The show surrounding the next army chief is expending much too much positive energy for the sake of Pakistan’s economy. It has increased the already significant political risk posed by former Prime Minister Imran Khan after his fall from power in April. Reports of a schism between Finance Minister Senator Ishaq Dar and the IMF about how to handle the ninth review of a large credit facility have harmed the country’s economy’s prospects even further. In light of this, the announcement this week that Pakistan’s five-year credit default swap (CDS) rate had risen to a mind-boggling 92.53 percent was merely the icing on the cake. This is simply a symptom of our economy’s deterioration, which is not a secret. The fact that Pakistan’s economy is on the verge of default is also widely known.
Reports like this, on the other hand, should compel authorities to take immediate action to correct the situation because the arbiters of global finance factor report like these into their investment calculus. Dar and his staff understand that FDI, not DFi, is the key to Pakistan’s future. They understand that, in the end, it is free-wheeling global capital that builds or breaks national economies these days. In fact, attracting this money was one of the main reasons Pakistan devoted so much time and effort in recent years to engage with the IMF and its Financial Action Task Force (FATF). That’s how it should be.
Looking at the big picture, Pakistan is ranked eleventh among emerging markets in terms of default risk. While some may argue that this suggests the situation is not as dire as some reports suggest, there is no room for complacency. Pakistan’s economic management must recognize that it was a default on foreign currency sovereign debt, not multilateral or bilateral debt, that caused political unrest in Sri Lanka a few years ago. Furthermore, the challenges confronting our economy are genuine and significant. In less than a week, we must raise $1 billion from investors for a Eurobond issuance. Our foreign exchange reserves are currently insufficient to cover six weeks of imports. This outflow, which is scheduled for December 5, will thin out FX holdings unless there is another substantial liquidity injection through bilateral debt or development finance, neither of which is on the horizon.
In the short term, recent import cuts have harmed the government’s already meager revenue while dwindling exports and remittances are depleting the country’s hard currency reserves and worsening the current account deficit. All of these are bad omens, especially at a time when a global recession is threatening to squeeze the world and send shockwaves through all national economies. The devastation caused by this monsoon’s devastating floods has taken a tremendous toll on the economy, forcing food and commodity imports and putting pressure on sectors already strapped with rising input costs. Then there’s the massive challenge of rebuilding in the aftermath of this calamity, the likes of which our country has never seen before. The most pressing economic concern, though, is the political risk that looms over our heads. One expects that the government will expedite the long-delayed November appointment process and steer the country toward political stability.
