Default Threat Reaches Pakistan as Political Crisis Deepens

Default Threat Reaches Pakistan as Political Crisis Deepens

Over the last two weeks, Pakistan’s default risk has risen dramatically. Is anyone paying attention? Predetermined short-term net drains on foreign currency holdings equal to $4.889 billion, according to the State Bank of Pakistan (SBP) (more than 1 and up to 3 months). Pakistan owes $4.889 billion before the end of June 2022. Is there anyone concerned? Furthermore, our current account deficit is forecast to reach $3 billion by the end of June. Does anyone give a damn?

Why has the chance of Pakistan defaulting risen so quickly? Liquid foreign exchange reserves with SBP were $20 billion in August 2021. Liquid foreign exchange reserves will drop to $10.1 billion in the next nine months.

SBP has lost about $6 billion in liquid foreign exchange reserves in the last eight weeks. SBP’s reserves are clearly insufficient to repay debt commitments and meet the current account deficit. Pakistan will, without a doubt, be unable to “meet all of its present and future payment obligations without exceptional financial help or default.”

Pakistan’s bad politics have resulted in even worse economics. When a country is unable to pay its debts, it is said to be in default. Sri Lanka has already defaulted due to bad politics. Sri Lanka slipped into default for the first time in its history on May 18 after failing to pay $78 million in debt interest payments. A sovereign default has three consequences: it harms a country’s reputation with international investors; it makes borrowing prohibitively expensive; and it undermines trust in the country’s currency.

To be sure, Pakistan, which has a budget deficit of around Rs5 trillion and a current account deficit of almost $20 billion, must maintain its access to international credit markets at all costs. Rising unemployment, higher interest rates, bank runs, currency depreciation, and a stock market meltdown are all outcomes of a government default.

As the country approaches default, each power centre in Pakistan is playing their own game. Hulaku Khan, commanding a Mongol army, invaded Baghdad, the Abbasid Caliphate’s capital, in 1258. The Abbasid Caliph might have summoned 50,000 warriors to defend Baghdad, but he and his opponents were too preoccupied with discussing whether a crow was halal or haram. Baghdad was largely destroyed, and “800,000 of its residents perished.”

Over the last two weeks, Pakistan’s default risk has risen dramatically. Is anyone paying attention? Predetermined short-term net drains on foreign currency holdings equal to $4.889 billion, according to the State Bank of Pakistan (SBP) (more than 1 and up to 3 months). Pakistan owes $4.889 billion before the end of June 2022. Is there anyone concerned? Furthermore, our current account deficit is forecast to reach $3 billion by the end of June. Does anyone give a damn?

Why has the chance of Pakistan defaulting risen so quickly? Liquid foreign exchange reserves with SBP were $20 billion in August 2021. Liquid foreign exchange reserves will drop to $10.1 billion in the next nine months.

SBP has lost about $6 billion in liquid foreign exchange reserves in the last eight weeks. SBP’s reserves are clearly insufficient to repay debt commitments and meet the current account deficit. Pakistan will, without a doubt, be unable to “meet all of its present and future payment obligations without exceptional financial help or default.”

Pakistan’s bad politics have resulted in even worse economics. When a country is unable to pay its debts, it is said to be in default. Sri Lanka has already defaulted due to bad politics. Sri Lanka slipped into default for the first time in its history on May 18 after failing to pay $78 million in debt interest payments. A sovereign default has three consequences: it harms a country’s reputation with international investors; it makes borrowing prohibitively expensive; and it undermines trust in the country’s currency.

To be sure, Pakistan, which has a budget deficit of around Rs5 trillion and a current account deficit of almost $20 billion, must maintain its access to international credit markets at all costs. Rising unemployment, higher interest rates, bank runs, currency depreciation, and a stock market meltdown are all outcomes of a government default.

As the country approaches default, each power centre in Pakistan is playing their own game. Hulaku Khan, commanding a Mongol army, invaded Baghdad, the Abbasid Caliphate’s capital, in 1258. The Abbasid Caliph might have summoned 50,000 warriors to defend Baghdad, but he and his opponents were too preoccupied with discussing whether a crow was halal or haram. Baghdad was largely destroyed, and “800,000 of its residents perished.”

Over the last two weeks, Pakistan’s default risk has risen dramatically. Is anyone paying attention? Predetermined short-term net drains on foreign currency holdings equal to $4.889 billion, according to the State Bank of Pakistan (SBP) (more than 1 and up to 3 months). Pakistan owes $4.889 billion before the end of June 2022. Is there anyone concerned? Furthermore, our current account deficit is forecast to reach $3 billion by the end of June. Does anyone give a damn?

Why has the chance of Pakistan defaulting risen so quickly? Liquid foreign exchange reserves with SBP were $20 billion in August 2021. Liquid foreign exchange reserves will drop to $10.1 billion in the next nine months.

SBP has lost about $6 billion in liquid foreign exchange reserves in the last eight weeks. SBP’s reserves are clearly insufficient to repay debt commitments and meet the current account deficit. Pakistan will, without a doubt, be unable to “meet all of its present and future payment obligations without exceptional financial help or default.”

Pakistan’s bad politics have resulted in even worse economics. When a country is unable to pay its debts, it is said to be in default. Sri Lanka has already defaulted due to bad politics. Sri Lanka slipped into default for the first time in its history on May 18 after failing to pay $78 million in debt interest payments. A sovereign default has three consequences: it harms a country’s reputation with international investors; it makes borrowing prohibitively expensive; and it undermines trust in the country’s currency.

To be sure, Pakistan, which has a budget deficit of around Rs5 trillion and a current account deficit of almost $20 billion, must maintain its access to international credit markets at all costs. Rising unemployment, higher interest rates, bank runs, currency depreciation, and a stock market meltdown are all outcomes of a government default.

As the country approaches default, each power centre in Pakistan is playing their own game. Hulaku Khan, commanding a Mongol army, invaded Baghdad, the Abbasid Caliphate’s capital, in 1258. The Abbasid Caliph might have summoned 50,000 warriors to defend Baghdad, but he and his opponents were too preoccupied with discussing whether a crow was halal or haram. Baghdad was largely destroyed, and “800,000 of its residents perished.”

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