What if Pakistan does default? – M.B. Naqvi writes from Karachi

DEFAULT is a dreaded likelihood. BoP crunch worries the government and the media. One concurs, and regards the situation as dangerous. A naughty thought arises though: What precisely will happen if indeed the dreaded meltdown happens? Who will gain and who will lose? Since the future of the economy is everybody’s concern let’s find out what precisely will happen.  

The time is approaching fast when Pakistan will have to pay its annual debt servicing and discharge some other liabilities amounting to over $4.5 billion. Other payments will follow, including import bills as they fall due; total of net outflows for a year exceeds $50 billion after allowing for $28 billion US and other foreign aid inflows. A lot of money is involved. Meltdown means that Pakistan shall declare it does not have the money and will default. 

The prospect of being declared insolvent by rating agencies and international financial institutions abroad is what horrifies. With credit rating zero, the Pakistan government cannot borrow easily from private banks for BoP shortfalls or taking forex loans for short durations. 

The import trade will more or less come to a halt because no foreign exporter will accept Pakistanis’ Letters of Credit and send goods against them. Only those imports shall be received that will be paid for in advance, depending upon how many dollars and other hard currencies the State Bank can spare or purchase from the open market. 

The question recurs: Who will lose and who will gain? In the first instance, the ruling class will be discredited and will be held responsible: doubtless its economic management has been lackadaisical. But it is the PPP politicians who are now controlling the government, particularly President Zardari. 

But they have already made enough propaganda that the present economic mess is inherited from General Pervez Musharraf’s regime comprising his imported banker boys. This is reasonable. 

They were caught fudging production figures with a view to showing a higher rate of growth than was the case. They left behind shortages of electricity, gas, wheat and other food grains. These had been there, but few talked of them until the new government came in March, though inflation has been rising for years. 

Electricity is being denied to citizens throughout the country for anything from six to twelve hours a day; life is becoming physically hard. High inflation rates have to be mentioned afresh for their runaway nature. Life for the common man is becoming a hell on earth, with not enough income to pay the prices of essentials in the marketplace and no rest from the heat at home. 

Unemployment is causing increasing numbers of suicides, often with family members. People are naturally protesting. 

The present PPP-led government has shown a remarkable talent for doing nothing and changing no policy that Musharraf’s team had designed. The first direction given by the PPP prime minister to the team writing the budget for the current year was that there would be no paradigm change; all policies to remain the same; that continues to be the situation in political as well as economic matters. 

The new politicians vainly think they have shored up their reputation and image by shifting the blame to the past ruler, who is otherwise also being excoriated. 

As it is, it is all but certain that IMF will arrange a bailout for Pakistan, probably on November 7 or soon thereafter. There would be other aid also flowing in thanks to the America’s satisfaction over Pakistan implementing all the policies Musharraf had laid down. Pakistan’s political class comprises rich people; virtually every member of the National and Provincial Assemblies arrives in Armani suits and Italian shoes in Rs.25 to 50 lac cars. Surely they cannot be hurt by inflation. 

Who precisely will be hurt is obvious: at least 70 percent of 160 to 170 million people. Obviously, the very rich and the political class can scarcely feel the pain of inflation. It is they who consume the luxury goods, often fine foods that are imported. 

Ordinary things that are produced in Pakistan, like toothpaste, shaving cream, soda water are also imported because of certain European, British and American brand names. Even cakes and ice creams with well-known brand names are imported. 

Then, there is the issue of importing industrial raw material for industries and, of course, machinery. In the 61 years of independence, Pakistan still continues to import easy to fabricate machinery that requires imported raw material. 

Pakistan still imports some urea and other fertilisers despite being a primarily agricultural country that constantly talks about development but has still not been able to produce enough fertilisers of the kind needed, and should have chosen industries that use raw material available in the country. Some such industries will find it difficult to survive. It is a scandal that the country still needs to import wheat and lintels.

Pakistan’s exports are not even half of its imports. A figure of well over $20 billion is the trade deficit that immediately feeds into Current Account deficit. That is the heart of the matter. 

The present PPP minister for defence has already declared that there is no question of reducing the defence budget. Which means that all the necessary imports that the armed forces require will continue to be imported. That would set the pattern. What the government and GHQ think is necessary will continue to be imported, though perhaps the luxury goods or direct consumption goods to be eaten or drunk will now be ostensibly discouraged. 

The recent scramble for dollars has led to the Rupee’s value sinking against every major currency; everyone is trying to buy dollars, and exporting them. The more daily shortage of dollars and other foreign currencies, the more the Rupee sinks (and the value of national wealth declines pari passu). 

Currency dealers later import the same dollars and sell at higher rates. For the common man, it puts tremendous pressure on prices and inflation rates are intensified. The latest figure shows over 30 percent per week on weekly food inflation rates. 

The bigger businessmen don’t lose, whatever happens. It is the common man, the Aam Aadmi, who loses at every turn. High inflation gets him; shrinkage of exports due to high inflation rates will go on; new jobs creation will be reduced. 

The government will be unable to invest much in development projects to create new jobs. Economic condition will continue to worsen for Aam Aadmi. Already, at current food prices 32 per- cent of Pakistanis have reduced their food intake. 

Indications of pauperisation are given by many women, who have locally advertised with hand-written posters that say “I have three children, I want to sell them because I can’t feed them.” Some fathers have killed their wives and children before committing suicide because of poverty. Marriages are breaking up. This is the condition before the bailout. 

How will things shape up after the strongly expected IMF bailout? Pakistan has enough experience of IMF. So much so that the present economic Czar, Shaukat Tareen, another former banker from Citibank, has said for placating the public opinion that IMF would be his last option; he would first tap all other possible sources. The fact of the matter is that he has already tested all possible sources from where a bailout could possibly be expected. 

The Americans are in no mood to let Pakistan be bailed out easily for not responding to American advice with the earlier alacrity. The Chinese, despite the friendship, are talking in indefinite terms about future growth in the relations, though they are sure to invest some more. Only, they are not in the habit of writing cheques to get a troubled state off the hook. 

That the government and the ruling class look in real trouble has produced in many the not very laudable reactions of Schadenfreud. As a commoner, I too feel mischievously happy when I see the rich in trouble. But their troubles are minor and their money can find new ways to outwit the system, while common man’s troubles have to be borne by him as long as he lives.

M.B. Naqvi is a leading Pakistani columnist.