Experts Say Nuclear Power May be the Bargaining Chip Out of Crisis

Is Pakistan going the Sri Lankan way? Broad macroeconomic indicators for both countries point to similarities in the economic prospects of the two countries in the subcontinent.

Entangled in a political crisis, Sri Lanka is also facing a massive external debt crisis. It took out loans to accelerate its infrastructure and energy sectors, but failed to get the return on investment. According to data from the Central Bank of Sri Lanka, its foreign debt and liabilities of $51 billion will have to pay about $4.5 billion annually through 2025 in debt service (principal + interest) from its foreign exchange reserve.

The island nation is also highly import dependent, with about 40% difference between import and export figures. It basically means that the country needs enough extra foreign exchange reserves to guarantee the supply of essential items from abroad.

With increasing debt service each year, coupled with a decline in the number of major earners from foreign exchange, tourism and remittances, Sri Lanka has less than $2 billion in its foreign exchange reserve. In May, the country had only $50 million in usable foreign exchange reserve, which wasn’t even enough to manage a day’s imports. The rapid economic downturn caused Sri Lanka to default on external debt in May.

Pakistan is facing a similar crisis. The country has a huge foreign debt of about 130 billion dollars. In FY21, the country paid $13.424 billion in debt service, according to figures from the State Bank of Pakistan (SBP). For the three fiscal quarters of 2022, the amount has already surpassed $10.885 billion and is expected to exceed $14 billion.

Like Sri Lanka, Pakistan is also an import-dependent economy, but to make matters worse, the export-import gap is huge and the situation becomes even more precarious when there is a looming crisis on the foreign exchange reserve front. The country’s forex reserve has been reduced to just about $9 billion, enough for six to seven weeks of imports.

According to figures from the State Bank of Pakistan, in fiscal year 2021, the country’s exports were worth $25.639 billion, while imports were much higher at $54.273 billion, a huge gap of nearly $30 billion. For fiscal year 2022, it was even higher at $40 billion dollars, with imports at $72.048 billion and exports at $32.450 billion. In June 2022, the country’s imports were worth $7.038 billion, against an export figure of $3.118 billion.

The next quarter will be crucial for the country’s economic calculations, especially after the decision to lift the ban on non-essential and luxury items amid pressure from a political elite and the importer lobby. Import figures may rise, putting pressure on dwindling foreign exchange reserves.

The only solution to this problem is taking out even more loans and making efforts to restructure existing debt service options.

Pushan Dutt, professor of economics and political science at INSEAD, Singapore thinks that while Pakistan’s current economic crisis is really in a dire state, the country could avoid Sri Lanka’s fate, thanks to geopolitical reasons, the rivalry between India and China and Pakistan. – China connection.

“Although debt levels are the same as Sri Lanka’s in absolute terms, Pakistan’s economy is larger, so the debt-to-GDP ratio is smaller. At the same time, the country borrows a lot of foreign currency and we have seen examples of capital flight before. Now much of the debt is in the hands of China, so it could get debt relief for geopolitical reasons,” he said.

Pakistan’s GDP for 2021, according to World Bank data, is $339.4 billion in constant 2015 US$, nearly four times higher than Sri Lanka’s GDP of $92.1 billion. Pakistan’s debt-to-GDP ratio is still below 100%. It was 84% ​​in 2021, the corresponding data from Trading Economics says, while according to IMF analysis, Sri Lanka’s debt-to-GDP ratio in 2021 was 119%.

Support Islamic countries and China

Pakistan can also get support from other Islamic countries, says Jawad Nayyar, an economist, industrialist and techpreneur in Pakistan, while stressing that the country will not follow the path of Sri Lanka. “Pakistan has certain geopolitical advantages that few others enjoy. These include cordial relations with most of the MENA region, North Africa and the economies of Asia and the Far East.”

Pakistan is the founding member of the Organization of Islamic Cooperation. The OIC has 57 member countries across four continents. Pakistan, which is the second largest state in the organization and in fact the only Muslim nation with nuclear power, can find support from within.

On May 1, Saudi Arabia agreed to save Pakistan with $8 billion in financial aid. The oil facility (oil on deferred payment) from Saudi Arabia was doubled to $2.4 billion. Existing Saudi deposits worth $3 billion were pushed forward to June 2023 and Pakistan is also expected to receive additional deposits of more than $2 billion.

On June 22, Pakistan signed a loan agreement with a Chinese consortium of banks for $2.3 billion. In addition, Beijing has so far shifted $7 billion in debt to help Pakistan cope with its economic crisis.

Pakistan also expects to receive $1.2 billion from the IMF from its bailout package in August. Pakistan Army Chief General Qamar Javed Bajwa has even asked the US to put pressure on the IMF for early loan disbursements, according to a report by Nikkei Asia. The country also expects the IMF to release more funding with claims that it has met the conditions the IMF has set for eligibility for further bailout aid.

While things look bad for Pakistan, it won’t be as dire as Sri Lanka, where a standard currency crisis has turned into political turmoil. Pakistan has a floating exchange rate, so a sharp correction will not take place. But like Sri Lanka, it has a large trade deficit that gets worse as fuel prices rise and dollar borrowing has been done. Inflation is skyrocketing, so general fundamentals look bad.

Another Pakistani, now based in America, thinks otherwise. dr. Fida Mohammad, a sociology professor at the State University of New York, says Pakistan is in a debt trap and Pakistan’s currency is losing value daily. According to him, Pakistan is more likely to default and, if things develop in the same way, go bankrupt.

What has led Pakistan to this?

Dr. Fida Mohammad’s response highlights the global view of Pakistan as an army-governed state with deep corruption and much of the economic damage is being caused by itself. “Yes, the whole country is destabilized. Military behind the scenes control everything, including the judiciary. The judiciary legitimizes corruption of the deep state (military establishment). Socio-political chaos gives more political clout to the military, and they are the beneficiaries of anarchy.”

A good example of this is the move to lift the ban on imports of non-essential and luxury items, even though the country is short of foreign currency. The rush to create newer economic opportunities through loans when the country imports more than twice its exports also becomes a burden when its total reserve data does not exceed $20 billion in current US$ terms according to the data set from the United States. World Bank.

Pakistan’s external debt has doubled in the past decade. The groundbreaking project, China Pakistan Economic Corridor (CPEC), a $62 billion infrastructure and energy roadmap, looks good on the data front, but raises questions as we see it rebuild on Chinese loans.

Corruption is also a deep bottleneck and it has not even left the CPEC projects, according to a report by a panel put together by the Pakistani government. Pakistan reached 100th place on Transparency International’s Corruption Perception Index in 2004 and has shown a steady decline since then. It was ranked 140th in the list of 180 countries in 2021. Higher the absolute number means a more corrupt state.

Nuclear power the only saving grace?

Pakistan is a country that is capable of using nuclear energy and can also serve as a protection for the country, says Jawad Nayyar. “Pakistan is a nuclear power and the world cannot afford a bankrupt Pakistan just because a few hundred million dollars in debt cannot be refinanced.”

Richard Gardner, CEO of Modulus, a US-based high-performance Fin-Tech solutions and AI company, and a well-known financial analyst worldwide, says nuclear power can finally come to save Pakistan from becoming the next economic standard nation in Asia. “While Pakistan is most certainly in a dangerous position, it has a major advantage over Sri Lanka. The advantage, of course, is that it is a nuclear power, and until proven otherwise, I think we should assume that the IMF and other international entities will make significant efforts to ensure that the country does not default on its debt.”

Pakistan’s former Prime Minister Imran Khan admitted in 2019 that his country still had about 30,000 to 40,000 terrorists and 40 terrorist groups within its borders and that no country would want to have a nuclear-armed terrorist group in Pakistan in the future. The issue of nuclear weapons security becomes paramount in a politically destabilized Pakistan that continues to default on its economic debt.

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