Pakistan on verge of bankruptcy

pakistan debt per gdp 2008

pakistani currency trading hands

“The ratings agency Standard and Poor’s has given Pakistan’s sovereign debt a grade of CCC +, which stands only a few notches above the default level. The agency gave warning that Pakistan may be unable to cover about $3 billion in upcoming debt payments.”

This is not the first time, and indeed probably not the last, that Pakistan has/will face financial troubles and potential bankruptcy. In the fall of 2008, Pakistan sought help from the International Monetary Fund to avoid defaulting on billions of dollars in debt. In a statement, the IMF said Pakistan had requested help “to meet the balance of payments difficulties the country is experiencing.”

One of the major reasons for Pakistan’s problems is the ‘war on terror’ which caused a significant outflow of capital and investment (due to political instability). The country was starting to improve economically before this. Indeed, you don’t mobilize 160,000 troops to border regions, have suicide bombers attack your infrastructure, and not think it would have an effect on your economy. The bulk of Pakistan’s economic imbalance (aside from corrupt leaders) came because oil essentially spiked from $40 to $100 plus per barrel. The country is an oil importer and was subsidizing oil and food to prevent people from getting impacted. It couldn’t sustain this.

Pakistan is mostly in this mess because of the following: 1.) an inability to sign a comprehensive peace deal with India, 2.) an inability to agree with the US and its allies on dealing with its northern border, 3.) subsidizing fuel earlier this year, and 4.) engaging is many social programs it could not afford to begin with. The first two lead to enormous military costs. The third was to make the government popular by keeping fuel costs down. The fourth was to look good and help people. Yet if you cannot afford them then the answer is don’t do them.

People say corruption is a big deal but when we see corruption at $100 million and the outstanding budget deficits at $5-10 billion we have to realize that corruption is too small to be the biggest point of concern. It has to be dealt with but solving that problem won’t solve the larger problem.

Mr Zardari told the Wall Street Journal that Pakistan needed a bail out worth $100 billion from the international community. What exactly is the international community? That would be three words: International Monetary Fund whose programmes usually force fiscal restraint which means a painful weaning off of subsides. This has an immediate short term impact of increasing poverty for long term gain. In theory it works, but in reality and from pat history, does not work.

pakistan debt per gdp 2008

Pakistan facing bankruptcy

Pakistan’s foreign exchange reserves are so low that the country can only afford one month of imports and faces possible bankruptcy.

Officially, the central bank holds $8.14 billion (£4.65 billion) of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion – enough to buy about 30 days of imports like oil and food.

Nine months ago, Pakistan had $16 bn in the coffers.

The government is engulfed by crises left behind by Pervez Musharraf, the military ruler who resigned the presidency in August. High oil prices have combined with endemic corruption and mismanagement to inflict huge damage on the economy.

Given the country’s standing as a frontline state in the US-led “war on terrorism”, the economic crisis has profound consequences. Pakistan already faces worsening security as the army clashes with militants in the lawless Tribal Areas on the north-west frontier with Afghanistan.

While Mr Musharraf’s prime minister, Shaukat Aziz, frequently likened Pakistan to a “Tiger economy”, the former government left an economy on the brink of ruin without any durable base.

The Pakistan rupee has lost more than 21 per cent of its value so far this year and inflation now runs at 25 per cent. The rise in world prices has driven up Pakistan’s food and oil bill by a third since 2007. Source: Telegraph

The International Monetary Fund or IMF is not a charity nor does it have or is required to have a social conscious. It is to lend money to nations who cannot afford to borrow any more money as a last ditch resort. When you call the IMF in you are saying, “we’re in it so deep and so bad we need help and a firm hand.” This is no different then going to a loan from a parent and a credit counsellor at the same time.

Yes you will get the money but they will look at your situation and make judgement calls on what you can and cannot spend. In many cases the IMF says here’s the money now let’s restructure your economy so you can repay our loan and your other loans. The IMF website states that it is working to eliminate poverty in developing nations. However one of there stipulations for getting a loan is to cut public spending on services for the people

This is very hypocritical because they also undervalue the countries resources so that the Western world can steal them from the indigineous people. Corporations move in and start substandard, environmentally damaging and unsafe factories and pay the locals a pittance for the work they do. They also force free trade agreements so that the US can dump cheaply made products from other exploited nations in the country so all domestic markets dry up and go away.

How’s that for eliminating poverty in a nation?

So social programs get nailed and are often the first thing to get nailed. That’s the judgement of everyone else involved. If a nation cannot repay its loans and living beyond its means it has to cut back its spending. Yes social programs are wonderful but at some point they are like buying extras in the supermarket. Will people suffer? Yes. The question most people don’t ask is: will the suffering be worse now or will it be worse 10 or 20 years down the road when the debt situation is 5 times worse? We all tend to react to poverty we see like being pricked with a needle. We want the pain to go away now rather than suffer now and be rewarded 10 minutes from now with a cookie.

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