The case against sovereign default

OPINION

Ammar H. Khan

The case against through Eurobonds, Sukuks, and Commercial loans. Multilateral institutions have rarely (if ever) called on a default, they sovereign default 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 Groundhog Day is now a preferred reference point for the economic cycle in Pakistan, with each crisis largely resembling the previous crisis, and a government that refuses to learn from its mistakes. Another facet of this Groundhog Day is the noise regarding sovereign default that starts emerging as soon as we get close to (IMF) on an average of every three years in the last half century. Debt due to other sovereign nations is more an extension of the relationship that exists between the sovereigns. It can either be rolled over, or repaid, depending on the stage of camaraderie that exists at that point in time. If history is considered a guide, a sovereign nation can the peak of a balance of payments crisis. Despite all such noise, Pakistan get its debt repaid through a number of violent and non-violent has never been in default on its sovereign debt, except for a technical actions, here is to hoping none of that happens and we can default that occurred in the late 90s due to sanctions that were imposed maintain camaraderie with various nations, who keep on rolling on the country following nuclear tests. over our debt. This time is slightly different though – none of A sovereign default occurs when a sovereign nation is not able to the friendly sovereign nations are willing to extend any fresh pay back its creditors, whether the interest or principal amount as per debt, or rollover, till we get the IMF program in place, which its commitment. Pakistan has been an active borrower from the capital means till we agree to ensure some kind of fiscal and monetary markets, but relative to total external debt, debt from global investors discipline, for a change. or commercial loans is about17 percent of total external debt. It is Finally, it is the private investors subscribing to the important to understand the composition of Pakistan’s debt position country’s debt who may call on a default in case of an interest here. Roughly 63 percent of debt is PKR based, which means it is do- or principal payment is not made. These private investors mestic debt, from the population and institutions of the country, largely need to be the first ones to be paid, and it is estimated that the through banks, who utilize individual and institutional deposits alike country needs to pay US$ 3.1 billion to these investors during to invest in government debt. The sovereign can’t really default on this, the current year. A sovereign with a GDP of more than US$ 380 as it can theoretically print more currency, and repay earlier PKR based billion, which has posted growth rates to the north of 5 percent creditors. Although it may not default, but if it makes a habit out of this during the last two years isn’t really going to default on an (which it has), then the logical consequence is inflation, which means amount less than 1 percent of its GDP, or just about equivalent higher prices for everyone. Printing money to solve problems isn’t really to a month of remittances. This is more of a liquidity issue, the optimal solution here. rather than a credit issue. Rapid rise in commodity prices after 37 percent of our total debt is in FCY (mostly US$). Further the pandemic, as well as geopolitical volatility has put budgets breaking down external debt, 57 percent of external debt is due to of countries around the world under strain, particularly of multilateral institutions, 24 percent is due to other sovereign nations commodity importers. (mostly friendly), while another 17 percent is due to private investors Lack of decision making on the sovereign front, and absolute 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 The writer is an push inflation to the north of 20 percent for a few months, but would stave away a fear of default, and evenindependent tually create an environment of macroeconomic stability – till the next time someone goes ballistic with an macroeconomist and expansionary monetary and fiscal policy. energy analyst. Pakistan has had much severe crises over the last three decades, the current crisis pales in comparison 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.