Pakistan's Default Risk-What is Default
What is default?
When a state officially announces that it has no money or dollar or any other currency to pay installments of foreign debt, then such a country becomes defaulted.
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| Pakistan's Default Risk-What is Default |
What happens when a country defaults?
Even after default a country streamlines (come to normal
situation) within 16 to 18 days. It simply means that the crisis remains
maximum for 18 days. The case of Sri Lanka is the perfect example. Default is not a
threat to the sovereignty or territories of a country. A bad aspect of default is
the creditor renegotiates or reschedules the loans on hard terms and
conditions. The most dangerous aspect of default is the creditor guides the
defaulted country in terms of restructuring the affairs. For example,
privatizing state-owned enterprises reducing military expenditure, or talks
on nuclear programs.
Similarly, immediate consequences include no import due to
lack of a letter of credit. It affects basic necessities such as edible oil. Fuel
oil and agricultural inputs, but these consequences are for limited times.
Moreover, the biggest impact is on the psyche of the people.
This results in Bank runs, which means people think that the state has no money and their
money in the banks is under threat. They withdraw their money and consequently
banking system is disturbed
Panic in the stock exchange is another negative impact when
people start selling shares
How can we know that a country is near to default?
Three studies or conditions state whether a country is going to default or not.
1 Liquidation
It simply means any company, business, investment, or resource is liquidated, sold out, or left and the concerned individual leaves the country. In the case of Pakistan, no massive liquidation has been performed. So, this condition doesn’t lead Pakistan towards default.
2 Higher external debts to GDP ratio
If the external loan is 50 percent or more of GDP, it leads a country towards default. In the case of Pakistan, the external loan is 30 to 40 percent of GDP. So, this case is not applicable ditto.
In this study, data is collected which reflects whether a country is near to default or not. It entirely relies on data. In the case of Pakistan, merely documented data is taken, whereas, 52 percent of the economy is undocumented. If this study states that Pakistan is near to default, still the claim is not acceptable to an unclear picture of the data.
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