Why Is Pakistan Going Bankrupt?

Laden with Chinese loans and with an America that’s taken a hard line on terror funding, Pakistan is almost broke.

(Photo: Erum Gour/The Quint)

Pakistan’s Prime Minister in-waiting Imran Khan may have promised the country a 'Naya Pakistan', but the first thing he will need to address in order to deliver on his promise is the country's struggling economy, which is on the brink of collapse.

To put it simply, Pakistan’s debt is soaring, the Current Account Deficit is widening, reserves are dangerously low, and the currency has been devalued four times in just eight months, according to a Reuters report.

Pakistan is almost bankrupt, and here’s why.

1. Dwindling Currency Reserves

Several reports, including one by The Globe Post, indicate that the Pakistan state bank had just $9.1 billion worth of reserves as of July 2018. The report adds that these funds are barely sufficient to cover even two months’ worth of spending.

As a result, Khan may find himself at the doorstep of the International Monetary Fund (IMF) – the body that has saved the country from reaching a full-fledged financial crisis 12 separate times since the 1980s.

Notably, Asad Umar, the man who is widely tipped to be chosen as finance minister in Khan’s cabinet, told Reuters that the PTI government would not rule out asking China for a bailout, rather than approaching the IMF. Already, Pakistan has taken $60 billion worth of loans from China, much of which is for the development of the China-Pakistan Economic Corridor (CPEC).

China may well be the better bet for Pakistan, because US Secretary of State Mike Pompeo cautioned against any IMF bailout to Pakistan that would be used to repay its existing debt to China. Pakistan responded, saying “third parties cannot weaken its resolve” to build CPEC.

2. Increasing Tax Revenues Harder Than Pulling Teeth

As per a Bloomberg report, only 1 percent of Pakistan’s 210 million people, from grocers to billionaires, file income tax returns.

To quote Bloomberg, “This is a country known for rampant tax avoidance”.

Efforts to increase reserves with tax revenue through a government programme that profiles taxpayers aren’t expected to have much success in improving the tax-to-GDP ratio of 12 percent, one of the lowest globally, according to experts.

3. America’s Stance on Pakistan-Funded Terror

Earlier this year, Pakistan was added to the Global Financial Action Task Force’s “grey” list of countries to watch for terror financing.

This came after Donald Trump announced he’d be cutting US aid to Pakistan in the form of military expenditure in January, after accusing it of funding terror groups that attack Afghanistan.

If Pakistan is placed on the Financial Action Task Force’s blacklist, the sanctions against it would be more serious, further impacting its ability to borrow in the short-term.

4. Falling Exports, Rising Imports = Trade Deficit of Near $35 Billion

The value of Pakistan’s exports in 2017-18 stood at $21.9 billion. This was approximately 94% of the country’s annual export target of $23.1 billion.

But in the same period, the country imported goods worth $57.4 billion.

The value of Pakistan’s two highest export goods – miscellaneous textiles and cotton – in 2017 were around $7.5 billion. But the country has also relied heavily on imports for mineral fuels as well as machinery including computers, with the combined import value of the two at approximately $21 billion in 2017.

This has left the country with a trade deficit of nearly $35 billion, up from $29.4 billion in April, as per The Express Tribune.

Exports, which did show growth from the previous year, came on the back of tax incentives and rupee devaluation, further weakening the economy and the government’s coffers.

5. Developmental Activities With Borrowed Money

Pakistan’s caretaker Finance Minister Dr Shamshad Akhtar said that the total public debt-to-GDP ratio would be 74 percent by the end of the current financial year with a 2 percent increase within a year, Pakistan Today reported.

Pakistan Planning Commission’s former chief economist Dr Pervaiz Tahir said that public debt was the highest since 1990. The total public debt in 2017 was recorded at Rs 21401 billion, up from Rs 14318 billion in 2013.

This has been attributed to the fact that many developmental activities have been undertaken with borrowed money, in large part from China, because of inadequate domestic resources.

In the 2013-18 period Pakistan’s domestic borrowings were Rs 16.5 trillion and its external borrowings were Rs 8 trillion in the same period.

The present public debt in terms of the total size of the economy was around 72 percent, the report added.

6. Currency Devalued Four Times Since December

The Pakistan economy is currently valued at $305 billion, Reuters reports.

In an attempt to escape a “balance of payments crisis”, the report states, Pakistan’s central bank has devalued the currency four times since December 2017, which has led to the weakening of the rupee by more than 20 percent.

A similar situation back in 2013 had left the economy in a hot mess, and compelled the country to take a $6.7 billion loan from the IMF, according to Reuters. However, given the placement of Pakistan on the FATF’s terror “grey” list and America’s unwillingness to let the IMF pay off Pakistan’s Chinese debt, a bailout may not be so simple this time around.

Given the dwindling currency reserves, mounting debt, widening trade deficit, difficulty generating tax revenues, among the other reasons mentioned here, Imran Khan will likely inherit a country that is, economically speaking, on its last legs.

(With inputs from Reuters, Bloomberg, The Express Tribune, Pakistan Today, and World’s Top Exports)