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Pakistan “WILL NOT” default

One of Pakistan’s favorite hobbies is debating whether it will default on its debt or risk bankruptcy. After the first decade post-independence, it never got rid of this fear. The country’s rising debt and the cost of servicing factors will keep featuring in any discussion about Pakistan’s economy. It will remain dependent on external borrowing until the country’s course is corrected.

Pakistan has major economic problems because our managers have never enacted the structural changes that are needed, which is resulting in a sharp rise in our current account deficit, and it will quickly deplete our foreign exchange reserves. This lack of macroeconomic stability puts more pressure on the economy, negatively impacting Pakistan’s financial condition.

As a result, lenders will insist on austerity and ask the government to develop measures to control rising costs.

With more money going towards interest payments, the government is forced to spend almost 80% of its liquidity on investments in high-yield papers, bonds, and Sukuks.

The SBP must make investments via open market operations and Mudaraba contracts to reinject liquidity because banks’ holdings of GOP Marketable Securities (Outstanding Stock Basis – Face Value) have reached Rs 16.885 trillion. This practice has been in vogue for decades, which often leads to the depreciation of PKR and higher inflation rates. Austerity multiplies the problem, and it is linked with lending; consequently, increased austerity measures will lead to a policy interest rate hike.

With an economy that doesn’t generate profit, borrowing pressure starts to mount as costs of debt servicing and returning profits abroad increases.

Pakistan has been a risky investment because of the quick maturities under short-term borrowing. This is especially problematic for Pakistan because many see the external debt to GDP ratio as a measure that has not yet reached 50%.

It is difficult to gauge the health of the economy with this metric alone. With the size of borrowing being much larger than the size of loan packages, it can’t paint a clear picture. If we get more data about Pakistan’s economy going back decades, Pakistan has not been self-sufficient and does not enjoy a budget surplus.

Every time a new government gets in, they make unrealistic promises and rely on international loans. They never have enough of their own resources to pump in. The gains made by successive governments are of micro levels. As an economy, it needs macro growth which has been missing for many years.

Our economy is currently under pressure because of external, domestic, and national debt and other factors.

Another cause for the high inflation rate is the amount of currency in circulation- because people can take it out without being detected. The high demand for money, as well as supplying a high money supply, are also ongoing and serious problems in our system. If the government can control demand in the system by requiring taxes and providing existing services for free, there will be less pressure on our current account deficit.

The saying “The proof of the pudding is in the eating” is a fact. From 1966 to 1978, courtesy of the IMF, we drew SDR 100,000 or less on 5 occasions.

In the 1980s, Pakistan was borrowing substantial amounts of money. By the 1990s, trillions of SDRs (on average around USD 5-6 billion) were being borrowed each year. The country’s economy is in a better position than in the past, so it’s unlikely that they’ll default.

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