As Prime Minister Shehbaz Sharif contacted IMF Managing Director Kristalina Georgieva to revive the derailed $6.5 billion bailout package reportedly in a last-ditch effort to avoid default, the IMF urged Pakistan to follow the Constitution in order to resolve its political disputes.…. “We take note of the recent political developments, and while we do not comment on domestic politics, we do hope that a peaceful way forward is found in line with the Constitution and rule of law.”
The announcement followed a continuous crackdown on PTI leaders and workers, kidnappings, the violation of the 90-day constitutional deadline for holding elections in the two provinces, and the prosecution of civilians in military courts under the Army Act.
Usually, the IMF stays out of political discussions, but by doing so, and the finance ministry’s recent suggestion of ending the current IMF program, will mean a default amid the already high risk of default, as the country grapples with a severe economic crisis, a balance of payments problem, a dwindling foreign exchange reserves and a political turmoil. A default would have disastrous consequences for Pakistan’s economy and society, as it would trigger a liquidity crunch, a currency collapse, a hyperinflation and a social unrest.
In the event of a default, Pakistan would be unable to pay the local and international creditors who have lent the country money throughout the years. According to the State Bank of Pakistan, Pakistan’s total public debt as of March 2023 was Rs44.5 trillion, or 107.2% of GDP. Out of this, Rs17.8 trillion, or 42.9% of GDP, was owed to different bilateral, multilateral, and commercial lenders as foreign debt. Additionally, Pakistan has an external debt repayment obligation of $17 billion this year, which is greater than its $4.09 billion in current foreign exchange reserves.
Pakistan would be denied access to global financial markets and organizations including the International Monetary Fund (IMF), the World Bank, and the Asian Development Bank if it defaulted. Pakistan has been receiving crucial assistance from these sources to help pay its imports and development initiatives. Without them, Pakistan would have a serious lack of foreign currency, which is required to pay for imports of basic goods including food, medicine, fuel, and raw materials.
The Pakistani rupee, which has already lost more than 40% of its value versus the US dollar since 2019, would experience a sharp devaluation as a result of a default. A weaker currency would increase the cost of imports and reduce the competitiveness of exports, exacerbating the trade imbalance and inflation. A default would also reduce consumer and investor confidence, which would result in capital flight and weaker economic growth.
A default would also have significant social and political repercussions for Pakistan, which already has governance and security concerns. As a result of having to reduce spending on social services and development initiatives, a default would result in a rise in poverty, unemployment, and inequality. A default would also fuel unrest and frustration among the populace, which would erode the legitimacy and stability of the government and possibly cause the entire system to collapse.
