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Pak bond prices reflect imminent default risk

Matein Khalid

The year 2022 has been an annus horribilis for Pakistan’s sovereign debt, even by the dismal standards of the emerging markets. Political stability has been illusive as the populist, incompetent PTI government of Imran Khan lost a no confidence vote in parliament and the fragile PDM coalition has not been able to restore credibility on macro policy as the free fall in the rupee to 240 suggests. Pakistan’s sovereign bonds due in 2024-26 all trade significantly below par and price an imminent default risk, as do its credit default swaps.

Despite Punjab’s DNA as South Asia’s breadbasket, Pakistan’s agricultural productivity is so poor, the state even imports wheat, cotton and sugar. A country which imported $80 billion last year and barely exported $31 billion only demonstrates that its elite’s had led its people to the brink of macro economic meltdown since its products, other than labour are uncompetitive in the global economy. Pakistan has one of the lowest tax collection to GDP ratio in Asia and a subsidy culture that only benefits a small elite, both civilian and military.

Imran Khan had left a landmine for his rivals with his unsustainable 150 rupee a litre petrol price, a subsidy which cost the exchequer billions and sabotaged the last IMF program. The Russian invasion of Ukraine and surge in Brent above $130 coincided with PDM government’s removal of the petrol subsidy, the reason the energy prices and inflation have spiked. The misery of Pakistan’s poor and powerless masses, who have always been defined in the image of the powerful in one of the most callous and unequal societies in the world, is palpable.

Foreign exchange reserves at the State Bank are now $9 billion, barely enough to cover imports by two months. I believe finance minister Miftah Ismail when he asserts that an IMF bailout will avert sovereign default but even $4 billion in loans from the Bretton Wood twins will not improve Pakistan’s structural economic woes, led by a fiscal black hole, a chronic current account deficit, a surreal taxation regime and parasitic feudal, political and Pretorian elites. This time the wolf is here even though the slight rise in the rupee to 224 indicates that an IMF bailout is a done deal.

In the Cold War and war on terror, Pakistan was a geopolitical too big to fail state for Washington, Abu Dhabi and even Beijing. I wonder if this is still the case now that the US has done a cut and run from Afghanistan. The IMF’s austerity diktat may avert the fate of Sri Lanka for now but millions of impoverished Pakistanis are condemned to a Hobbesian life that is “brutal, nasty and short”. Pakistan desperately needs to peace with India and a zero tolerance policy against the religious zealots who have only given terror and death to its people and made a shameful mockery of Jinnah’s promise to protect its minorities. The alternative is a peasant revolution akin to the Taliban or Maoist takeover in China.

Also published on Medium.

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