Pakistan faces its most difficult set of challenges in modern history. A country plagued by political incompetence and a fragile economy, Pakistan was hit hard last week by a terrorist attack, which left 100 people dead. Pakistan faces a stark choice, as well as its creditors in China and the west. None of these are served by instability in a nuclear-armed country on a geopolitical faultline.
Over the past decades, dysfunction, corruption, and poor governance have been the hallmarks of the country’s military and political elites. The main parties continue to slug it, but there are few differences in their policies. This year’s elections will likely be used as an opportunity to engage in toxic squabbling rather than make substantive improvements to Pakistan’s destiny. They would be met with people who have little faith in the ability of the ruling class to help them. Politicians must start putting people first, not their party.
Pakistan is at risk of following Sri Lanka into default. With a population 10 times greater than Sri Lanka’s and a nuclear arsenal, an army with a history and a military that has been meddling in the affairs of others, and extremist Islamists who display their bloodthirsty fanaticism again, Pakistan is at risk of default. This situation must be avoided by international creditors and multilateral institutions.
These numbers are shocking: The country’s foreign currency reserves fell to $3.7bn last month, which is equivalent to three weeks of imports. This compares to a total public debt of $270bn which is approximately 79% of GDP. It is difficult to keep the lights on, as the country has experienced blackouts.
In addition, flooding in Pakistan last year caused $30bn worth of damage and impacted tens of thousands of people. While international lenders have agreed to a support package worth $9bn last week, there is not much clarity about how and when that will be delivered to those who are most in need. This urgently needs to be resolved.
To get here, inflation, the effects of Russia’s war on Ukraine on food prices and energy prices, as well as mismanagement have all contributed to it. A mission of the IMF is currently visiting Pakistan to attempt to unlock the $7bn support package that was first agreed in 2019. After the IMF agreed to a $7bn support package, the rupee dropped to record levels after the authorities removed exchange controls that were artificially supporting it. Even if $1bn more is frozen, this is still a good deal. It is not easy to swallow, but Pakistan needs magnitudes greater if it wants to avoid default.
It is not only up to the IMF, however, to do this. China is Pakistan’s largest bilateral creditor. It holds approximately $30bn of the country’s total debt. This does not include $1.1bn owed independent Chinese power producers to purchase electricity. Beijing denies that it creates a debt trap for emerging markets through its lending. China would have no problem adhering to a broad principle based on parity with international creditors, agreeing loan repayments on nearly equal terms with multilateral institutions, and making similar repayments haircuts.
China, the IMF, and the Paris Club of creditors nations must bring Pakistan into debt restructuring negotiations quickly. They should not present it behind closed doors with a fait accompli, which would be based on lengthy negotiations. The tangled web of sovereign debt restructuring that Pakistan is facing, like those of Sri Lanka and Zambia, needs to be redesigned. It shouldn’t take another default for that to happen.