We may not default, but this crisis exposes how vulnerable we are

Default occurs when you are unable to pay what is coming due (on debt) after all usual trade and services’ receipts and payments are met.

It is all about inflows versus outflows of money at different points in time. If your outflows are well-met with your inflows at any point in time, and you have a good buffer (reserves) in hand for an unforeseen mismatch, you are set.

Pakistan’s foreign exchange reserves are low, at less than two months of imports, as against global standards of at least 3 to a comfortable 6 months. We also have debt repayments coming due within a year.

In Pakistan's context, inflows have seemingly been planned/arranged with the International Monetary Fund (IMF) and, reportedly, others. But there is more certainty on outflow than on inflows, which turns into a higher risk that turns into greater risk premium and then results into negative market/investor sentiment.

Hence, there has been a negative impact on our financial and forex markets. In addition, there has been increased political uncertainty over how will the economy be handled, and who will handle it (read in the context of different political parties that now head the centre and Punjab).

Now coming to debt repayments that are coming due:

Our total gross financing needs this year are about $34 billion ($24 billion as foreign debt repayment and another $10 billion as estimated current account deficit). Apart from multilateral and bilateral debt repayments on an on-going basis, one significant repayment on our commercial loans (bond repayment) of $1 billion is due in December 22, and not immediate, while total additional financing being arranged is around $4-5 billion over the course of next few months (over and above total gross financing needs).

By December 22, the finance ministry says it will have arranged over $5 billion ($1.2 billion from the IMF and another $3-4 billion from friendly countries including arrangements as cash deposits/rescheduling with oil & gas on deferred payments, sell-off of assets with buyback arrangements), followed by World Bank/Asian Development Bank, and other donors with their long-term project and program funding/debt. This should offset total gross financing needs for a typical year.

Once all these additional inflows are materialised, expected by August-September 2022, the bond payment in December should not be a problem.

In addition, our current account should be much lower in the coming months (from over $2 billion to around or even under $1 billion), given some decline in oil and food prices globally, and excessive ban and delay in imports, high interest rates/growth supression, while depreciation of PKR will neutralise import growth too.

While this may slow down the economy, the supply of dollars should be much more than what it is now.

Having mentioned the above, all these will be temporary respites and adhoc/stop-gap arrangements.

We need structural reforms, stability, policy consistency with priorities defined, planned, and properly executed. Otherwise, we should expect another crisis, which could be a bigger and unmanageable one next time. Pakistan may have the IMF cushion for now, but all this tells you how vulnerable our economy is to external shocks. It doesn’t take much to rattle us.

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