Deeper in Debt

The month of February is always dim and grim in the United States, and so it is this year. In the House of Representatives, the new Republican majority is pretending to be alarmed about all the government spending Congress voted for under Trump. Even if there is no real debt crisis, they are threatening to create one by refusing to approve the additional borrowing necessary to pay those bills. Americans are complaining about inflation—very high egg prices!—and are unhappy that they should have to deal with any consequences of the doddering post-pandemic global economy. Yet unless Republicans are determined to see the United States default on public debt, which would create unpredictable ripple effects in the world economy, the government will end up paying its bills and honoring its debts. And inflation here is already beginning to moderate.  

To see how devastating the pandemic years have been in more vulnerable economies, though, one need only look to the island nation of Sri Lanka or to the West African nation of Ghana. Sri Lanka defaulted on its debt last spring and saw inflation peak at 90 percent last summer. Ghana is experiencing rampant inflation and had to suspend payments on most of its external debt in December, while seeking emergency loans from the International Monetary Fund. “Dozens of other smaller nations are similarly struggling with unsustainable debt, a hole that has become even harder to climb out of with the economic blow of the pandemic and rising prices related to Russia’s war on Ukraine,” the New York Times reported two weeks ago.

And now Pakistan is on the precipice. Pakistan owes $41 billion to international financial institutions, and its currency has been in near free fall for the past several months. Default would mean that it will not even be able to pay for crucial imports that are needed to run the country. Already, the rupee is losing value by the day, dropping to an all-time low on February 3 of 276 rupees to the dollar, down from 175 a year ago. Three weeks ago, almost the entire country plunged into darkness because of a nationwide power outage. It is an apt metaphor for the grim financial conditions in which it finds itself.

When the lights came back on you could see the extent of Pakistani delusions. In Karachi, the largest city, you can see Lamborghinis and Ferraris parked outside the city’s expensive eateries. Every sort of cuisine imaginable is available here; there are French bakeries, American pizza and burger joints, oyster houses, sushi bars, and on and on. All of them are crowded every night with people who obviously have expendable income despite all the bleak economic news, the constant specter of terrorism, or the unbreathable air. This is a country for the one percent—and in Karachi they spend with abandon, flush with the knowledge that their wealth, even if procured illegally, is stowed away in bank accounts in Dubai.

Pakistan is a great place to be if you are rich, a member of the one percent that has ruled and will rule the country indefinitely. For starters, the rich hardly pay taxes and the country has a dismally low tax extraction rate. Moreover, there are no inheritance, estate, wealth or gift taxes, allowing generational wealth to accrue in the hands of a few to the exclusion of everyone else. Feudal land holdings are also not taxed. The one percent are living off inherited wealth, armies of servants keeping their vast estates clean and tidy, cooking their meals to specifications, and shuttling their children to and from the elite schools that produce the next generation of grifter. Class mobility is virtually unheard of in Pakistan; if it existed these children of nepotism would not be assured of their status forever.

One cannot help but wonder if these are the moments of the mad bacchanal that precede that impending end when all the credit cards are maxed out and a foreclosure notice stuck on the front door. Pakistanis have lived on this particular edge for a long time—only three months ago the IMF allowed the country to delay its debt payments because of the catastrophic floods that hit the country. That came soon after the government of Prime Minister Imran Khan (allegedly owed to the meddling of the Pakistan Army) lost support and succumbed to a no-confidence vote in parliament. The people who took over deployed a finance minister named Miftah Ismail to broker the deal with the IMF to delay payments. The second he was done, a new finance minister with less economic acumen and more political capital was put in his place. That new official, Ishaq Dar, took to the airwaves in late January to inform the Pakistani people that the price of petrol (which controls the price of everything else) was going to increase by 35 rupees per liter. The rate, still subsidized, will only have to be increased further to reflect the new low value of the Pakistani currency. The new price went into effect ten minutes after the finance minister’s speech and just in time for the arrival of an IMF negotiating team.

The floods last year were a huge setback for Pakistan; they made millions homeless and caused billions in damage to the country’s agriculture. It was this that led the IMF to allow Pakistan to temporarily suspend existing debt payments. Eight million people still continue to be displaced from that flood even now because not enough rescue aid has arrived. Simply put, the pace of climate destruction and the creation of climate refugees occurs much faster than governments can act on their pledges to save them.

Everything else is devolving fast. Last month 7 million people lost their jobs as textile mills were shuttered, the mills unable to import the parts needed to produce goods. And textile manufacturing is Pakistan’s largest export industry. Other factories, such as one that manufactured tractors, have also shut down. Such industries are crucial to generate the foreign exchange necessary to dig the country out of debt. The State Bank of Pakistan now only has $3 billion left in foreign reserves, or perhaps only $2 billion, according to some reports. And so, a delegation from the IMF just spent ten days in Islamabad, departing on February 9 without a final agreement on aid. The high-stakes negotiations are continuing from afar into this week, as Pakistan is asking for the equivalent of $1.1 billion to be released from a 2019 agreement worth $6.5 billion.

It is likely that the IMF will bail out Pakistan once again. This is after all the twenty-third time since Partition in 1947 that it is asking for such emergency aid. Yet general elections in Pakistan loom later this year, which means the possibility of a new government with new ideas about how the country should be run. The IMF knows this and could be leery of negotiating a deal when the next leader in charge can come in and throw out the agreement. The IMF could conclude that Pakistan is a case of chronic indebtedness, an entirely understandable perspective given that the country’s debt-to-GDP ratio is 70 percent, a danger zone that is closer to the level of Sri Lanka when it defaulted. The usual IMF approach is to require higher taxes, fewer subsidies for necessities such as fuel, and privatization of publicly owned entities. In other words, austerity for everyone but the rich.

Here in South Asia then is the world’s post-Covid hinterland where survival itself is at stake not least because some of the pre-Covid global arrangements have fallen through. In Pakistan’s case the dead horse of projects past is the China-Pakistan Economic Corridor that was unveiled in 2015 and was to be the beginning of the turn away from the United States and toward China. This was part of China’s much larger One Belt One Road Initiative. Thanks to this initiative, Pakistan did expand its electricity capacity, but now it owes China $30 billion (the largest chunk of its debt). This includes at least $1.1 billion to independent power providers in China.

The IMF has wanted Pakistan to restructure the debt, but China is reluctant to do so. China could bail Pakistan out by suspending or, better still, forgiving its debt, but China’s since-rescinded zero-Covid strategy has led to its own economic slowdown with factories facing severe worker shortages. The Chinese public is likely uninterested in the government bailing out defaulters like Pakistan—or Ghana or any of the several other creditor nations that are deep in debt to China—instead of pouring money into its own economy. The Chinese-Pakistan relationship was not helped when in September 2022 Pakistan’s Army chief of staff referred to the United States (and not China) as the country’s “partner of choice.”

But the United States appears to be in no mood to be Pakistan’s savior. When Pakistan asked about assistance last September Secretary of State Antony Blinken said it should ask Beijing first. This time may be no different given the fact that following its exit from Afghanistan the United States does not really need an ally in South Asia. Nobody in Washington, busy in negotiations regarding the debt ceiling, seems to have much of an appetite to send the billions Pakistan needs to extricate itself from this mess. And a complicating factor is that U.S. financial policies have tightened the screws in heavily indebted nations: as the Federal Reserve raised interest rates here, it caused the dollar to appreciate against other currencies. Countries that pay interest in dollars now find the debt service to be even more expensive than it was.

The fate of Pakistan, Ghana, and Sri Lanka lies in the hands of the International Monetary Fund. For its part, the Fund appears to have noticed that this is not an isolated situation. The managing director of the Fund Kristalina Georgieva has stated that the Fund will be holding a roundtable on of Global Sovereign Debt this month, making sure to invite China. Precarity, in the meantime, now extends far beyond only the world’s poverty stricken. Collapse is a bogeyman for the inflation-hit American consumer but a reality for the many millions not fortunate enough to live in the richest country in the world.