What Does it Mean to Go Default?

Economy of PAkistan and Default

#pakistaneconomy #economiccrisis #imfbailout #imf #imfpakistan


I use social media quite a lot. I have joined several groups, and follow quite many people. The increasing dollar price, and decreasing foreign reserves, has sent people into a frenzy. Vakeel online, a social media community where people can seek pro-bono legal advice is being bombarded with questions about their money, and whether the country is going to default. Against the backdrop of the events unfolding in Sri Lanka before the entire world, many are bewildered about their future, and their life long savings.

The State Bank of Pakistan has been forthcoming in mitigating the impact of political and economic turmoil in the country. Still, I believe it is essential for us to understand what default is? According to the aid dependency theory, the developing countries are constantly dependent on their developed counterparts for growth. They rely on expensive imports, but their own exports (in the form of raw material) are not worth as much. This imbalanced relationship keeps the developing states in debt and need for loans. Pakistan’s case is no different. It depends on funds from external sources to survive and grow. The need for external support rises from Pakistan’s account deficits which is a result of rampant corruption, and the war on terror, etc.

When such a country fails to return the loans as per schedule the government is then said to have defaulted. So why doesn’t the government print more money to pay off its debts? Well, for starters, international dealings are done in petro dollars. So, any loan or fund Pakistan takes is going to be in international currency. Secondly, if the country did take money in local currency, excessive printing of the money will lead to hyperinflation. Therefore, a state’s ability to service external loans is the benchmark of its economic health. As Pakistan’s biggest predicament right now is depleting foreign exchange reserves, people are panicking about going into default.

But we need to understand that defaults is not an uncommon phenomenon. Since 1960, 147 countries have defaulted on their obligations. It means, their local currency gets devalued, economic growth becomes slower, and they  lose credibility on international platforms. Lack of credibility entails they were no longer trusted to be given money by other countries. After a state declares it has defaulted, in most cases, the outstanding debt is restructured, or reduced, but with strict negotiations with international leaders.

Sri Lanka’s default was blamed on poor economic decisions and their political turmoil in the country. It was stated that the Sri Lankan leaders burned through the country’s Forex. Greece’s case is similar. The country started out by rejecting bailout terms. After the country was marred with a liquidity crisis, it defaulted in 2015.

Pakistan’s economic crisis is a result of several elements: the Russia-Ukraine war, the political turmoil and the stringent IMF bailout plan. Pakistan’s public debt is 71 percent of its GDP. Its external debt lies at 36 pc of its GDP. At this point, the policy makers need to make sure they remain in the IMF program and try securing loans from friendly countries. But this is not it. The political parties need to put their differences aside which has been the driving factor of political chaos in Pakistan. Also, the political parties need to look above their agenda, and focus on navigating through the economic crisis.


 By Amna Sheikh




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