The financial situation in Pakistan has reached a critical point, with the government struggling to manage the overwhelming task of repaying external debt that amounts to USD 100 billion between 2024 and 2027.
According to a recent report in The Express Tribune, this figure does not even account for the liabilities recorded on the central bank’s balance sheet or the financing requirements for the current account deficit.
This daunting financial burden comes at a time when Pakistan’s foreign exchange reserves sit at a mere USD 9.4 billion, highlighting the stark disparity between the country’s resources and its obligations.
In response, the government has been forced to lean heavily on a strategy of rolling over existing loans, securing deferrals from lenders like Saudi Arabia, China, and the UAE.
Ali Pervaiz Malik, Pakistan’s Minister of State for Finance, explained this approach during a meeting of the National Assembly Standing Committee, stating that while the external debt obligations are significant, they could potentially be managed through loan rollovers or by replacing old debt with new loans.
Malik’s statement, however, underscores a concerning reality—that the country does not have a sustainable long-term plan to repay its debt. The reliance on annual deferrals means that the financial crisis will persist, with the government essentially postponing the problem rather than addressing it head-on.
The numbers are stark: the USD 100 billion that Pakistan owes over the next four years is more than ten times the country’s current foreign reserves. Moreover, the USD 7 billion bailout package from the International Monetary Fund (IMF) that is scheduled to be approved in September 2023 provides only temporary relief, and even that was delayed due to challenges in securing debt rollovers from key creditors.
The IMF has also identified a USD 5 billion financing gap that will remain unresolved even after its support is provided, further complicating the situation. The broader concern is that this debt crisis could spiral out of control, especially in the absence of meaningful reform or a sustainable repayment strategy.
The Reliance on Rollovers and International Support
Pakistan’s debt crisis is compounded by the fact that much of its strategy hinges on securing rollovers and deferments from international lenders.
Saudi Arabia, China, and the UAE are among the key countries from which Pakistan has sought extensions, with rollovers amounting to USD 5 billion, USD 4 billion, and USD 3 billion respectively. Additionally, Pakistan has also sought assistance from Kuwait, albeit on a smaller scale, with USD 700 million in rollovers.
While these rollovers provide short-term relief, they do not address the underlying issue—Pakistan is borrowing to pay off existing debt, and this cycle cannot continue indefinitely.
The lack of a concrete repayment plan has already caused delays in securing a much-needed IMF bailout. Although Pakistan eventually secured assurances from its creditors to roll over the debt for another year, the temporary nature of these rollovers only serves to postpone the inevitable, leaving Pakistan’s financial future uncertain.
The IMF’s decision to provide Pakistan with a 37-month Extended Fund Facility worth USD 7 billion offers some breathing room, but it is not a comprehensive solution. Even with this aid, Pakistan’s external financing requirements are far from being fully met.
Finance Minister Muhammad Aurangzeb has acknowledged that despite the IMF’s new program, Pakistan will still face a USD 5 billion financing gap between 2024 and 2026. The inability to fully cover its financial needs means that Pakistan will likely need to continue seeking rollovers or additional loans in the coming years, perpetuating the cycle of debt.
Moreover, the geopolitical climate adds to the complexity of Pakistan’s financial challenges. The political situation in the Middle East, particularly in countries like Saudi Arabia and the UAE, can directly affect the willingness and ability of these nations to provide further financial support.
Additionally, rising interest rates, fluctuations in oil prices, and global economic instability, including the ongoing conflict in Ukraine, all contribute to Pakistan’s precarious position. Omar Ayub Khan, leader of the opposition in Pakistan’s National Assembly, has warned that these factors could lead to a “perfect storm” of economic pressure on the country, further straining its already fragile financial situation.
Consequences of the Debt Crisis on Pakistan’s Economy
The debt crisis has already begun to take its toll on Pakistan’s economy, with far-reaching consequences for its citizens and businesses. The country’s dependency on external lenders has left it vulnerable to fluctuations in global markets, while the depletion of foreign exchange reserves has led to a significant devaluation of the Pakistani rupee.
This, in turn, has made imports more expensive, further exacerbating inflation and reducing the purchasing power of ordinary Pakistanis. The inflation rate in Pakistan has already soared to record highs, making basic necessities such as food, fuel, and medicine unaffordable for many.
The government’s focus on securing rollovers and new loans has also meant that long-term economic reforms have taken a back seat. Structural issues within the economy, such as tax evasion, corruption, and inefficiencies in key sectors like agriculture and manufacturing, remain unaddressed.
Without significant reform, Pakistan’s ability to generate the revenue needed to repay its debts and reduce its reliance on external borrowing will be severely limited.
Additionally, Pakistan’s precarious financial position has made it more difficult to attract foreign investment. Investors are hesitant to commit to a country with such high levels of debt and economic instability, further hampering growth prospects. This lack of investment has stunted the development of critical infrastructure projects and industries that could provide much-needed employment opportunities and boost the economy.
The debt crisis has also strained Pakistan’s relationships with international financial institutions like the IMF and the World Bank.
While these organizations have provided financial support in the form of loans and aid packages, they have also imposed strict conditions that require Pakistan to implement austerity measures, such as cutting public spending and raising taxes. These measures, while necessary for fiscal discipline, have proven unpopular among the public, leading to widespread protests and political unrest.
The current financial crisis is not just a short-term challenge—it has long-term implications for Pakistan’s economic sovereignty and its ability to make independent policy decisions.
As Pakistan becomes increasingly reliant on external lenders, its ability to negotiate favorable terms or chart its own economic course diminishes. This loss of control over its economic destiny is perhaps one of the most concerning aspects of the debt crisis, as it leaves the country vulnerable to external pressures and influence.
In summary, Pakistan’s looming debt repayments of USD 100 billion over the next four years have placed the country in a precarious financial position. With foreign exchange reserves at an alarmingly low level and no viable long-term repayment plan in place, the government is relying heavily on rollovers from international creditors to stay afloat.
However, this strategy is unsustainable in the long run, and the country’s reliance on external borrowing could lead to a deeper economic crisis if meaningful reforms are not implemented.
The consequences of the debt crisis are already being felt in the form of inflation, devaluation of the currency, and a slowdown in foreign investment. Without a comprehensive plan to address the root causes of the crisis, Pakistan risks being caught in a cycle of debt that will continue to undermine its economic stability and sovereignty.
The path forward for Pakistan requires not just short-term fixes but long-term solutions that involve economic reforms, fiscal discipline, and a reduction in its dependence on external borrowing.
let’s enjoy few years on earth with peace and happiness….✍🏼🙏