As Pakistan faces one of the worst economic crises in its history, fears that Islamabad will default on its debt obligations are growing. The United States Institute of Peace (USIP) warned that Pakistan could default on its debt obligations.
Pakistanis are suffering due to skyrocketing inflation, political conflicts and rising terrorism. These issues are also adding to the economic issues Pakistan is facing. The USIP pointed to four main factors which need to be considered if the government wants to pull the country out of the economic abyss.
The USIP said Pakistan should firstly factor in the composition of its overall external debt. The outstanding loans from foreign governments and international financial institutions has burdened the economy and it is due to successive governments taking loans to finance development projects, as well as to pay for imports.
Secondly, the think tank says the repayment pressure on the debt in both the short and medium-term has added to Pakistan’s difficulties. Pakistan’s forex reserves have dwindled and its reliance on loans to meet its external financing needs have added to the burden.
USIP says that the third factor is potential inflows that can offset debt outflows. The country has tried to attract foreign investment to help offset its external debt obligations but its struggles with its security situation, political instability and economic turmoil has hurt its ability to attract investment.
The fourth point highlighted by USIP is the nation’s external debt management strategy and Islamabad’s need to adopt a comprehensive strategy to manage its external debt obligations effectively and increase exports, reduce imports and attract more foreign investment.
The think tank warned that if Pakistan defaults on its debt it will lead to a “cascade of disruptive effects”, leading to disruption of imports and shortage of essential items and services. This could add to the unrest, debilitating Pakistan’s targets for the future.
The danger of default also could intensify political turmoil amid already surging terrorism. Pakistan is witnessing intense political conflict between the Pakistan Democratic Movement-led government and Pakistan Tehreek-e-Insaf (PTI), and the economic crisis could create more political turmoil.
The USIP report warns that the economic crisis could exacerbate this problem by providing terrorist groups with an opportunity to exploit the situation as Pakistan faces significant challenges in dealing with terrorism.
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