The ongoing political and economic turmoil in Pakistan has made the country vulnerable to several crises. While many of them seem to have already hit the country, a few others are waiting to unleash their might on its poor citizens and fragile institutions. One of them is the mounting debt burden on Pakistan which has the potential to cripple its economy for decades to come.

By December 2022, Pakistan’s external debt had reached $126 billion; accounting for 35 per cent of its GDP. The problem is an outcome of legacy issues plaguing the Pak economy including dwindling foreign exchange reserves, high inflation, a lack of foreign investments and balance of payments difficulties. While the depreciation of domestic currency is resulting in expensive essential imports of fuel and edible oil, the skyrocketing inflation is leading to a humanitarian crisis with the shortage of food supplies. The balance of payments crisis is fueled by a swollen current account deficit and a decline in export earnings and workers’ remittances. Similarly, the ever bottoming level of forex reserves is making it difficult to cover imports and repay the country’s growing debt.

The consistent rise in debt burden has multiple causes, including poor economic management, corruption, excessive defense spending, and reliance on foreign loans. Broadly, the debt can be classified into four categories: multilateral debt, outstanding bilateral debt to the Paris Club countries, private and commercial loans, and Chinese debt. Among these, the multilateral debt, amounting to around $45 billion does not pose immediate challenge to the Pakistan’s economic stability due to its long tenure and concessional terms. Similarly, the Paris Club debt of around $9 billion is scheduled for repayment over decades with a low interest rate. However, the increasing volume of private and commercial loans (approaching $8 billion), including bonds and Sukuk have emerged as a major concern. Most of these loans are short-term and have high-interest rates attached to them, with a significant portion ascribed to Chinese financial institutions.

The increase in debt stock during recent years is mainly attributed to loans from China and from its commercial banks as Beijing accounts for about 30 percent of the country’s total external debt at present. While Pakistan is having a currency swap facility with the country, the repayment pressure in the short and medium term is a sore point. Notably, over 80 per cent of Pakistan’s bilateral debt service went to Beijing alone between July 2021 and March 2022.

A major portion of the increase in Chinese debt is considered the fallout of unviable CPEC projects and their un-equal terms for both countries. The loans under several long gestation CPEC components have led to huge repayment obligations. Indifferent to Pak woes, the Chinese investors are increasingly concerned about repatriation of their profits.

Between April 2023 and June 2026, Pakistan needs to repay around $75 billion which is about to 20 per cent of its GDP. The gigantic burden is posing a real risk of Pakistan defaulting on the dues during this period. Worse, the negotiations with the IMF for a bailout are taking longer than anticipated, putting the country’s financial stability at risk. Since, exports earnings, FDI and remittance inflows are crucial for debt repayment, Pakistan’s trademark trade deficits, lack of export diversification, low investor confidence, and rising costs of business are prominent obstacles. Clearly, the colossal debt cannot be managed by Islamabad without any help from its foreign investors and creditors.

This makes it imperative for the country to go for a fresh look at its foreign partnerships along with evaluation of their long-term benefits. While Pakistan claims its relations with China to be of ‘iron brotherhood’, the latter is alarmed about the security of its nationals working in the country. The other foreign investors were already concerned with the widespread terrorism in the country which hampers the flow of investment and aid.

Corruption is another issue that hinders socio-economic progress, distorts market mechanisms, and deters foreign investments. To address these challenges, Islamabad must find a balance between its total external debt and the volume of Chinese debt. Further, the country needs to closely scrutinize Chinese funds while working towards debt restructuring, raising investment inflows, fiscal prudence and credit diversification. Short term measures like rolling over of its debt at Chinese conditions is only going to trap the country further.

L'articolo Pakistan has a debt problem and China is making itunmanageable proviene da InsideOver.

US Envoy to Sri Lanka Julie Chung made a scathing remark recently that China is a ‘spoiler’ as it is holding up Sri Lanka’s application for the USD 2.9 billion International Monetary Fund (IMF) bailout, a dire need for the government of Sri Lanka. When the BBC questioned Ms. Chung about the IMF and the current state of Sri Lanka, she responded in the affirmative. Her remarks came while Sri Lanka remains silent keeping its fingers crossed over China’s decision.

Her statement came at the right time as still it is not known what the Chinese think of Sri Lanka’s IMF deal and there are only rumours that China has agreed to a two-year repayment plan for the country’s debt to China of approximately USD 7 billion.

China’s position

There are several rumors currently circulating in the social media over China’s position regarding its restructuring programme.

A letter dated January 18 to President Ranil Wickremesinghe of the Chinese government declaring that they can only give a five-year moratorium and that they cannot go beyond that prompted inquiries from several media outlets.

The letter, which the Chinese Embassy has declared to be a forgery, was circulating on social media and claimed that Chinese financial institutions had contacted Sri Lankan officials to offer their assistance in finding a suitable solution to the country’s maturing loans. The falsified letter stated that because of the slowdown in the real estate market and the already-stressed status of the Chinese banking system, they regret to advise that China would not be able to pay off the outstanding debt but are willing to reduce the repayment terms.

The Chinese government immediately reacted to the forged letter, however, they are yet to convey what is true.

Also, another story broke out about China’s stand. This time it was according to a letter seen by Reuters. The Reuters said that the Export-Import Bank of China reportedly offered Sri Lanka a two-year debt moratorium, according to a Reuter’s story. It also consented to aid the nation in its quest to obtain a USD 2.9 billion loan from the International Monetary Fund. Which of these two stories is correct, is not known and yet to be determined by the government of Sri Lanka.

US envoy statement

But the US envoy statement that the greater onus to move was on China, as the biggest bilateral lender, irked China. She openly said, “We hope that they do not delay because Sri Lanka does not have time to delay. They need these assurances immediately.” “For the sake of the Sri Lankan people, we certainly hope China is not a spoiler as they proceed to attain this IMF agreement.”

It is also unclear whether India and China will ultimately agree to write down their loans to Sri Lanka which is widely anticipated. India has already agreed to the terms but their recommendations are not made transparent.

Ms.Chung said after Argentina plunged into economic crisis and default in 2001, some American hedge funds, rather than accepting a restructuring of the sovereign bonds they had bought on the open market, demanded full repayment and took the country’s government to court in the US to achieve it.

In response to Ms Chung, the Chinese Embassy in its official media release said it’s always “China, China, China is our US colleague starts chanting this infamous mantra and blaming China as a spoiler to the Islands negotiation with the IMF during her recent interview on Sri Lanka debt Issue.”

But one of the remarks was the US is printing dollar with more than USD 3 trillion in 2020 alone. China criticized, “Who is keeping on printing money?” referring to the US. But China needs to be retold that the US dollar is the global reserve currency. In other words, most countries and companies from other countries usually need to transact business in US dollars, making them exposed to the value of their currency relative to U.S. dollars. The United States and the Federal goverment in particular, don’t face this “currency risk”.

However, the economist suspects that China is still undecided on the IMF recommendations to Sri Lanka. “China will test the waters from time to time to see what idea will succeed,” an economist said. China is unwilling to completely commit. They simply require 100% commitment from the debtors in order to finally take over their assets.

Despite making the Sri Lankan government scratch its head over the IMF deal, China has scooped up another joint venture to establish a cargo service hub at Colombo Port. The contractor is none other than China’s CM Port group, which has taken the Hambantota Port for 99 years lease. The proposed deal is worth USD 150 million.

L'articolo US calls China a “spoiler” as China still “cold” over restructuring its debt to Sri Lanka proviene da InsideOver.

Popular demonstrations and nationwide sit-ins in Lebanon gained rejuvenated momentum today as Prime Minister Saad al Hariri handed his cabinet’s resignation to President Michel Aoun shortly after 3 pm GMT. Hariri earlier in the day announced his intention to the public as he headed for the Baabda presidential palace to see the president, stating that he was doing so after he had reached a dead-end, and in response to the popular demands of the 13-day long uprising for his cabinet to step down.

Hariri declined to talk to journalists or make any statement or comments following the resignation which plunges Lebanon into the abyss of political vacuum. Tuesday witnessed the most violent clashes so far between demonstrators and Lebanese army and police forces trying to reopen some vital streets and bridges the blockage of which has crippled much of the everyday business and movement for millions of ordinary Lebanese citizens protesting at the protesters’ actions which have rendered the country under a virtual lock-down.

Despite the overwhelming initial jubilation expressed by demonstrators at Hariri’s resignation, their insistence that the whole political system must be overhauled sent alarm bells that the tear gas and rubber bullets of this morning clashes, could soon deteriorate into something much more serious and costly. The two sides remain at volatile loggerheads over the endless list of political and electoral reforms as well as demands for all political figureheads to step down in advance of new parliamentary elections and the formation of a new government void of any of the traditional political or sectarian quotas-based considerations and criteria.

Political vacuum; a whirlwind that could sweep all 

After 10 months of procrastination, political hurdle-jumping exercises and endless rounds of deliberations following his mandate as prime minister-elect for the third time running, Hariri was able to form his national unity government, which included some of his political adversaries, less than two years ago. However, he has struggled to remain a compromised broker among deeply divided and bitterly belligerent Lebanese politicians and traditional heirs to controversial dynasties – many themselves are, or were decedents of,  prominent warlords who made massive fortunes during and after the Civil War (1975-1990)- that have ruled the country since its independence from France 31 December 1946. Hariri inherited a humongous burden of economic hardships, corruption scandals and political challenges he was unable to tackle.

His scandal of Hariri’s unprecedented arrest in Riyadh – along with hundreds of Saudi royals and top businessmen- by Saudi Crown Prince Mohammad Bin Salman (MBS) and the forced televised resignation Hariri had to make from the Saudi capital on 4 November 2017 rendered him much weaker and lacking any independent political will or decision-making capability.  In recent months, the country’s rapid economic deterioration, billowing debts, rising prices further aggravated by the proposed new taxes which sparked off the current unrest, made it impossible for the Lebanese government to remain functional.

Who bears the blame, and at what cost?

Whether the outgoing Prime Minister bears much of the blame for a good deal of Lebanon’s chaos and corruption scandals, or whether he was a sitting lame duck and a scapegoat to the big sharks in the country and beyond, looking for acceptable Sunni substitutes is not at all an easy job in Lebanon. “I can’t hide this from you. I have reached a dead-end,” Hariri said in his resignation speech. “To all my political peers, our responsibility today is how to protect Lebanon and to uplift the economy,” he added. “Today, there is a serious opportunity and we should not waste it.” Although it wasn’t yet clear if President Michel Aoun would ask Hariri himself to form a new government, regardless of popular demands of protesters, leaving Lebanon to take a free dive to the abyss of a political vacuum could easily spell disaster and cause massive economic, political and social irreparable damage.

The country needs a miraculous recipe that can manage to fulfil all or most of the demonstrators’ conditions to end their uprising, and at the same time take into consideration the extremely volatile and delicate balance of force among the country’s influential war barons turned politicians. Many of those warlords have their militias, conflicting regional and international backing and affiliations, massive fortunes estimated at over $320 billion in Switzerland alone according to a recently published freezing order.

The ‘Nero’ s of Lebanon, if threatened to lose their economic grip and political powerhouse, could resort to the suicidal option of chaos, destruction and even the mayhem of civil war once again. President Aoun, his allies and a few rational factions in Lebanon are working hard on a compromise way out that prevents a total collapse. Whether they will succeed in their challenging mission or not, remains to be seen.

Meanwhile, Lebanon’s banks, schools and most business outlets remain shut down for the 13^th day running, and Hariri’s resignation could deepen the divide already reflected by the ongoing unrest and exacerbate the economic crisis. However, many protesters on the streets of Lebanese cities and towns claim that it also provides an opportunity to shake off the country’s sectarian system and facilitate its transition into civil governance.

L'articolo Political Vacuum and Chaos Loom as Lebanon PM Steps Down proviene da InsideOver.

World Bank data shows an increasing trend of indebtedness in the world’s emerging regions since 2012. Will this debt be a precursor to higher development, or instead to a decline?

The trends of debt owed to foreign lenders by four emerging world regions (Latin America and the Caribbean, South Asia, Sub-Saharan Africa and Middle East and North Africa), show both positive and worrisome signals.

The price of debt incurred by emerging regions of the world has heavily depended on the sources of debt, and the resources the borrower can offer to the lender or its allies. Cost of borrowing can be assessed by yearly payment rates and debt yields.

Long-term interest payments made by Middle Eastern and North African countries have been increasing year-by-year from 2012. Public and publicly guaranteed interest payment decreased in 2015, but saw a sharp increase in 2017.

Latin America and the Caribbean countries (3.8 – 5.8 per cent from multilateral development banks) follow the lead with significantly smaller borrowing costs. For all but two Latin American countries, borrowing from multilateral development banks is a cheaper alternative to the release of sovereign bonds.

The amount of the debt carried by Latin America and the Caribbean, South Asia, Sub-Saharan Africa and MENA has been growing since 2012. A slight ($13B) decrease in 2016 for South Asia, is the only decrease in the amount of debt taken on by these emerging regions since 2008.

The increases in the amount of debt carried by these four regions, along with high borrowing costs, point to the conclusion that external debt stocks should be very well thought out steps. Mostly, because of their large downside.

The amount of debt taken on by these four emerging regions has created an interesting relationship between them and some financial indicators. The relative strength index (RSI) for the Emerging Markets Bonds Index is particularly interesting. By charting the iShares JP Morgan fund for EMBI from 2012 to 2019, it is possible to see that its RSI frequently trends to values close to 70. With the amount of indebtedness growing in the emerging regions, these RSI values can mean that the perception of the debt’s value is decreasing.

Fundamental analysis of the emerging regions taking on debt in the Americas, Africa and Asia, shows a complex picture of debt and its management.

The increasing debt, when not used to re-finance older and unpaid debt (like 73% of new debt in 2018), fundamentally looks to be a precursor to higher development.

By using debt, MENA and Latin America and the Caribbean regions, have built energy infrastructure and invested into industry, trade and services – all necessary for higher development.

Receiving development assistance, and using it successfully, also comes with its costs. Latin America and the Caribbean and MENA, are regions that could eventually see a re-classification of their financial state into a more developed one. And with a re-classification to one of higher development, less developed regions will become competitors for cheaper assistance from multilateral development banks.

The success of debt taken on by emerging regions, can be measured by the growth in GNI, decreases in unemployment, and increases in wealth. Increases in unemployment are a particularly worrying trend for countries in emerging regions – as forecasted by the IMF. It could mean that the rising indebtedness has not translated into spending related to a better life quality.

The most basic indicators of a country’s financial state and their ties to external debt should also not be forgotten. Not improving debt to GDP ratios; and the still present divergence of debt growth in different industries, in contrast to mature markets, are basic factors that have shown mixed performance since 2012. Along with growing debt, this means that the trend of growing indebtedness could turn for the worse.

The effects of increasing debt in Latin America and the Caribbean, South Asia, Sub-Saharan Africa and MENA will be positive for all regions using accountable spending and fiscal responsibility.

The percentage increase of external debt stocks of South Asia (25.3% from 2012-2017) and Latin America and the Caribbean (20.1% during the same period) is the smallest out of all these four emerging regions. Yet, potentially, this increasing debt for the Asian and American regions, carries the most risk.

South Asia’s environmental problems have the power to decrease the development potential of this region. Having both too much, and not enough aquatic resources, remains a problem for some South Asian countries. Moreover, the still unpredictable impacts from recycling operations in South Asian countries like Sri Lanka, will very likely increase healthcare costs and spending in a country with an already high debt to GDP ratio.

Growing debt should not present a problem if the debt to GDP ratio remains stable. That is, if the economy will follow the same growth trend. In Latin America and the Caribbean, the effect of growing debt could turn negative, if the negative and uncertain growth prognoses will come true.

A growing external loan portfolio along with the underdeveloped finances sector could start to become a political issue in countries of MENA. Simon Neaime of American University of Beirut argues that “[…] MENA policy-makers will need to introduce macroeconomic policy measures […]” and “[…] financial policies aimed at increasing MENA countries’ savings […]”. All that to decrease the impact of the growing debt and its negative effects.

Increasing external debt can also affect the debt released by the borrowing government. Sub-Saharan Africa is the emerging region which saw the highest percentage increase in external debt stocks from 2012 to 2017. This increase has been recorded at 34%. The increase by over a third, if higher debt to GDP will continue to be a positive influence on debt yields, could lead to even higher indebtedness or difficulties in repaying debt.

Countries in different continents of emerging regions have used external debt for vastly different projects.

In emerging regions of Asia and Africa (MENA, South Asia, Sub-Saharan Africa), debt is mostly used to finance energy and extraction and public administration (World Bank 2019 Annual Report) projects.

In MENA and Sub-Saharan Africa, borrowing from external borrowers is done mostly for the financing of the energy and extraction sectors.

South Asian countries, in a similar manner, have received over a tenth of development loans for their energy sector in 2019.

Contrarily, in an emerging region of Americas (Latin America and the Caribbean), external debt is a more complex tool. In contrast to spending on energy and extraction, development loans are used to finance social protection and industry, trade and services (World Bank 2019 Annual Report).

The country which has taken on the highest proportional share of external debt to GDP in this region is Jamaica. Jamaica has used the debt to combat the negative effects of a financial crisis. Although non-infrastructure spending is harder to assess, but the second-highest interest payment to GDP figure in the region (6.9% of GDP), looks to have been a necessary step to take.

The lowest share of external debt taken on by a country in Latin America and the Caribbean belongs to Paraguay. Most recently, Paraguay’s 15% debt to GDP ratio has been taken on to finance its budget.

Without any financing, even in the form of external debt stocks, world’s emerging regions would have had a much harder and longer path to development. Loans for development or financing of necessary operations, can uplift emerging regions if used properly and with accountability. Latin American countries are the best examples of debt used for development without going into too much indebtedness. However, in regions where corruption perception is higher, and governmental accountability may be lower, the once good solution to both financial and developmental problems can easily submerge the already struggling countries.

L'articolo Will External Debt Uplift or Submerge Emerging Regions? proviene da InsideOver.

Pakistan is in the midst of a severe debt trap that is threatening the very fabric of the nation. With debt growing from China and the IMF and Pakistan’s resentment over the China–Pakistan Economic Corridor (CPEC) projects, the Imran Khan-led Pakistani Tehreek-i-Insaf government is striving to escape from the clutches of a vicious debt trap. The Financial Action Task Force (FATF) has threatened Pakistan of blacklisting it. So the million-dollar question is if Imran Khan can save Pakistan from the debt situation.

As per local media reports, Pakistan accumulated a record public debt of $47.5 billion during one year of Imran Khan’s rule. Geo News reported that the foreign debt incurred by Pakistan’s Tehreek-e-Insaf (PTI) is PKR 2,804 billion ($81.4 billion) from August 2018 to August 2019, while the internally accumulated figure stood at PKR 4,705 billion. The State Bank of Pakistan reported that at the end of June 2019, the total public debt stood at PKR 31.786 trillion (0.20 trillion dollars). Additionally, the government projected that public debt is likely to increase by 47 percent and reach PKR 45.57 trillion ($0.29 trillion) in the next five years (2022-23).

The International Monetary Fund (IMF) has pointed out that despite repayment of $48 billion during the tenure of the Pakistan Tehreek-e-Insaf (PTI) government, Pakistan’s external debt will reach $130 billion by the end of the fiscal year 2022-23 under the government of Prime Minister Imran Khan. This means that the PTI government will borrow a gigantic $83 billion in the next five years to finance the current account deficit, service the old debt, and build foreign exchange reserves.

The growing debt has set alarm bells ringing compelling the Pakistani finance minister Asad Umar to say that Pakistan’s basic debts have reached alarmingly high levels, and the threat of bankruptcy looms large over Pakistan. Worried over the dangerous economic condition, the business community led by 25 prominent business tycoons of the nation met with the Army Chief General Qamar Jawed Bajwa in Rawalpindi and sought his help to solve their problems with the Khan-led government.

According to political observers, the Imran Khan government’s decision to put an end to fuel subsidies, increase gas and electricity prices, salary cuts, and the International Monetary Fund-led $6 billion bailout conditions are forcing the government to slash spending and increase revenues. All these have compounded the problems of people and the business community in the country. According to the business community, high-interest rates, ruthless tax targets, cuts in development spending have brought the economy to a standstill. They had no option but to meet the army chief as the Imran Khan government simply kept listening to their grievances and failed to address the issue effectively.

Economic analysts opined that the slowdown in the growth rate of the Chinese economy is likely to further aggravate Pakistan’s financial crisis, as the integrated value chains spread across East Asian and South-East Asian economies would be disrupted.

With immense pressure from the opposition parties to bail out Pakistan from the precarious situation and growing demand from the people to relieve them from skyrocketing prices of food & non-alcoholic beverages, transport, clothing & footwear, and miscellaneous goods & services, Prime Minister Imran Khan is facing a herculean task to save the economy and at the same time earn laurels of the masses. Prime Minister Imran Khan is in a catch 22 position; he was elected on an anti-corruption plank with a promise to end austerity measures. Khan had vowed to improve the economic situation of the cash-strapped country. In reality, prices of essential commodities have risen significantly, burning a hole in the common man’s pocket.

If he implements populist policies like fuel and electricity subsidies, bailout packages from IMF and others will end. And if the current situation persists, opposition parties will intensify their stir against the Khan-led government, thus paving the way for a more significant say of Pakistan army in the day-to-day governance. It remains to be seen how well Imran Khan fights the war on economic and opposition frontiers and bails out Pakistan from the financial mess.

L'articolo Can Imran Khan Prevent Pakistan from the Debt Trap? proviene da InsideOver.