Virtual isolation of Pakistan makes its economic revival difficult while growing support may quickly get Sri Lanka on path to normalcy
K.A.Badarinath
It’s the tale of two South Asian economies that continue to provide jitters to analysts and policymakers alike. Pakistan and Sri Lankan economies facing tumult are pictures in contrast.
The two Indian neighbours are on the verge of collapse on economic front. The two have also been struggling and desperate to get back on revival mode with very little headway thus far.
The course taken by both these countries seems diametrically opposite to deliver what they set out to achieve as uniquely placed Indian Ocean small countries.
Sri Lanka with an economic size of $ 84.52 billion has piled up a debt of $ 40 billion from bilateral and multi-lateral sources over last one decade that’s unsustainable.
In contrast, Pakistan with a medium sized economy of $ 376.49 billion that had previously grown in double digits is in doldrums with virtually no savior in sight. It’s heading for virtual bankruptcy given that the Islamist country that believes in terrorism as a state instrument has piled up $ 274 billion debt that’s roughly over three fourths of its gross domestic product in January this year.
Both the South Asian economies have landed in a big mess and it is their own making.
While Sri Lanka’s misdirected reforms pushed the island’s fragile economy into chaos, its political churn and protests over last one year have added to the people’s woes.
On the other hand, Pakistan’s unsustainable energy import bill, unserviceable expensive foreign debt stock, lack of investments and revenues coupled with huge spending on its untenable security establishment are clear culprits.
Unwritten word is that huge unaccounted spending in exporting terror in particular to Bharat is a big expenditure head with no or rather negative returns.
Highest common denomination factor in both cases is China where it pushed both countries into a huge debt trap by design especially the funding of infrastructure projects, belt and roads initiative.
As per publicly available data, more than two dozen countries including Sri Lanka and Pakistan have been pushed into unsustainable debt contracts via the BRI (Belt and Road Initiative), a pet initiative of President Xi Jingping and Chinese Communist Party.
Apart from economic and strategic expansionism of China run by its oligarchy, global headwinds are not in favour of Pakistan and Sri Lanka given the looming recession in Europe and United States in aftermath of protracted conflict between Ukraine and Russia. Metamorphosis of this conflict into a big war cannot be ruled out given that the US and Germany apart from other NATO allies were sending in tanks and major military equipment to support the battered Ukraine.
Over 60 per cent consumer price inflation in Sri Lanka has rendered millions of people jobless, without food and shelter. Moving away from traditional agricultural practices to purported organic farming without safety latches or back up plan has boomeranged on this beautiful island nation. The political uncertainty has also destroyed its famed tourism and hospitality industry that’s known globally for being very ‘inviting’.
On the other hand, Pakistan that reported over 40 per cent retail inflation in January 2023 has made basic food items like wheat flour, oil, sugar, out of the reach for a large section of its population. Owing to massive corruption in both Pakistani army establishment and political leadership, most food items are either unavailable or retail prices unreasonably doubled or tripled.
Hoarders and business cartels have had a field day in both Sri Lanka and Pakistan cashing in on weak political structures and greasing corrupt hands all the way.
In this adverse situation loans or cash advances have been hard to come by for both countries. Both countries have burnt the midnight oil to keep their heads afloat.
Sri Lanka has some advantage over Pakistan that has no friends in the region barring China.
India has taken the lead to provide financing assurances to Sri Lanka if one were to go by external affairs minister Subramanyam Jaishankar to the island nation. In effect, outstanding debt can be paid by Sri Lanka on deferred basis. Also, Colombo can access fresh lines of credit in sync with debt restructuring proposal made by International Monetary Fund in which Bharat is actively involved as representative of South Asia. As an ally, Japan is also bound to follow suit.
If these developments go as anticipated, Sri Lanka will be able to access $ 2.9 billion relief package from IMF.
But, this will happen only when China as the largest contributor to most expensive debt Sri Lanka has availed agrees. As of now, indications are that China may extract its pound of flesh in terms of lucrative contracts and Colombo agreeing to approve its expansionist tantrums.
While Sri Lanka has enlisted support of trusted allies like Bharat, Pakistan has not made any headway so far. Barring Saudi Arabia’s agreement to defer payments on oil imports, Pakistan has not made much progress thus far. Deferred payments proposal for Russian oil has not fructified till now.
As per State Bank of Pakistan (SBP), the country’s reserves have plummeted to $ 5.576 billion as of January 1, 2023. This means there’s every possibility of Pakistan defaulting on its repayments if immediate support is not enlisted.
Even after businessman turned Pakistan Prime Minister Shehbaz Sharif buckled and agreed to tough conditions proposed by IMF for $ 6.6 billion bailout package, the multi-lateral lender is yet unconvinced on Pakistan economy’s unsustainability. As on date, IMF has not sent its team for negotiation though Pakistan requested for early conclusion of negotiations.
Most significant is that it’s all weather friend and military equipment supplier China has not acceded to Pakistan’s request for deferment of its $ 6.3 billion loans. Only Saudi Arabia has hinted at deferring $ 3 billion repayments for Pakistan that matured in December 2022.
Possible collapse of Sri Lankan and Pakistan economies collapse will have larger impact in South and South East Asia given the political and social turmoil coupled with terrorism envelope being pushed by Islamabad.
Enlisting friends to get out of crisis like Sri Lanka is a sustainable strategy rather than getting solo with no backers.
(Author is Director & Chief Executive of bipartisan think tank, Centre for Integrated and Holistic Studies based in New Delhi)
CIHS - Centre for Integrated and Holistic Studies 