Prepare for default Uzair Younus

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