Ever since Pakistan's economic crisis made headlines, questions are being raised as to whether the cash-strapped country will be able to repay its debts and loans. As of December 2022, the Pakistan government's External Debt stood at PKR 17.87 trillion — down from PKR 18 trillion (1 INR = 3.18 PKR) in September 2022, according to the data shared by the State Bank of Pakistan (SBP). Pakistan's net foreign exchange reserves (with SBP) hovers around $3.2 billion as of February 17.

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Moody’s slashes Pakistan’s rating to lowest in 3 decades

Global ratings agency Moody's cut Pakistan's sovereign credit rating to 'Caa3' from 'Caa1' - the lowest in three decades, Dawn reported on Tuesday. The global rating agency said the country’s increasingly fragile liquidity "significantly raises default risks".

The agency also changed the country’s outlook from negative to stable. This came as the Pakistan government is in talks with the International Monetary Fund (IMF) to secure a $1 billion loan, which has been pending since late last year over policy issues.

Moody’s estimated Pakistan’s external financing needs for the rest of the fiscal year ending June 2023 to be around $11 billion, including the outstanding $7 billion external debt payments due. "The remainder includes the current account deficit, taking into account a sharp narrowing as imports have contracted markedly," Geo TV reported.

Daunting default risk looming over Pakistan

Burdened with debt, Pakistan continues to take loans from China banks. Last week, the Board of China Development Bank (CDB) Wednesday approved a $700 million credit facility for Pakistan. This comes on top of $30 billion that Pakistan already owes China and Chinese commercial banks, the Guardian reported.

As the default risk continues to mount over Pakistan, the country said it is due to repay foreign debt and interest worth almost $22 billion over the next 12 months, according to the Express Tribune report in February.

The report quoted data from the SBP showing that "Pakistan is to replay a total debt of $21.95 billion in one year; $19.34 billion in principal and another $2.60 billion in interest on the total debt". It added that the SBP data projects no foreign debt inflows for the next 12 months.

Adding to its woes, the foreign direct investment (FDI) inflows plunged 44.2 percent to $683.5 million during the first seven months of financial year 2023 against $1.22 billion in the same period last year, Dawn reported. In Pakistan, the government's fiscal year is July 1 of the previous calendar year and ends on June 30.

This has brought Pakistan on the cusp of a daunting economic crisis - with the government trying numerous ways to handle the finances amid skyrocketing inflation and falling currency. The Shehbaz Sharif government has already rolled out a tax-loaded mini-budget which is expected to make people's life more difficult in the cash-strapped country.

Moody’s hinted at the reduction in default risk potentially "to a level consistent with a higher rating" with external financing — such as "through the disbursement of the next tranches under the current IMF programme and related financing" — being available "in the very near term".

IMF and other challenges

All this unfolds in the backdrop of the Pakistani government's ongoing talks with the IMF. Moody and other economists believe that a payment by the IMF may help to cover Pakistan’s immediate needs but warned that "weak governance and heightened social risks impede Pakistan’s ability to continually implement the range of policies that would secure large amounts of financing".

Experts believe that Pakistan needs to come up with innovative measures and follow a collective approach that is "not anti-India but pro-Pakistani", said Ashwani Mahajan of the Swadeshi Jagaran Manch and Amir Jahangir. Pakistan also needs to reduce its dependence on China and focus on manufacturing goods in the country itself.

Next, "Pakistan need to showcase that the system is transparent - that the money is spent on the issues and challenges that Pakistan is facing right now," Amir Jahangir, Founder and CEO of Mishal Pakistan said. There should also be accountability in the system, he argued.