Congratulations: default averted
In August 2021, State Bank of Pakistan’s (SBP) liquid foreign exchange reserves stood at $20 billion.
By March 2022, SBP’s liquid foreign exchange reserves had fallen to $11 billion. In the four weeks of March, liquid foreign exchange reserves fell by $4 billion.
By end-March, a country of 220 million was left with dollars barely enough to cover 5 weeks of imports.
In early-April, international investors, expecting that Pakistan will default by end-June, began selling bonds guaranteed by the Government of Pakistan-and yields went through the roof to 27 percent.
The Pakistan Stock Exchange (PSX) had fallen some 3,500 points, a loss equivalent to some $4 billion.
Pakistan’s imports, during the first 10 months of the current fiscal year, had hit a record high of $65.49 billion.
Pakistan’s trade deficit, during the first 10 months of the current fiscal year, had widened by 65 percent to $39.26 billion.
At the SBP, predetermined short-term net drains on foreign currency assets was expected to be a colossal $15 billion. Financial markets, within and outside of Pakistan, were expecting a default by end-June.
A sovereign default in Sri Lanka had created shortages of food, petrol, diesel and life saving drugs. Colombo had instituted food quotas, petroleum quotas and 7-hour load-shedding. All of this turned into social unrest, troops deployed and violent protests followed.
The Sri Lankan prime minister was forced to resign amid a worsening economic crisis-and the new interim prime minister told his countrymen: “The next couple of months will be the most difficult ones of our lives.
I have no desire to hide the truth and to lie to the public. Although these facts are unpleasant and terrifying, this is the true situation.”
He further added, “At the moment, we only have petrol stocks for a single day…..We must prepare ourselves to make some sacrifices and face the challenges of this period…..Against my own wishes, I am compelled to permit printing money in order to pay state-sector employees and to pay for essential goods and services.”
On April 11, Mian Muhammad Shehbaz Sharif took oath as the 23rd Prime Minister of Pakistan.
On April 11, SBP’s liquid foreigin exchange reserves stood at a paltry $10.5 billion. On April 11, Pakistan was 80 days away from a potentially disastrous sovereign default. In Pakistan, some 3,000 km from Sri Lanka, something happened on May 27.
On May 27, international investors had begun buying bonds guaranteed by the Government of Pakistan. On May 27, Pakistan Stock Exchange (PSX) gained 319 points, an increase in capitalisation of Rs80 billion in one trading session.
On May 27, the Pakistani rupee gained Rs2.40 against the dollar in just one trading session. Question: What happened in Pakistan on May 26? Answer: The government increased the rates of petroleum products by Rs30 per liter.
International investors viewed it as ‘paving the way for reaching a staff-level agreement with the International Monetary Fund (IMF)’. To be certain, there’s one more test left: the Budget 2022-23.
On April 11, the day Mian Muhammad Shehbaz Sharif took the prime ministerial oath, the new government was up against a serious dilemma: face a potentially disastorus soverign default or further burden inflation-stricken Pakistanis.
