OPINION
Ammar H. Khan
The case against sovereign default
through Eurobonds, Sukuks, and Commercial loans. Multilateral institutions have rarely (if ever) called on a default, they negotiate with the borrowing country, no matter how stubborn, and eventually work out a restructuring plan. Similar to what happens in our case with the International Monetary Fund (IMF) on an average of every three years in the last half century. roundhog Day is now a preferred reference point for Debt due to other sovereign nations is more an extension of the the economic cycle in Pakistan, with each crisis largely relationship that exists between the sovereigns. It can either resembling the previous crisis, and a government that be rolled over, or repaid, depending on the stage of camaraderie refuses to learn from its mistakes. Another facet of that exists at that point in time. this Groundhog Day is the noise regarding sovereign If history is considered a guide, a sovereign nation can default that starts emerging as soon as we get close to get its debt repaid through a number of violent and non-violent the peak of a balance of payments crisis. Despite all such noise, Pakistan actions, here is to hoping none of that happens and we can has never been in default on its sovereign debt, except for a technical maintain camaraderie with various nations, who keep on rolling default that occurred in the late 90s due to sanctions that were imposed over our debt. This time is slightly different though – none of on the country following nuclear tests. the friendly sovereign nations are willing to extend any fresh A sovereign default occurs when a sovereign nation is not able to debt, or rollover, till we get the IMF program in place, which pay back its creditors, whether the interest or principal amount as per means till we agree to ensure some kind of fiscal and monetary its commitment. Pakistan has been an active borrower from the capital discipline, for a change. markets, but relative to total external debt, debt from global investors Finally, it is the private investors subscribing to the or commercial loans is about17 percent of total external debt. It is country’s debt who may call on a default in case of an interest important to understand the composition of Pakistan’s debt position or principal payment is not made. These private investors here. Roughly 63 percent of debt is PKR based, which means it is doneed to be the first ones to be paid, and it is estimated that the mestic debt, from the population and institutions of the country, largely country needs to pay US$ 3.1 billion to these investors during through banks, who utilize individual and institutional deposits alike the current year. A sovereign with a GDP of more than US$ 380 to invest in government debt. The sovereign can’t really default on this, billion, which has posted growth rates to the north of 5 percent as it can theoretically print more currency, and repay earlier PKR based during the last two years isn’t really going to default on an creditors. Although it may not default, but if it makes a habit out of this amount less than 1 percent of its GDP, or just about equivalent (which it has), then the logical consequence is inflation, which means to a month of remittances. This is more of a liquidity issue, higher prices for everyone. Printing money to solve problems isn’t really rather than a credit issue. Rapid rise in commodity prices after the optimal solution here. the pandemic, as well as geopolitical volatility has put budgets 37 percent of our total debt is in FCY (mostly US$). Further of countries around the world under strain, particularly of breaking down external debt, 57 percent of external debt is due to commodity importers. multilateral institutions, 24 percent is due to other sovereign nations Lack of decision making on the sovereign front, and ab(mostly friendly), while another 17 percent is due to private investors solute chaos in terms of certainty is a bigger problem here. The recent removal of fuel subsidies after more than three months of a fiscal disaster has signaled to the market, and to the lenders that decisions are finally being taken, which will eventually push inflation to the north of 20 percent for a few months, but would stave away a fear of default, and evenThe writer is an tually create an environment of macroeconomic stability – till the next time someone goes ballistic with an independent expansionary monetary and fiscal policy. macroeconomist and Pakistan has had much severe crises over the last three decades, the current crisis pales in comparison energy analyst. to many of those. A resolution of the decision-making crisis and a much-needed consensus among all political and non-political actors would stave away any risk of sovereign default. If the country continues to inch towards a default this time around, it would solely be a consequence of the current political crisis, in addition to consistently bad policy making during the last fifty years.
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COMMENT
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