market is limited due to downgrades by international credit rating agencies. Therefore, if the country seeks to avoid default the leadership will depend on Middle Eastern partners and China, not just for existing rollover but also fresh loans.

The report noted that the details of these will depend on negotiations with the IMF. If the stalled IMF programme is revived, the amount will be smaller than the one it would seek if the programme collapses. And in case the bailout programme is revived and completed over the summer, Pakistan will need a new IMF programme, in addition to new loans and rollovers from its Middle Eastern and Chinese partners, due to its external debt burden over the new three years. The second option that the country has is that it seeks pre-emptive restructuring of debt as it will help reduce the repayment pressure and spare scarce dollars in the economy to finance the country’s current account deficit. The report mentions that if Pakistan ultimately defaults, there will be a “cascade of disruptive effects”. Primarily, the country’s imports could be disrupted, which could lead to a shortage of essential goods and commodities. The nation of 220 million people, which is already seeing intense political conflict between the Pakistan Democratic Movement-led government and Pakistan Tehreek-e-Insaf (PTI), may also see the economic crisis creating more political turmoil. “And given Pakistan’s demographic profile and surging terrorism threats, the resulting crisis could go in unexpected directions,” it stated.

The USIP report highlights the challenges faced by Pakistan’s governance system and provides recommendations for reform. The report identifies several areas where reform is needed, including strengthening the rule of law, improving the delivery of public services, promoting economic growth, and enhancing democratic governance. Overall, the USIP report on Pakistan provides a comprehensive analysis of the challenges facing its governance system and offers several recommendations for reform. It is time Pakistan enforced reforms in every sector to stand on its own feet and work for the betterment of its people.