Pakistan is facing its worst set of challenges in its modern history. Riven with political incompetence, an economy that is on the brink and devastation wrought by climate change, the country last week suffered a terrorist attack that left 100 dead. A stark set of choices faces Pakistan, and its creditors in the west and in China, none of whom are served by further instability in a nuclear-armed power on a geopolitical faultline.
The country’s political and military elites have presided over decades of dysfunction, corruption and woeful governance. While the main political parties interminably slug it out there is little to differentiate them on policy. Elections this year will probably be exploited as an opportunity for a fresh round of toxic squabbling, rather than substantive efforts to improve Pakistan’s fate. If they travelled outside the bubble of Islamabad they would find people with little faith that the ruling class will do anything effective to alleviate their misery. Politicians need to start putting the people, not their parties, first.
As it is, Pakistan risks following Sri Lanka into default, where food and medicine have been in short supply. But with a population ten times that of Sri Lanka, a nuclear arsenal, a military with a history of meddling, and extremist Islamists who are displaying their bloodthirsty fanaticism once more, default is a situation international creditors and multilateral institutions must help Pakistan avoid.
The figures are stark: the country’s foreign exchange reserves dwindled to just $3.7bn late last month, equivalent to just three weeks’ of imports. That compares to total public debt of $270bn, around 79 per cent of GDP. Just keeping the lights on is seemingly tough: the country has faced blackouts.
On top of this, Pakistan suffered flooding last year that caused $30bn of damage and affected tens of millions of people. International lenders agreed a support package of $9bn last month but there is little clarity as to how and when it will reach the people who need it. That needs to be determined, urgently.
Inflation, the impact of Russia’s war in Ukraine on food and energy prices, and of course, mismanagement, have all played their part to get to this point. An IMF mission is currently in Pakistan to try to unlock a $7bn support package first agreed in 2019. The rupee fell to record lows recently after the authorities, in a bid to meet IMF conditions, abandoned exchange controls that were artificially supporting the currency. But even if another $1bn or so is unfrozen, this is a sticking plaster. Unpalatable as it is, what is needed is magnitudes higher if Pakistan is to avoid default.
But it is not just up to the IMF to provide this. Pakistan’s biggest bilateral creditor is China, which holds about $30bn of its total debt, not including the $1.1bn owed to independent Chinese power producers for electricity purchases. Beijing rejects any suggestion that its lending creates a “debt trap” for emerging markets. In which case, China should have no problem with abiding by a broad principle of parity with other international creditors, agreeing to loan repayments on close to equal terms with multilateral institutions and taking similar haircuts on repayments.
China, the IMF and the Paris Club of creditor nations need to bring Pakistan into debt-restructuring negotiations, and quickly; not present it with a fait accompli struck behind closed doors after drawn-out negotiations, similar terms to which it must try also to strike with commercial creditors. Pakistan’s plight, as Sri Lanka’s and Zambia’s before it, shows the whole rickety architecture of sovereign debt restructuring needs an urgent redesign. It should not have to take another default to make that happen.