Bankruptcy looming? Clock ticking on Pakistan to serve massive debt and avert major financial crisis

Pakistan Economic crisis: That Pakistan’s economy is in doldrums is well-known, but the country may fall into abyss in the next 48 hours if Islamabad defaults on its debt payment of $500 million — a majority of which will go to a commercial bank in China, said a report in The Express Tribune. Pakistan’s external debt has increased to $126 billion by the end of 2021. Of this, $500 million has to be serviced in the next 48 hours to China and failure to do so could set off a disastrous chain of events for the $1.512 trillion Pakistani economy. 

With the memories of Sri Lanka still fresh in minds, economists fear that the consequence of sovereign debt default may lead to further complications. When a country fails to repay loans taken from other countries, it gets into a situation called sovereign debt default.  

When a country defaults, then some of the major consequences it has to face include further borrowing at higher interest rates (which eventually transcends to the domestic market), foreign investors refuse to invest and retreat, and future loans get difficult to manage.

Miftah Ismail, a former finance minister, mentioned in one of his columns that the country has no resources to repay its lenders and will just have to try to borrow from one creditor to pay off another. Now, if the country defaults on its external debt, then it will become difficult for the country to get loans in the future from other countries. 

Economists pointed out that one of the major reasons that led to such an economic crisis in Pakistan is the country’s inability to build on any domestic assets.  

As mentioned in some of the research papers on Pakistan economy, the country’s economic crisis is deep-rooted as it has taken loans repeatedly to repay other debts. Thus, the economy has spiralled in a vicious circle of debt and part-payment, and the crisis has loomed for some time.

With the debt crisis spiralling, the economic pressure will now transcend to the masses at the grassroot level too. The government has now resorted to limiting imports and shutting down malls and wedding halls early, small measures that fail to adequately address the problem.

The country has also failed to meet some of the basic demands of its citizens. A large chunk of Pakistan’s economy survives on imports, and with the economic crisis worsening, several imports restriction have been imposed on the country. 

So, economists fear that eventually there will be a shortage of food items and other necessary items among the masses. Alongside, foreign portfolio investors try to sell off their local assets in a defaulting country and this often leads to an unemployment crisis.