Islamabad, July 17: The economic meltdown in Sri Lanka triggering unrest and unprecedented political upheaval has sent alarm bells ringing in the Indian Ocean region and the loudest among them is in Pakistan, according to foreign policy analysis.
“We may not be in Sri Lanka’s shoes yet, but are not very far off as there are some comparable symptoms. With negotiations with the IMF apparently inconclusive, and the much-awaited financial support from friendly countries yet to come, the country is not in a good state,” Journalist and author Zahid Husain warned in Pakistan daily Dawn, according to a report published in Islam Khabar.
Similar to China, Sri Lanka is indebted to heavy loans and investments from China. While Sri Lanka has defaulted on repayment and is already in a debt trap, Pakistan, with investments under the China Pakistan Economic Corridor (CPEC) is a close second.
Major investments in both the South Asian countries are in infrastructure and since both the countries lack economic, industrial and managerial skills, they have leased such projects to Chinese firms to manage, which as resulted in the two countries incurring further debts plunging them in a vicious circle they cannot escape from, the Islam Khabar report added.
Even though there is a new government in Pakistan, the new regime is fighting on multiple fronts. The previous government of the Pakistan Tahreek i-Insaf has always been blamed for not being able to control inflation by the incumbent rulers when they were in the opposition.
Imran Khan was ousted from power after losing a no-confidence vote, which he alleged was part of a US-led conspiracy targeting him because of “independent” foreign policy. Even after his ouster, the former PM has continued with foreign conspiracy tirades at every rally.
The result is the absence of economic activity, pushing away modest foreign and domestic investment but above all, foreign aid is coming to a halt. The International Monetary Fund (IMF) is also tightening the screws on Pakistan’s economy before it can release the much-needed USD three billion bailouts, the report added.
The Sharif Government has imposed unpopular measures like raising fuel prices, slashing subsidies and imposing a ten percent ‘super tax’ on large-scale industries. The dollar exchange rate is PKR 210. All these have sent inflation skyrocketing at 15 percent.
The country has been facing a serious threat on the external front as the State Bank of Pakistan’s foreign exchange reserves fell to single digits despite a USD 2.3 billion inflow from China late last month.
“The increasing size of the external debt servicing in each quarter indicates the government has been borrowing dollars at higher commercial rates to meet its foreign debt repayment obligations,” the report said.
Meanwhile, the recent outbreak of COVID-19 and heavy rainfall affecting a large number of households and lives have added to the woes of the country. While the IMF is in no hurry to release USD three billion – Pakistan is estimated to require between USD 9 billion to 12 billion by the end of 2022 – China is also playing its game, considering that both the IMF and Beijing are rivals.
Initially, Beijing had agreed to roll over the syndicated loans before the ouster of the previous PTI government.
However, Sharif’s administration had to wait for two months to secure the Chinese loan. Since the IMF has visibly slowed down its negotiations with Pakistan, the country is not getting project funding from the World Bank and Asian Development Bank.
The governments in FY22 that ended on June 30 could not control the influx of huge imports totaling USD 80 billion creating a large current account deficit (CAD), which alone is enough to understand the external weakness of the economy.
For Pakistan, the Sri Lanka comparison is unmistakable, both in over-dependence on China and its own handling of the economy. “The Sri Lankan turmoil is a classic example of an economy caught in an acute debt trap while failing to boost its revenues. Indeed, political corruption, too, played a role in the country’s financial collapse,” Zahid Husain said.
“Now the IMF is the last hope for the country of 22 million, but aid will not come without stringent conditionalities that may increase the hardship of the people. In fact, a bailout by itself won’t provide a long-term solution, which requires undertaking fundamental structural reform to resuscitate the economy,” he added.
Meanwhile, the analysts said that given the current preoccupation of the US government with the Ukraine conflict and the confrontation with China in the Asian region could only mean imposing harsher terms, both political and monetary, on desperate loan-seekers like Pakistan and Sri Lanka.