Japan’s Bank Nomar has placed Pakistan in the list of the seven countries of the world including Romania, Egypt, Sri Lanka, Turkey, Czech Republic and Hungary, which are currently suffering from a dangerous currency crisis
By Ghulam Haider
Bankruptcy speculations have been fueled by the widening of the credit-debit swap (CDS) of Pakistan in the international market as the country has to pay one billion dollars worth of Eurobonds on the 5th of December next month, issued five years ago, to become eligible for borrowing from international market.
Financial research houses and experts have termed the increase in CDS as dangerous, and expressed concerns about Pakistan’s chances of default, but, Federal Finance Minister Ishaq Dar, in a presser a few days ago, rejected any such risk.
He told that the government will fulfill its external debt commitments including the repayment of a sukuk bond that’s due in the first week of December. “There is no chance of default. Repayment will be done on time,” he said, adding that arrangements for debt repayments for next year have been done “in principle.”
With soaring inflation, squabbles over fuel prices, a fractious political environment, for months, Pakistan has struggled to keep its economy afloat, raising the prospect that one of the world’s most populous nations could soon follow Sri Lanka in a wave of potential global defaults.
After the progress of increase in the CDS of Pakistani bonds in the international market, the report on Pakistan’s currency crisis by the Japan’s Bank Nomara has placed (Pakistan) in the list of seven countries which are suffering from severe currency crisis.
Given an increase in CDS and currency crisis, economic and financial affairs experts are of the view that the country is currently facing a severe financial crisis with rapidly deteriorating economic conditions.
However, they rule out the possibility of Pakistan’s default on the payment of one billion dollar Eurobond next month, but after that, the country may face difficulties in debt repayment as Islamabad is currently without significant financial assistance from anywhere. Due to the non-availability of loans, foreign exchange reserves are also depleting rapidly.
Why was the possibility of Pakistan’s default shown?
News about the possibility and risk of Pakistan’s default emerged when CDS on Pakistan’s bonds rose sharply in the international market.
CDS is actually an insurance premium on bonds to provide an insurance cover to the investment in these bonds so that the investors get their money back in case of default on these bonds. At the beginning of this year, the CDS rate was four to five per cent, which has gone up to over ninety per cent in the last few days.
Finance expert Yusuf Saeed says that earlier the rate was usually four to five per cent, but it started showing an increase after a few months. He said that since Pakistan has to repay one billion dollar euro bond next month, the news of increase in CDS has started to emerge due to precarious economic and volatile political conditions of Pakistan.
Former finance minister of Pakistan Dr. Hafeez Pasha says that the economic conditions are definitely bad, so there are talks that Pakistan will default. He says that next month Pakistan has to repay one billion dollars of debt, then the increase in CDS rate added fuel to fire for such news.
Can Pakistan go bankrupt?
Regarding Pakistan’s default, Minister of State Dr. Ayesha Ghos Pasha recently told the National Assembly that there is no such risk and country has the ability to meet its international payments.
Federal Finance Minister Ishaq Dar also announced the payment of a billion dollar bond next month and said that Pakistan will not go bankrupt.
In this regard, Dr. Hafeez Pasha said that Pakistan will pay one billion dollars next month, but the situation after that is very dangerous and Pakistan may be close to bankruptcy. He says that Pakistan’s international credit rating has gone down and the country is not even getting dollars from abroad due to which the situation is getting worse.
He further says that there is no immediate risk of Pakistan’s default but the risk may increase in coming months as the country is not getting any significant funds from anywhere to balance external payments.
Economist Amar Khan also rules out the possibility of Pakistan defaulting. He says that Pakistan will easily pay the one billion dollar Eurobond and there is still plenty of time for the next payment. He went on to say that increase in insurance premium i.e. CDS of Pakistani bonds in the international market and the possibility of default was taken wrongly. He says that this is purely a technical matter and cannot be linked to bankruptcy in any way.
Ali Khizr, a financial expert, says the CDS had risen, leading to reports that Pakistan could default on its payments, but there was no immediate risk of next month’s payments.
What is the currency crisis facing Pakistan?
On behalf of the Japan’s Bank Nomar, Pakistan has been placed in the list of the seven countries of the world, which are currently suffering from a dangerous currency crisis. These include Romania, Egypt, Sri Lanka, Turkey, Czech Republic, Hungary and Pakistan. As per the exercise done by Namura Bank, a country’s foreign exchange reserves, exchange rate, financial condition and interest rate were used as the basis for this.
According to the bank, a score of more than 100 means that a country is facing a currency crisis of up to 64 per cent and Pakistan’s score was 120.
Dr. Hafeez Pasha says that according to this report, the list of countries in which Pakistan has been placed shows how bad the economic conditions of Pakistan have become. He says that Pakistan’s credit rating has gone down and if dollars are not getting from outside, it will necessarily affect our foreign exchange reserves and our exchange rate.
Pakistan’s currency is currently trading at 223 to the US dollar while Pakistan’s foreign exchange reserves are currently a little over $13 billion and less than $8 billion in reserves with the central bank.
According to Amar Khan, there are many reasons for the currency crisis in Pakistan. There is a shortage of dollars in the country at the moment. Domestic imports are high while exports have been stagnant due to which more dollars are flowing out through foreign trade and fewer dollars are coming into the country. He says that this is also having a negative impact on the exchange rate of Pakistan, due to which the value of the rupee has nosedived.
How will the currency crisis affect the common Pakistani?
Talking about the severe currency crisis facing Pakistan and its impact on the common Pakistani, Ali Khizr says that it will impact the common man very negatively. He says when the value of the rupee is low, it affects the income and savings. He says that a Pakistani’s income and savings are in rupees and when the value of the rupee falls, the income necessarily decreases and the savings also shrink. The currency crisis also brings more inflation for a common Pakistani, he says
Pakistan is dependent on imports for energy and food needs and needs dollars. A strong dollar will make these imports more expensive, which means that oil and food items will become more expensive for a common citizen.
Ali Khizer says that if this currency crisis continues and the price of one dollar goes above 250 rupees, it will increase the rate of inflation very much.
Pakistan Rupee Exchange Rate