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Asia | A fine balance

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Pakistan may be able to avoid a

full-blown economic crisis
But only if everything goes right

Jul 28th 2022 Share

O n the list of unfortunate economies that markets think might ADVERTISEMENT

soon follow Sri Lanka into debt default and economic crisis,
Pakistan sits near the top. It relies heavily on imported food and
energy. As commodity prices have soared, its current-account balance
has widened and hard currency has drained away. In the past year,
Pakistan’s foreign-exchange reserves have shrunk by more than half,
to just over $9bn, about six weeks’ worth of imports. Its currency, the
rupee, has lost 24% of its value against the dollar in 2022. Many
reckon that a crisis is inevitable.

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Not Murtaza Syed. A former employee of the International Monetary

Fund (imf) now serving as acting head of Pakistan’s central bank, Mr
Syed believes the country is well equipped to survive its current
troubles. It is thanks only to lazy markets’ unwillingness to take a
nuanced view of individual countries’ circumstances that Pakistan
nds itself lumped in with other, more endangered economies.

Mr Syed has something of a point. At 74% of gdp, Pakistan’s public-

debt load is high for a poor country, but below the level of many other
vulnerable economies. Importantly, it owes much less to foreigners,
and does not rely very heavily on bond markets. Pakistan’s funding
problems mostly stem from bad timing; it owes a lot to external
creditors over the next year, at a time when global nancial conditions
are deteriorating and the cost of imports is spiking. If it can survive
this pinch point, Mr Syed reckons, things will look up.

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Hopes for survival received a big boost on July 13th, when the
government concluded an agreement with the imf to revive a pre-
existing bail-out arrangement, clearing the way for about $1.2bn to
ow in. With that money, Pakistan just about has the nancing to
meet an estimated $35bn in external obligations over the next year.
Crucially, the imf’s renewed involvement should dissuade big
creditors (including China) from demanding immediate repayment;
rolling over those debts would meet nearly a third of Pakistan’s
funding needs. The agreement might also convince markets that they
have underestimated Pakistan’s nancial health.

The problem with this plan is that it leaves little margin for error.
Pakistan’s current-account de cit, which mostly re ects that more is
being spent on imports than foreigners are spending on Pakistan’s
exports, is responsible for a huge share (about a third) of its projected
nancing needs over the coming year. If in the coming months that
de cit turns out to be larger than anticipated then the sums no longer
add up. Weak in ows of capital, because of reduced investment or
remittances, could also upset the delicate balance. Maintaining
market con dence will be crucial. imf reports on the economy may
well help in this regard, particularly if the new government shows that
it is making progress towards its ambitious goals for trimming its
budget de cit, which last year stood at 6% of gdp. But establishing
that credibility will take time.

And time may not be on Pakistan’s side. As the troubles of the

emerging world grow, markets are showing signs of becoming less
discriminating, not more. This pervading gloom may help explain
why Mr Syed has gone on a public-relations o ensive. Yet in these
conditions, markets do not seem especially inclined to listen. 7

This article appeared in the Asia section of the print edition under the headline "A fine balance"

Asia
July 30th 2022

→ What it will take to fix Sri Lanka’s economy

→ Pakistan may be able to avoid a full-blown economic crisis

→ Myanmar’s brutal junta has brought back the death penalty

→ Australia and China are on speaking terms again

→ India’s Hindu-nationalist ruling party preaches social inclusion

From the July 30th 2022

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