Bankruptcy of a country, and its negative effects

Economists say that when a country is unable to pay the installments of its external debt and the interest on it, then this country is declared bankrupt

By Ghulam Haider

According to media reports, the former chairman of the Federal Board of Revenue (FBR), the federal agency that collects taxes in Pakistan, Shabbar Zaidi, declared the country bankrupt based on the economic conditions of Pakistan. However, later he explained in his message on Twitter that the media has taken his statement out of context.

Thus, Shabar Zaidi has explained his statement, but there is still a lot of discussion on this issue. Economists believe that although Pakistan’s economic indicators are suffering from a bad situation, there is currently no possibility of the country going bankrupt.

So the question arises that how a country becomes bankrupt.

Economists say that when a country is unable to pay the installments of its external debt and the interest on it, then this country is declared bankrupt.

Saim Ali, a professor of economics at the Institute of Business Administration (IBA) in Karachi, says that technically a country is declared bankrupt when it defaults on external debt or fail to implement international agreements. He quotes Argentina, which has gone bankrupt twice in the last ten years.

Former finance minister Dr. Hafeez Pasha says that ‘internal debt is also a problem for a country, but on the basis of this, a country cannot be declared bankrupt at the international level because of failure to pay internal debt. They can be paid by printing local currency, but to pay off external debt, a world currency is needed, such as the dollar, which currently has the status of world currency.

Former vice chancellor of Pakistan Institute of Development Economics Dr. Amjad Rashid also describes the definition of bankruptcy of a country in case of failure to pay installments and interest on external debts.

He says that when a country gets a loan, it is not paid back in one lump-sum but in installments and interest is paid with each installment. He says that a country makes an agreement with international financial institutions and other countries for the repayment of loan, and loan and interest on it will be paid in a certain time and period. And if it fails to pay interest on this loan, this country becomes bankrupt.

What are the symptoms of bankruptcy?

Among the signs that appear before a country’s bankruptcy, the biggest sign is the amount of foreign exchange reserves a country has, and how many installments of external debt, and how much interest it has to pay on them.

Dr. Amjad Rasheed says that ‘when the country’s current account deficit increases and foreign exchange reserves are rapidly reduced, the external loan installments and interest payments on them are a problem. If it becomes, it shows that the country is moving towards bankruptcy.

He said that the current account deficit increases because the imports in the country are high and in comparison, the exports do not increase at the pace that the dollars going abroad on the imports are in the form of exports. come back and this puts pressure on foreign exchange reserves as imports have to be paid for from there. Due to this payment, it becomes difficult to repay the installment of the external loan and the interest on it because the external loan also has to be paid in dollars.

Saim Ali of IBA Karachi says that the biggest sign of a country moving towards bankruptcy is the situation of the country’s foreign exchange reserves, how fast they are decreasing. “The decrease in them has an impact on external payments because the debt has to be repaid in dollars and if the dollar reserves are decreasing, it means that the country’s ability to repay the debt is decreasing.”

He says that “Similarly, if the trade deficit is increasing continuously and more dollars are being spent on imports and dollars are coming less in the form of exports, then this will also reduce the reserves of the country.”

Dr. Amjad Rashid says that ‘when a country is close to bankruptcy, the bonds issued by it to take loans in the international market are also taken at high interest rates, which means that the country has to invest in these bonds. Those have to pay higher profits and the country’s rating is downgraded by international credit rating agencies.

What are the negative effects of bankruptcy?

Dr. Amjad says that bankruptcy it lowers the country’s credit rating in the global market and does not allow more credit facilities from international institutions and other countries. He says that a country that runs on loans also needs loan facilities from international financial institutions so that the country’s economy can run.

He says that “in the case of bankruptcy, the serious consequences can be that the merchandise going out of the country is seized and the aircraft and ships of your country are seized in another country.”

Dr. Pasha says, “In the case of bankruptcy, the value of the currency begins to depreciate very quickly on a remittance basis, as happened in Venezuela, when the country went bankrupt, its currency became so worthless that it It was scattered on the streets and people used to run over it.’

Is Pakistan at risk of bankruptcy?

Talking about Pakistan’s bad economic situation and the possibility of the country going bankrupt, Dr. Pasha says that there is no possibility in his view because the economic situation of Pakistan is not such that it should be declared bankrupt. He says that if a very difficult situation comes up, friendly countries of Pakistan can help him.

He says that we should not say anything at this time that would indicate that Pakistan is going bankrupt. He said that Pakistan’s credit is still such that it can get more loans.

Dr. Amjad says that Pakistan is not likely to go bankrupt, although the situation is difficult, but there is no such risk. He says that the import bill is a cause for concern but the central bank is taking steps to reduce it and international financial institutions also allow Pakistan to reduce imports.

Dr. Amjad says that all over the world, countries run at a loss and Pakistan is not a unique case. He said that the example given by Shabar Zaidi can be applied to a private company, that if a company runs in loss for a long time, it becomes bankrupt, but the case of countries is different and there are many countries that are in loss. Let’s go and borrow from international institutions.’

He says that ‘Pakistan had partially defaulted once in 1999 when the country defaulted on payments to Pakistanis in foreign exchange bonds, but that too was due to sanctions imposed after the nuclear explosions. ‘

Saeem Ali also rejects the possibility of bankruptcy of the country in the current economic situation and says that “Pakistan has to take steps to avoid any such situation so as to balance the external payment sectors of the country.”