A disaster in the making?

Pakistan’s economy is racing towards a potentially disastrous default. Our rupee is in a free fall. Pakistan Stock Exchange has lost over Rs500 billion. On July 19, Fitch Ratings, one of the big three credit rating agencies, revised Pakistan’s outlook from ‘stable’ to ‘negative’. On July 20, the yield on Pakistan Eurobond maturing on April 15, 2024 skyrocketed to over 50 percent-global investors telling us that your country is heading towards a sovereign default.

According to Fitch, ‘political risks’ are extremely high and reserves are declining. Imagine, the economic trajectory is towards a sovereign default and our elite are all busy in a game of thrones. Who will change the trajectory?

A ‘currency crisis’ occurs when a “nation is unable to pay for essential imports or service its external debt repayment.” That is exactly where we are right now-not being able to pay for oil imports, food imports and medicines.

We are in the midst of a ‘currency crisis’ never seen before. The entire banking system is now having great difficulty in raising a paltry $100 million for maturing oil payments. The rupee has fallen from Rs210 to-a-dollar to Rs226 to-a-dollar in less than a week.

The pharmaceutical industry is unable to import active pharmaceutical ingredients (API)-that would mean shortage of life saving drugs.

For the past several days running the interbank market has been in a state of perpetual panic.

Politics or economics? The only thing that matters to 220 million is economics. The only thing that matters to our decision makers is politics. If we are to turn the current trajectory to default around economics would have to take over politics. Will that happen?

According to the State Bank of Pakistan (SBP), predetermined short-term net drains on foreign currency assets stand at a tall $18 billion. Add another $18 billion for the current account deficit. That’s gross financial need of $36 billion over the next 12 months. Gross financial mismanagement over the past several decades plus political chaos produced Sri Lanka. Sounds familiar? Pakistan’s external debts have doubled just over the past six years-that’s gross financial mismanagement.

On top of that, the world is now telling us that political risks in Pakistan are just too high for their appetite. How are we then going to refinance our $135 billion external debt?

I do not think that the IMF wants us to default. I do not think that the World Bank wants us to default. I do not think the world around us wants us to default-we are too big and volatile. But our own politics is pushing Pakistan towards a potentially disastrous default.