While the country’s nuclear arsenal is not under threat, it is a testament to the fear of default that such questions are being raised. However, what would happen if the promised funds do not materialise?
“Is Sri Lanka better after default?” the taboo question was voiced aloud by former Federal Board of Revenue (FBR) chairman Shabbar Zaidi, who seemed to think so in an interview with Dawn, a thought recently echoed by former president Asif Ali Zardari.
“Sri Lanka is better off on all economic indicators. Their production is improving, their consumption habits are better, their exchange rate has stabilised, and their politics are less in flux. The default made them realise the country’s problems and take the hard decisions,” Mr Zaidi says.
As controversial a statement as this is, Sri Lanka’s exchange rate appears to become less mercurial. Since it defaulted in April 2022, the Sri Lankan rupee has stabilised — it was 325 Sri Lankan rupees to a US dollar then and it is 342 Sri Lankan rupees as of last week, a depreciation of 6pc. Pakistani rupee, on the other hand, has depreciated by 54pc.
However, similar to Dar bowing under Fund’s pressure to have a free exchange rate, Sri Lanka also plans to ensure its rupee is fully market-driven. Since March 7, it has shifted to an ad hoc pegging arrangement that is leading to a continued depreciation of the currency.
As per Bloomberg, Sri Lanka’s inflation rate eased for the fifth straight month to 50.6pc last month after peaking at nearly 70pc last year. Thankfully, Pakistan is not facing a rate that high (as yet), but its Consumer Price Index is expected to continue to rise to 30pc. Its short-term inflation, measured by the Sensitive Price Index, hit an all-time high at 45.64pc for the week ended March 16.
“My analysis of Sri Lanka is not what the average Pakistani perceives. Sri Lanka has gone through a very dark period. Yes, it is awful for the country to default, but my question is, what is the technical difference: they could not import oil or open letters of credit and Pakistan is going through the same thing,” says the former FBR chairman.
But, according to the New York Times, just because the South Asian nation is calmer does not mean things are better. While long fuel lines have disappeared, two out of five households spend 75pc of their household income on just food purchases. Charity Save the Children estimates that half of Sri Lankan households are cutting their children’s food intake.
Sri Lanka has suffered through punishing IMF conditions, including a recent 100 basis points increase in the policy rate, to avail a $2.9bn bailout package. However, while things have stagnated in Sri Lanka, they are not getting worst post-default, whereas the same cannot be said for Pakistan’s indicators.
Moody’s recently downgraded Pakistan’s rating to Caaa3 — as per the company’s rating scale, only Ca (very near default) and C (defaulted) are below the country’s current standing. Sri Lanka is a step lower than Ca.
“I am not saying that Pakistan should default; the fear of bankruptcy is the fear of the unknown. While thousands died because of the Tamil Tigers issue, no deaths were caused by the default. Default is a taboo, but that is not the case,” says Mr Zaidi.
We have not had a sovereign debt default — which is when the government is unable to pay off its loans — but technically we are in a state of default, he adds.
Another example Mr Zaidi gives is Argentina. “Many countries, such as Argentina, have defaulted, but their economy recovered, and they still receive foreign direct investment (FDI) flows,” he says.