Domestic Bonds

Unlike Sri Lanka, Pakistan should escape default

ISLAMABAD: The Ministry of Economic Affairs, in a comparison on the economic front, said Pakistan’s debt service is relatively lower than Sri Lanka’s and overall policies would likely prevent it from facing a default. payment.

He shared an article titled “Is Pakistan closer to Sri Lanka? A comparative analysis. The paper concludes: “Sri Lanka’s heavy reliance on the tourism industry and then the collapse of the tourism sector can be said to have devastated the economy’s foreign earnings. Political opportunism has forced politicians to make reckless economic and political decisions the cost of which is now being paid by the entire nation. To show that government business was running smoothly, they continued to borrow in the market at high interest rates, which eventually caused him to default on his debts.

“In the case of Pakistan, borrowing from multilateral and bilateral sources (i.e. concessional loans) keeps its debt service relatively lower than that of Sri Lanka,” he said.

“Furthermore, Pakistan’s strategy to manage the pandemic crisis, better level of foreign exchange earnings and reforming the economy under the IMF program will most likely prevent it from defaulting.

“Additionally, Pakistan’s strong economic relations with China, the United Arab Emirates and Saudi Arabia have always provided a cushion during difficult times. However, the global and regional dynamics have changed dramatically, it is high time to shift our thinking and our approaches to policy-making from seeking assistance to a self-sustaining economy for a better future,” he said. -he declares.

“There have been face-saving political mistakes by the ruling party in Sri Lanka that have intensified the economic problems. In view of the pandemic, the government of Sri Lanka introduced tax exemptions in 2019, which reduced government revenue by $1.4 billion. On the other hand, declining foreign income due to reduced tourism has created foreign exchange shortages which has led to the banning of imports of expensive chemical fertilizers and the promotion of organic farming using locally produced fertilizers. in April 2020. As a result, the government faced a shortage of domestic and foreign resources which discouraged investment and production from the commodity-producing sectors, leading to lower growth in all sectors during the l fiscal year 2020.

“In contrast, Pakistan has attempted to contain the impact of the pandemic by launching numerous livelihood incentives and generating economic activities. .2 trillion rupees which includes direct financial assistance of 200 billion rupees for the vulnerable, payment of electricity bills, deferment of rents and installments at all banks and lowering of the policy rate to 8 %. , etc.

“A country’s fiscal policy plays a crucial role in macroeconomic stabilization. Recent global challenges such as the pandemic and the ongoing war between Ukraine and Russia have added to national challenges. The economies of Pakistan and Sri Lanka are grappling with such emerging global and domestic issues that immediately affect the fiscal space available to the government. However, while comparing the factual fiscal situation of the two countries, it is evident that Pakistan’s tax collection and fiscal deficit are much better than those of Sri Lanka. “Additionally, in the case of Sri Lanka, the impact of the tax reduction policy is evident in 2020, which reduced the tax to GDP ratio from 11.6% in 2019 to 8.1% in 2020 and widened the budget deficit.

“Similarly, Sri Lanka’s total public debt to GDP jumped from 86.8% (2019) to 105% (2021) in two years, indicating the severity of the fiscal challenges facing the country. Although Pakistan also continued to borrow, its macroeconomic imbalances were brought under control being a relatively large country with a better performing real sector.

“Remittances and tourism are the two main sources of foreign exchange earnings for the Sri Lankan economy after exports. The dependence of the Sri Lankan economy on tourism has made the country vulnerable in the external and real sectors by compressing aggregate demand. After excluding exports, remittances and tourist earnings play an important role in providing foreign income, contributing 57% and 31% of total inward inflows in 2019. However, due to the terrorist attacks in 2019 and a global pandemic in 2020, foreign exchange earnings from tourism have declined significantly, which has serious implications for Sri Lanka’s balance of payments. Similarly, remittances received through official channels which cover 80% of Sri Lanka’s annual trade deficit have also dropped significantly due to the peg of the exchange rate with Middle Eastern exchange bureaus. It is observed that the country experienced an overall decline of 29% in foreign income in 2021 compared to that of 2019 with an 86% drop in tourism income and an 18% drop in remittances in 2021 (CBS, 2022 ). Consequently, the shortage of foreign revenue has aggravated the external sector and debt service problems.

“On the other hand, excluding exports, remittances provide 82% of foreign income in Pakistan. The country received one of the highest remittance flows during the Covid-19 period, defying all predictions (World Bank, 2021). In addition, a 26% increase in foreign income in 2021 was observed compared to that of 2019 with a 35% increase in remittances and a 10% increase in FDI in 2021 (SBP, 2022).

At a glance, Sri Lanka’s international trade profile resembles that of Pakistan, as the trade deficit of both countries is reaching worrying levels. Likewise, the import direction of both countries highlights the crucial need and consumption of fuel. Since there is no alternative to reducing fuel imports, at least in the short term, it is prudent for Pakistan to remove fuel subsidies to save the country from default. Pakistan recently adopted this policy and ended the fuel subsidy to reduce the tax burden.

“The government of Sri Lanka has continued to borrow from external sources over the past two decades without generating enough revenue in the country. Since the end of the civil war in 2009, the country has started borrowing excessively through market-based instruments and commercial loans which are expensive forms of borrowing with maturities of five to ten years. Recently, borrowing through sovereign bonds and commercial banks by Sri Lanka has reached about 55% of total external debt. Debt service has also increased, making it difficult for the government to repay its loan.

“In the case of Pakistan, two-thirds of total external public debt is concessional, obtained from multilateral and bilateral sources, with an average maturity of 25 years. Since FY22, about 10% of total external public debt has been acquired through Eurobonds/Sukuk and 9% through commercial banks. The average maturity of international bonds is 20 years while the maturity of commercial bank instruments is one to three years.