Pakistan Default Risk Grows Day By Day

Political Uncertainty & Economic Instability Pushes Pakistan Into Dark Ages
Pakistan flag [Representational Image]
Pakistan flag [Representational Image] File: Pixabay

Pakistan is edging closer to a default as political unrest sparked by the recent  arrest of former prime minister Imran Khan and violence in the country — on other hand four months delay in International Monetary Fund bailout.

Pakistan’s default risk has risen considerably amid lack of breakthrough with the IMF.

Pakistan’s 100 largest businesses have opposed the continuation of the super tax and voiced their concerns about the imposition of up to 7.5% income tax on their retained profits. They issued a stark warning to the government about the increasing default risks and its impact on the business environment.

Ehsan Malik, CEO of the Pakistan Business Council (PBC), representing the country’s 100 largest manufacturers, stated that there is a significant default risk, and the government should not expect new investments.

Pakistan’s rupee, after plunging to Rs308 per dollar, in the open market, has become the weakest currency in the South Asia.

The Pakistani rupee has reached the weakest level in South Asia as the cheapest currency, Sri Lankan beats the Pakistani rupee. One US dollar 304 Sri Lankan rupees, and 308 Pakistani rupees.

Warnings of a massive drop in the rupee are flaring up, with some analysts forecasting another 20% decline is possible. Economists believe that the rupee will likely fall further if uncertainty and instability continue to clash and if the International Monetary Fund (IMF) chooses not to provide loans. The rupee may slump to as low as 350 per dollar in June if Pakistan fails to secure the loan.

Pakistan’s foreign exchange reserves, which are currently at a dangerously low level of $4.3 billion, have been steadily declining while a disproportionately large quantity of foreign currency is needed to cover import costs and pay off foreign debt.

By the end of June 2023, Pakistan must repay $3.7 billion in foreign debt. Additionally, it requires an additional $3.7 billion each month to guarantee the smooth import of necessities.

According to source in State Bank of Pakistan, that the more than 20000 letter of credits are pending for clearance, which is huge challenge but due to shortage of dollars, the SBP is not able to clear the import bills.

The source also reveals that Chinese and Malaysian firms are now demanding full advance payments from Pakistani traders, as they are not trusting more Pakistan’s economic system.

What if Pakistan defaults?

Here are some highlights possible outcomes of default…

  • Loss of Market Access (International Banking, Bonds and Trading,...)

  • Trade Restrictions for Pakistan

  • Pakistan to Witness Higher to Hyper-Inflation

  • Massive Contraction in GDP

  • Steep Devaluation of the Currency

  • Pakistan may face Lawsuits, Sanctions, and Ratings Downgrades 

  • Worst Implications for the Domestic Banking Sector and Possible all Commercial Banks Default

DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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