Sri Lanka’s economic suicide Is Pakistan making the same mistakes?
Pakistan’s politics is killing Pakistan’s economy. In Sri Lanka, politics killed the economy. Question: Why did Sri Lanka default on its debt for the first time since Sri Lanka’s independence in February 1948? Answer: Gross financial mismanagement in-tandem with political chaos. Sounds familiar? For the record, over the past several decades, Pakistan has been subjected to gross financial mismanagement.
Lo and behold, on top of gross financial mismanagement now we have complete political disorder and utter confusion. That’s the perfect recipe for economic suicide.
Sri Lanka is import dependent-oil, machinery, nuclear reactors, electrical and electronic equipment, plastics and pharmaceutical products.
Pakistan is also import dependent-oil, machinery, nuclear reactors, electrical and electronic equipment, plastics, iron, steel and pharmaceutical products. Sri Lanka has long been running trade deficits. So has Pakistan.
Sri Lanka piled up external debt to finance its trade deficits. So did Pakistan. Foreign exchange reserves of Sri Lanka Maha Bankuwa, the central bank of Sri Lanka, evaporated in thin air.
For the past 11 months the State Bank of Pakistan has been losing a billion dollars a month-from $20 billion in foreign exchange reserves in August 2021 to $9.3 billion in July 2022. Now the differences. Sri Lanka has been heavily dependent on tourist dollars; Pakistan has never been dependent on tourism.
Sri Lanka is short on food while Pakistan is nearly food sufficient. Sri Lanka’s crisis revolves around four things: foreign exchange reserves, food, fuel and medicines.
Pakistan’s crisis revolves around three things: foreign exchange reserves, fuel and medicines. Sri Lanka has entered into 16 arrangements with the IMF since its membership in 1950; Pakistan has had 23.
In Sri Lanka the vicious cycle began with a currency crisis leading to devaluation of the Sri Lanka rupee followed by inflation, fuel shortages, loadshedding, shortage of food and medicines, social unrest, a sovereign default, violent protests and finally troop deployment.
Red alert: Pakistan’s international sukuk maturing on the 5th of December 2022 is now yielding upwards of 50 percent. What that means is that Pakistan can no longer access the eurobond market for financing.
What that also means is that the collective investor wisdom is now factoring-in a high probability of a default. Question: Is Pakistan making the same mistakes as did Sri Lanka?
There’s a thinking in Pakistan that the IMF will somehow save Pakistan’s economy. For the record, saving Pakistan’s economy is not the IMF’s responsibility-it is the responsibility of our own decision makers.
There’s a thinking in Pakistan that the IMF’s support program will somehow save us. It will not. Sri Lanka did not reform and restructure. We are bent upon taking the same path.