OPINION
Uzair Younus
Prepare for default
After having become used to and made complacent by friendly benefactors, Pakistan’s ruling classes are finding out that the world is more preoccupied with other issues. In addition, friendly countries like Saudi Arabia are wondering what they get in return from Pakistan’s elites for bailing them out time and time again. After all, decades of largesse transrises evolve at an exponential pace. Much like a lated into a humiliating public rejection of the Saudi request to support herd of animals spooked by the scent of a nearthem in their war in Yemen – it was the way in which this request was by predator, once markets smell a crisis, panic denied, less so the denial itself, that angered the House of Saud. begins to set in. The whiplash of the pandemic has One would think that at a time when Pakistan is seeking smacked Pakistan’s economy in the face, unleashing enhanced financial support from Saudi Arabia that its policymakers inflation and immense suffering on millions of ordiwould be measured in how they deal with Tehran. But the last few nary citizens. The ruling classes are meanwhile engaged in shenanweeks have seen increasing engagement with the Iranian regime, igans to determine who gets to rule over the domain. These elites whose increasing belligerence is a source of anxiety for Saudi Arabia must realize that by the time they are done, there may not be much and the United Arab Emirates. Surely such antics are not going to left to rule over. Pakistan is staring at a sovereign default, which is make their absolute monarchs excited about immediately aiding the an increasingly likely scenario. Islamic Republic of Pakistan. Early last week, a shockwave ripped through Pakistan’s On the Chinese side, things have not progressed either, meaning economy as the rupee slid to around 225 to the dollar. Reports and that beyond the rollover provided a few days ago, there is not much conversations indicated that by the time markets closed, the rate else in the pipeline. Mounting security concerns are being reported in being quoted for transfers was around 240 rupees. Over the entirety the public domain; there is about $1.5 billion in payables to Chinese of the week signals from market participants indicated the followpower sector investors; and private sector participants allege that Paing: there was a shortage of dollars in the open market, banks were kistan has been unable to provide the facilities necessary to operationnot opening any new letters of credit except for essential goods and alize business investments in special economic zones. raw materials, and concerns about making payments for energy Add to this the tightening financial conditions in the global marimported over the last few weeks were growing. kets and you have a recipe for disaster. The international bond market In short, liquidity has dried up and there is yet no indication is pricing in default, and bond markets are usually very accurate in that a major new injection of dollars is coming. We have for weeks pricing in sovereign risk. been hearing that bilateral flows from friendly countries are around Does this mean that Pakistan is staring into the abyss and lookthe corner, but these have not yet materialized while this article is ing at imminent default? This is still an unlikely scenario if you view being written. Even these injections, while will be in the form of things from a rational and logical perspective. But add a bit of chaos bilateral deposits and credit facilities, will only avert the immediate into your analysis and default does not look like a far-fetched idea. crisis of confidence. Paired with the expected flow of dollars from Start with politics – there is no signal that the ongoing political the IMF, which stands at almost $1.2 billion, these flows may bring saga is ending anytime soon. After intervening with the system for years, Pakistan’s economy from the brink, but only for a short time. the interventionists have wiped their hands clean of the problem – at Economics and finance are rarely only about economics and least this is what we are being told. This has led to all sorts of political finance, especially when it comes to Pakistan’s political economy. volatility in the system at a time when markets need certainty and clarity. This volatility has spooked domestic elites, who are bracing for the worst, which in and of itself is a self-fulfilling prophecy. As these elites prepare for the worst and actively find ways to secure their wealth by dollarizing, the markets tighten that much more, which in turn fuels the next round of dollarization. Foreign creditors have noThe writer is Director of ticed this, which is why they have held back for the time being. the Pakistan Initiative Financial actors, domestic and foreign, are waiting for the political chaos to settle down, which is at the Atlantic Council, a not happening. In this timeline, every single day matters, as chaos today exponentially increases chaos toWashington D.C.-based morrow. There is no end in sight for this uncertainty at this point given that there is no political incentive think tank, and host of the to end the cycle. podcast Pakistonomy. He Which brings us to the worst-case scenario: default. Many will insist that this is an extremely tweets @uzairyounus. unlikely scenario. A few days ago, I would have agreed. I am not so sure anymore. n
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