“We may not be in Sri Lanka’s shoes yet, but are not very far off as there
are some comparable symptoms. With negotiations with the IMF
apparently inconclusive, and the much-awaited financial support from
friendly countries yet to come, the country is not in a good state,”
journalist and author Zahid Husain has warned in Dawn newspaper (July
13, 2022).
The economic meltdown in Sri Lanka triggering unrest and unprecedented
political upheaval has sent alarm bells ringing in the Indian Ocean region.
They are the loudest in Pakistan.
One common feature in Pakistan and Sri Lanka is the heavy debt burden
thanks to the Chinese loans and investments. While Lanka has defaulted
on repayment and is already in a debt trap, Pakistan, with investments
under the China Pakistan Economic Corridor (CPEC) is close second,
experts say.
Much of the investment is in infrastructure in both the South Asian
nations that takes time to yield results. Lacking in economic, industrial
and managerial skills, both have leased those projects to Chinese firms for
management, incurring further debts that have caused a vicious circle
they cannot escape.
Amidst a serious and persisting economic crunch, Pakistan has also seen a
government change in April. The new regime is fighting on multiple
fronts. The political opposition is unrelenting against Prime Minister
Shehbaz Sharif’s coalition government as his predecessor Imran Khan,
whose handling of the economy worsened the woes demanding a snap
poll.
The result is absence of economic activity, pushing away the modest
foreign and domestic investment but above all, the foreign aid is coming
to a halt. The International Monetary Fund (IMF) is also tightening the
screws on Pakistan’s economy before it can release the much-needed USD
three billion bailout.
The Sharif Government has imposed unpopular measures like raising of
fuel prices, slashing on subsidies and imposing ten percent ‘super tax’ on
large-scale industries. The dollar exchange rate is PKR 210. All these have
sent inflation sky-rocketing at 15 percent.
The return of Covid-19 pandemic, though in small measure so far, and a
heavy monsoon inundating Karachi, the financial capital, has added to the
country’s woes.
Sharif has reportedly secured a loan from China, at a high rate that he will
not make public. The financial sector and other stakeholders of the
economy are still not satisfied with the “hidden cost” of the Chinese loan.
The market is full of speculation that Chinese loans were taken at a very
high rate.
Friends in the Gulf have relaxed concessional fuel supplies, but no loan has
come from Saudi Arabia and the UAE.
Cash-starved Pakistan’s external debt servicing rose to $10.89 billion in
the first three quarters of 2021-22 compared to $13.38 billion in the entire
FY21.
The country has been facing a serious threat from its external front as the
State Bank of Pakistan’s foreign exchange reserves fell to single digits
despite a $2.3 billion inflow from China late last month, the Dawn
newspaper reported.
“The increasing size of the external debt servicing in each quarter
indicates the government has been borrowing dollars at higher
commercial rates to meet its foreign debt repayment obligations,” the
report said.
While the IMF is in no hurry to release USD three billion – Pakistan is
estimated to require between USD 9 billion to 12 billion by the end of
2022 – the China is also playing its game, considering that both the IMF
and Beijing are rivals.
Initially, Beijing had agreed to roll over the syndicated loans before the
ouster of the previous PTI government. However, Sharif’s administration
had to wait for two months to secure the Chinese loan.
Since the IMF has visibly slowed down its negotiations with Pakistan, the
country is not getting project funding from the World Bank and Asian
Development Bank.
The governments in FY22 that ended on June 30 could not control the
influx of huge imports totalling $80 billion creating a large current
account deficit (CAD), which alone is enough to understand the external
weakness of the economy.
For Pakistan, the Lanka comparison is unmistakable, both in overdependence on China and its own handling of the economy. “The Sri
Lankan turmoil is a classic example of an economy caught in an acute
debt trap, while failing to boost its revenues. Indeed, political corruption,
too, played a role in the country’s financial collapse,” Zahid Husain writes.
In Pakistan’s case, it is its 13th attempt at seeking IMF bailout for which
each government of the day blames the predecessor. Each government
also engages in anti-American rhetoric to placate and arouse the public
sentiment since the US nod is needed for any IMF money.
This sentiment is at its worst now with Imran Khan, not only refusing to
admit economic mismanagement by his government, but also blaming the
US for ‘conspiring’ to oust him from office. This has become integral to his
political campaign after losing power, making Sharif’s task more difficult.
As Zahid Husain says of Pakistan, “Now the IMF is the last hope for the
country of 22 million, but aid will not come without stringent
conditionalities that may increase the hardship of the people. In fact, a
bailout by itself won’t provide a long-term solution, which requires
undertaking fundamental structural reform to resuscitate the economy.”
The Biden administration has been interacting with the Sharif
government, including meeting foreign minister Bilawal Bhutto Zardari
(something Khan did not get). But analysts say that given its current
preoccupation with Ukraine conflict and the confrontation China in the
Asian region could only mean imposing harsher terms, both political and
monetary, in desperate loan-seekers like Pakistan and Sri Lanka.
